Key Changes under Revised Draft of PRC Arbitration Law

As reported in an earlier post, the Ministry of Justice of the PRC released proposed revisions to the PRC Arbitration Law (AL) for public consultation on 30 July 2021.  In this post, we look in more detail at the key changes in the revised draft.

Mainland courts, particularly in Beijing and other large cities, have long demonstrated their support for best practice in international arbitration. Mainland institutions have modernised their rules to reflect international best practice. The AL, however, was promulgated in 1994 and lacks many of the concepts and powers that are fundamental to modern arbitral legislation. These include kompetenz-kompetenz doctrine, power for tribunals to grant interim relief, and the concept of a legal seat of arbitration. In addition, it is still unclear whether non-Chinese institutions can administer arbitrations in Mainland China.

If enacted, the proposed revisions would address these lacunae and bring Mainland China fully into line with other leading arbitral jurisdictions

(1) General principles

Article 10 of the revised draft provides that the PRC courts will "support and supervise" arbitration.  Articles 4, 29 and 30 further propose the following principles:

• parties to arbitration should be treated equally and provided with opportunities to fully present their cases (Article 29);
• undue delay and expense should be avoided in arbitral proceedings (Article 30); and
• arbitral proceedings should be conducted in good faith (Article 4).

The principle of conducting arbitration in good faith is further enshrined in Articles 21(2) and 33 of the revised draft.  Article 21(2) provides that if a party does not raise an objection to the existence of the arbitration agreement, that party will be deemed to have entered into the arbitration agreement; Article 33 provides that if a party is aware of any procedural irregularity but does not timely raise any objection in writing and continues to participate in the arbitration, that party will be deemed to have waived its right to raise any objection. Akin to the principle of estoppel, Articles 21(2) and 33 prevent parties from raising jurisdictional or procedural objections at a later stage (e.g. in the enforcement stage or the set-aside proceedings) if they did not raise the objections in the course of the arbitration.

In addition, the revised draft seeks to adapt to the post-COVID-19 era by allowing electronic methods of serving arbitration documents (Article 34) and conducting arbitration proceedings (Article 30).  All above-discussed articles are newly proposed in the revised draft.

(2) Foreign arbitral institutions permitted to "conduct foreign-related arbitration business"

Article 12 of the revised draft provides that foreign arbitral institutions may set up offices in Mainland China to "conduct foreign-related arbitration business".  Although no clarification is provided in the revised draft as to what this term means precisely, it has been widely considered that this article would allow foreign arbitral institutions to administer arbitration cases in Mainland China, which is currently not allowed except for certain designated areas such as Shanghai's Lin-gang free trade zone. The scope of case administration services to be provided by foreign institutions will be limited to foreign-related arbitration cases, and not include purely domestic cases.

In this connection, the revised draft also replaces the term "arbitration commission(s)" with the term "arbitral institution(s)". The AL uses the term "arbitration commission(s)", a specific name for Mainland Chinese arbitral institutions, as the legislators had only intended to cover domestic institutions without envisaging that foreign institutions might also operate in Mainland China. In order to introduce the ground-breaking change of allowing foreign institutions to operate in Mainland China, the revised draft adopts the term "arbitral institution(s)" throughout, which refers to both domestic arbitration commissions and foreign arbitration institutions.

(3) Seat of arbitration

While the PRC judiciary has already adopted this approach in practice, the concept of a "seat of arbitration" is not expressly recognised under the current AL. The revised draft expressly recognises this concept and adopts the term "seat of arbitration".

According to the revised draft, if the parties failed to agree on the seat of the arbitration, the seat should be "the location of the arbitral institution" (Article 27); However, in case of a foreign-related arbitration, the seat may be determined by the arbitral tribunal having regard to the circumstances of the case (Article 91). Based on the proposed texts, there appears to be two possible interpretations: (1) Article 27 applies to domestic arbitration whereas Article 91 applies to foreign-related arbitration; (2) Article 91 applies to ad hoc foreign-related arbitration only, whereas Article 27 applies to both domestic arbitration and institutional foreign-related arbitration. The first interpretation is more in line with international practice in our view, and hopefully this ambiguity could be clarified in later versions of the revised draft.

Article 27 of the revised draft further provides that arbitral awards shall be deemed to have been made at the seat of the arbitration.

(4) Arbitration agreements and kompetenz-kompetenz doctrine

The revised draft proposes a number of important changes to the current AL with respect to the issue of validity of arbitration agreements.

First, under the current AL, a valid arbitration agreement must contain three basic elements: (1) an intention to arbitrate; (2) matters for arbitration; and (3) designated arbitration commission. An ambiguous arbitration agreement based on which an arbitration commission cannot be ascertained will be deemed invalid.  The revised draft significantly relaxes the requirement. According to Article 21 of the revised draft, the only necessary element for a valid arbitration agreement is an intention to arbitrate. Article 35 further provides that if the parties are unable to ascertain an arbitral institution pursuant to their agreement or the adopted arbitration rules, then the first institution that accepts the case administers the case.

Second, the revised draft establishes the kompetenz-kompetenz doctrine which allows arbitrators to determine their own jurisdiction. Under the current AL, an application to challenge the validity of the arbitration agreement may be made either to the arbitration commission or a competent PRC court, and the court's decision shall prevail if applications are made to both the arbitration commission and a PRC court. The revised draft abandons this mechanism and, in line with the international practice and UNCITRAL Model Law, provides that the tribunal has the power to decide on its own jurisdiction (Article 28). The draft further provides that the tribunal's decision may be reviewed by a competent PRC court and, if the court decides that the arbitration agreement is invalid or the tribunal does not have the jurisdiction, either party may apply to a higher level court for a second-level review (Article 28).

Third, Article 90 of the revised draft clarifies that the law governing the validity of the arbitration agreement is, in the following order: (1) the law agreed by parties to apply to the arbitration agreement; (2) the law of the seat; (3) the PRC law.

(5) Appointment of Arbitrators

The following changes have been proposed in the revised draft with respect to the appointment of  arbitrators:

• parties to arbitration are permitted to select arbitrators off the panel of arbitrators of the institution (Article 50);
• where parties are unable to jointly appoint a presiding arbitrator, the presiding arbitrator will be jointly appointed by the co-arbitrators and, failing which, be designated by the institution (Article 51);
• arbitrators have a duty to disclose any circumstances that give rise to reasonable doubts as to his or her independence and impartiality (Article 52). The current AL has only provided that an arbitrator must recuse himself or herself under certain circumstances but does not provide a disclosure obligation.

(6) Tribunals empowered to grant interim relief

Under the current AL, the power to grant interim relief is exclusively reserved to the PRC courts. The revised draft fundamentally changes this mechanism by granting the power to also arbitral tribunals and emergency arbitrators (Articles 43, 46 and 49). The PRC courts are required to enforce or provide assistance in the enforcement of the interim measures ordered by arbitral tribunals or emergency arbitrators (Articles 47 and 48). The revised draft further provides that: -

• the types of interim measures include asset preservation, action preservation, evidence preservation and any other types of interim measures deemed necessary by the arbitral tribunal (Article 43);
• asset preservation and action preservation may be granted where behaviours of one party or parties, or any other reasons, may render it impossible or difficult to enforce the award or cause losses to the other party (Article 44);
• evidence preservation may be granted where the evidence may be destroyed or lost or become difficult to obtain in the future (Article 45);
• arbitral tribunal should require the applicant to provide security, if it intends to grant an interim relief order (Article 47).
• If an application is wrongfully made and thus causes damages to the other party, the applicant must be liable to compensate the loss suffered by the other party (Article 47). This article mirrors Article 105 of the Civil Procedure Law which applies to interim relief applications made to the PRC court, but it remains to be seen how it would apply to applications made to the arbitral tribunals or emergency arbitrators.

(7) Arbitral awards

While Article 55 of the AL already provides that arbitral tribunals may issue partial awards before issuing the final award, Article 74 of the revised draft further clarifies that: (1) tribunals may issue partial or interim awards; (2) parties must perform as required by the order(s) granted in any partial or interim awards; and (3) if a party fails to perform as required by the order(s) granted in a partial (but not interim) award, the other party may apply to a PRC court for enforcement.  This article clears any concerns under the current AL regarding the finality of any partial awards.

Interestingly, Articles 69 and 70 of the revised draft provide that if parties reached a settlement agreement prior to the constitution of the tribunal or before commencing an arbitration, either party may apply to the arbitral institution to form an arbitral tribunal pursuant to the arbitration agreement and ask the tribunal to enter into an award based on the contents of the settlement agreement.  These articles appear to intend to enhance the enforceability of settlement agreements and the use of other alternative dispute resolution mechanisms such as mediation.

(8) Grounds for setting-aside and non-enforcement of arbitral awards

The revised draft proposes a number of changes to the mechanisms for setting-aside and non-enforcement of arbitral awards. Most significantly, it seeks to unify the grounds for setting aside domestic and foreign-related awards, and to prevent the enforcement courts from reviewing issues relating to the merits or procedures of the arbitration with respect to domestic and foreign-related awards.

First, under the current AL and Civil Procedure Law, different grounds apply for setting aside domestic awards and foreign-related awards. While grounds for setting aside foreign-related awards are more aligned with the UNCITRAL Model Law, domestic awards may be subject to a more substantive review and be set aside if (1) the award is rendered based upon any falsified evidence; or (2) any material evidence which may have an impact on the decisions in the award was concealed by either party.  The revised draft removes these two grounds and unifies the set-aside grounds for domestic and foreign-related awards (Article 77).

In addition, the revised draft introduces a new ground, providing that an award may be set aside if "the award was obtained through fraudulent conduct including malicious collusion and falsifying evidence" (Article 77). This ground is also applicable to both domestic and foreign-related awards. This is understood to intend to tackle "falsified arbitrations" in China, where arbitrations were brought based on non-genuine legal relationships and falsified documents in order to damage third parties' interests. Although this new ground does not exist under the Model Law, the circumstances it intends to tackle should, in our view, be also caught by the violation of due process ground or the violation of public policy ground provided under the Model Law.

Second, the revised draft provides that the PRC courts may refuse to enforce a domestic or foreign-related arbitral award, only if the award is "against social public interest" (Article 82).  While this appears to be inconsistent with the New York Convention, it arises from the legislators' concern of duplicative review of arbitral awards by the PRC courts in set-aside proceedings and non-enforcement proceedings and potentially conflicting results.  This change will consolidate the power to the court hearing the set-aside applications and restrict the power of the enforcement court.

Other important changes introduced by the revised draft regarding set-aside and non-enforcement procedures include:

• the time limit for applying to set aside an arbitral award has been shortened from six months to three months, from the date of receipt of the award (Article 78);
• the revised draft confirms that the PRC courts may partially set aside an arbitral award, which is the approach already followed by the courts in judicial practice (Article 77);
• the revised draft stipulates the specific circumstances under which the courts may remit the case for re-arbitration (Article 80);
• the revised draft confirms third parties' right to object to the enforcement proceedings if the proceedings affect the third party's legitimate rights and interests (Article 84). This was already provided in the PRC Supreme Court's judicial interpretations and is now confirmed in the revised draft of the AL.

(9) Ad hoc arbitration permitted for foreign-related commercial disputes

Chapter 7 of the revised draft of the AL contains special provisions for foreign-related arbitrations.  A key change proposed in Chapter 7 of the revised draft is permitting ad hoc arbitration for "commercial disputes involving foreign-related elements" (Article 91).  Ad hoc arbitration is currently not permitted under the AL for any arbitrations seated in Mainland China.  The revised draft further provides that parties to ad hoc arbitrations may jointly appoint an arbitral institution as the appointing authority, failing which a competent PRC intermediate people's court may designate an arbitral institution as the appointing authority (Article 92).  Furthermore, the arbitral tribunals appointed in ad hoc arbitrations are required to file the original award and the record of service of the award with the intermediate people's court of the seat of the arbitration (Article 93).

For further information, please contact Weina Ye, International Partner, Helen Tang, Partner, Eric Xu, Trainee Solicitor or your usual Herbert Smith Freehills contact.