Interpretation of the SHIAC Pilot Free Trade Zone Arbitration Rules

Just recently, on 1st May 2014 the China (Shanghai) Pilot Free Trade Zone Arbitration Rules came into effect. Formulated by the newly structured Shanghai International Arbitration Center (SHIAC) the regulations consist of 10 chapters and 85 articles. In line with international developments, the framework shall provide an alternative way for contractual and property rights dispute resolution in contrast to enduring court proceedings.

After the issuance of the Interpretation of the Rules by the SHIAC, it is now interesting to have a closer look at particular issues and improvements for foreign companies in China with the new Arbitration Rules framework.

Rules openness and opening up of the panel of Arbitrators:

Besides the automatic application of the rules, if the related parties agreed upon solving disputes by the SHIAC, the particular case is related to the FTZ and the parties did NOT exclude the application of the Arbitration Rules, the framework also enables parties operating outside the FTZ to mandate the SHIAC with the dispute resolution no matter if the cause is related to the FTZ or not.

Both parties would need to agree either to refer their disputes to the SHIAC and to apply the rules of arbitration or to delegate the responsibility of dispute resolution to an institution reasonably inferred to be the China (Shanghai) Pilot Free Trade Zone Court of Arbitration. Additionally a sole agreement to refer their disputes for arbitration under the Arbitration Rules without designating a particular institution is sufficient for being treated under the SHIAC framework.

Furthermore, the choice of the person responsible for the arbitration process (the arbitrator), is not anymore limited to a particular panel but may freely be chosen, to meet the parties needs more precisely. Nevertheless, this person still needs to comply with certain standards for education and experience of the SHIAC and have to be finally approved by it to ensure a basic quality of the arbitration process.

Conclusion:

Since cases in China not related to the FTZ are solely under the jurisdiction of the People’s Court, the designation of the SHIAC as the responsible institution to process the arbitration procedure might result in a time advantage and therefore in a faster solution to the dispute.

Interim Measures:

In order to implement preservation measures to prevent parties from abusing their advantageous position by transferring or destroying property or evidence in the period before setting up a tribunal, the SHIAC adopted the already under the P.R.C. Civil Procedure Law stipulated interim measures. Henceforth the constitution of tribunals and emergency tribunals is statutory for the period before the actual arbitration procedure, the period between acceptance of the case and constitution of the tribunal and after the constitution of the tribunal.

Since it can take up to a few months for the actual arbitration process, those regulations shall ensure that no further damage is taken by the suitor before the dispute is solved. In line with international developments, the framework also implemented a system for urgent interim relief by enabling the parties to call for an emergency tribunal.

Interim measures include evidence preservation, property preservation, act preservation or even the limitation or prohibition of a party to perform.

Conclusion:

The constitution of tribunals or emergency tribunals together with the ability for those institutions to issue a decree against the counterparty to ensure an undistorted judgment of the conditions prior to dispute resolution is in line with common international developments and therefore vastly welcome. However, since the SHIAC framework states that the regulations of the arbitration rules may not interfere with general laws, the rendering of measures and the final decision over the enactment remains at the People’s Court according to the P.R.C. Civil Procedure Law.

Only cases outside of the P.R.C. that are referred to the SHIAC and where regional laws empower arbitration tribunals to render and execute interim measures directly, the FTZ tribunals can act without the engagement of the higher court.

So far, the tribunals bound by the SHIAC arbitration rules for cases in China are demoted to simple application collection processing and forwarding to the People’s Court.  Thus the actual impact of the interim measures in regard to their purpose of urgent relief and protection of the party’s claims before the actual arbitration process is at least doubtful.

Rules of Evidence in Arbitration:

The rules of evidence in arbitration such as documentary evidence, witness testimony, expert evidence, the burden of proof, examination of evidence and evidence preservation have been stipulated in the Articles of the P.R.C. Arbitration Law. Further problems relating to evidence in arbitration have been clarified under the P.R.C. Civil Procedure Law.

But so far, there has been no stipulation about the definition and content of the evidence rule in general.

With the new FTZ Arbitration Rules, the parties are henceforth able to freely agree on its own rules of evidence. In the case that both parties are foreign entities the framework allows them to be treated under evidence rules that are familiar to both parties or according to the commonly used IBA Rules of Evidence in International Arbitration.

Furthermore, the recently passed Arbitration Rules allow for exchange and/or cross examination of evidences before the hearing in the court (arranged by the arbitration tribunal) and implement rules for the regulation of expert advice in line with international arbitration agreements (i.e. the International Bar Association, IBA).

Conclusion:

With the opportunity to agree on independent regulations, the SHIAC particularly shows its intention for the internationalization of the framework and the focus on the principle of party autonomy in the process of arbitration. Where both parties are from different origin and may find it hard to comply with the continental law system in Mainland China, the aforementioned freedom of choice might result in a smoothening and facilitation of the arbitration proceedings and might increase the appeal to refer disputes to the SHIAC.

Arbitration in combination with mediation:

Originally perceived as two different ways of solving commercial disputes, the combination of mediation with the arbitration process in the SHIAC Pilot Free Trade Zone Rules follows the common international development process to treat them as complementary methods.

The mediation process starts upon agreement by both of the parties and is scheduled for the period between the acceptance of the case and constitution of the tribunal. But theoretically the mediation process can be initiated at every time of the arbitration procedure. It’s the SHIAC’s responsibility to appoint a mediator from the panel of mediators or in particular cases even from the panel of arbitrators. However, the appointed person may not jointly be serving as a mediator and an arbitrator in the same dispute solving process unless otherwise agreed by the parties.

If the mediation yields the desired outcome, the parties may chose to withdraw the application or continue with the process to let the tribunal decide the verdict based on the reconciliation agreement. If the dispute is not settled in the mediation process, the arbitration procedure continues unaffected.

The mediation process automatically ends once the parties receive notice of the constitution of the tribunal.

Conclusion:

Due to its ability to facilitate and cheapen the dispute solving process the combination of mediation with arbitration seems beneficial for all involved parties.

Solely the international discussion about the pros and cons of appointing the same person as mediator and arbitrator in the same arbitration process might leave some questions over (especially if mediation fails) since that would also be possible according to the new rules upon agreement by both parties.

The Principle of “ex aequo et bono”:

Since the intention of arbitration is the settlement of disputes in a mutual way, the limitation of the authorities to a certain regulatory framework when rendering the final decision seems counterintuitive. Thus, the Free Trade Zone Arbitration Rules embrace the principle of “ex aequo et bono” to issue verdicts at the courts discretion according to fairness and reasonableness.

Conclusion:

While the benefits of the principle of “ex aequo et bono” are vastly welcome, since it provides more space to settle disputes, avoids unjustifiable results due to the strict application of conflict rules, and preserves the possibility of future cooperation between the parties, the subordination of the FTZ Rules under P.R.C. law lets them stay ineffective for entities in China.

In the P.R.C. Arbitration Law, a principle similar to “ex aequo et bono” remains unknown. Since for all cases related to Mainland China the People’s Court keeps the jurisdictional power to render final arbitration decisions, the above mentioned principle only applies to foreign related cases and stays vastly limited in its development in the P.R.C.

Procedure for small claims:

In order to trigger efficiency, speed up the arbitration process and further reduce the parties costs, the FTZ Arbitration Rules are introducing procedures for small claims. If the amount of dispute not exceeds 100.000 RMB, the parties shall be able to apply for this procedure. In contrast to the general arbitration process, the time for submitting defense papers and/or counterclaims has been reduced to 10 (from 45/20 days) and the time frame for the whole process to 45 days (from 3-6 month).

Furthermore, the costs for the case registration and the arbitration fee are vastly lowered (100 RMB/ 1,250 RMB). In addition, the arbitrator is going to be appointed by the SHIAC directly and the tribunal can decide based on a hearing whether to accept the case or not.

Conclusion:

Since the amount of cases for arbitration are likely to increase over time, especially after the issuance of the new Arbitration Rules, there is a necessity for a system to efficiently deal with minor cases, to avoid overloading of the tribunals and courts. But if the quite low border of 100.000 RMB really significantly decreases the amount of cases that need to take the conventional way, is yet to be seen.

Final Conclusion:

The issuance of the new FTZ Rules for Arbitration brings along several desirable improvements of the arbitration procedure law and the opportunity to apply it even outside of the FTZ is quite appealing for foreign entities especially in regard to the inefficiency and impartiality of the conventional jurisdictional system in China.

However, since the most powerful regulations in the framework are circumcised by the overriding principle of conventional P.R.C. Law and therefore jurisdiction is not delegated to the tribunals, the actual impact in China is most likely to be perceived as slightly.

Also the intention of the SHIAC for stressing the internationalization of the rules is commendable but besides entities that are struggling with the Chinese court system and are seeking for a more independent solution to their disputes, the voluntary application of Chinese Arbitration Rules by entities not situated in China is more than unlikely. Considering sophisticated arbitration rules issued by a broad range of international institutions (i.e. the International Chamber of Commerce) that enjoy a much greater amount of trust than Chinese authorities and the more efficient court system in other countries, there are no circumstances imaginable under which foreign entities would apply Chinese arbitration rules.

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