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A Booming Market and an Evolving System amid the COVID-19 By Wilson Wei Huo 2020-05-07

 

The year of 2019 has proven another busy year for arbitration lawyers in Mainland China, with the highlights being the significant growth in case volume and the further refinement of the arbitration infrastructure. However, the year of 2020’s outlook of arbitration in Mainland China seems less certain amid the outbreak of COVID-19. Based on the recent developments in arbitration industry in Mainland China, this article will explore the likely trends of arbitration in Mainland China arbitration in 2020 under the influence of the COVID-19 pandemic.

 

I.The General Impact of COVID-19 on Mainland China Arbitration Industry

 

The mushrooming COVID-19 outbreak that hit Mainland China at the beginning of 2020 has been declared a global public health emergency by WHO. Cities are under lockdown, the Lunar New Year Holiday is extended, the resumption of business is delayed, and people are required to stay home to restrict public movements. Mainland China has sacrificed a lot to contain the deadly virus while a shadow was casted over all walks of life including arbitration.

 

However, there are still reasons to be optimistic. Almost all arbitration institutions in Mainland China have announced special measures in response to the coronavirus outbreak such as deferring all meetings and events, automatic adjournment of scheduled hearings and promotion of online communication, submission and service etc.[1] These measures would effectively minimize the impact of the coronavirus and to some extent allow cases to proceed as usual. Practitioners believe that influence of COVID-19 is all temporary and they look forward to a prosperous 2020.

 

 

II.Continued Growth in Arbitration Volume of Both Domestic and Foreign-related Cases

 

Arbitration has been steadily gaining popularity in Mainland China in recent years. As shown in the annual report of China International Economic and Trade Arbitration Commission (“CIETAC”), one of the major arbitration institutions in Mainland China, in 2019 its overall caseload increased by 12.53% to 3333 disputes.[2] The total amount in dispute increased by 20.3% to RMB122.04 billion (approx. USD17.46 billion).[3] Similarly, in 2019 Beijing Arbitration Commission/Beijing International Arbitration Center (“BAC”), another major arbitration institution based in Beijing, also reported 38.18% growth in caseload to 6732 cases while the total dispute amount increased by 20.74% to RMB88.2 billion (approx. USD12.55 billion).[4]

 

The internationalization progress of Mainland China arbitration is particularly impressive. In 2019 CIETAC handled 617 foreign-related cases, accounting for 18.5% of its total caseload.[5] The total amount in dispute of the foreign-related cases grew by 30.79% to RMB38.08 billion (approx. USD5.41 billion).[6] BAC also saw a significant increase in foreign-related cases as 163 cases submitted to BAC were of international nature with the total amount in dispute of RMB6.95 billion (approx. USD0.99 billion).[7]

 

The overall development of Mainland China arbitration industry as demonstrated by these surging figures is very promising. It is on the one hand the result of the effort by Mainland China arbitration institutions to enhance quality, case management efficiency, institutional transparency and participation in the global arbitration community. On the other hand, the implementation of interregional initiatives such as One Belt One Road (which is a collection of interlinking trade deals and infrastructure projects throughout Eurasia, the Pacific and Africa), the Greater Bay Area (which is a development plan to create a world-class city cluster across the Guangdong-Hong Kong-Macau region) and the establishment of Pilot Free Trade Zones (“PFTZ”, which are regional free trade zones set up to test new styles of foreign investment management, trade facilitation and transformation of government functions to better integrate the economy with international practices) also bolstered international arbitration in Mainland China.

 

We predict this trend will continue to grow in 2020 as the long-term momentums of the development remain solid even under the threat of COVID-19. In addition, the increasing enforceability of arbitral awards, the easy access to arbitration institutions and the greater input that parties have over the arbitral process will all contribute to a growing preference of the businesses for arbitration. Besides, due to the COVID-19 pandemic, numerous contracts are being delayed, breached, terminated or frustrated and these would spark even more disputes that may end up in arbitration proceedings, providing additional momentum to Mainland China and/or cross-border arbitration market.

 

 

III.Constant Improvement and Innovation of Arbitration System in Mainland China

 

Alongside the growth in the use of arbitration by Mainland China companies, authorities and arbitration institutions in Mainland China are also constantly working to improve the pro-arbitration judicial environment and arbitration system and this will provide end-users of arbitration with more confidence in Mainland China arbitration’s future.

 

A. Broader Judicial Assistance and Closer Interregional Cooperation

 

The year of 2019 witnessed further improvement of overseas enforceability of Mainland China arbitral awards and expansion of current interregional judicial assistance regime. On April 2, 2019, Mainland China and Hong Kong Special Administrative Region (“HKSAR”) entered into the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the HKSAR (关于内地与香港特别行政区法院就仲裁程序相互协助保全的安排) (the “Arrangement”). As pointed out in Mr. Wilson Wei Huo’s previous publication Mutual Assistance Gets Closer,[8] the Arrangement is a response to the realistic needs of mutual assistance in interim measures in aid of arbitral proceedings between the Mainland and the HKSAR. Above all, the primary significance of the Arrangement is that it provides the legal basis for parties in arbitral proceedings in HKSAR to apply for interim measures from the courts of the Mainland. It also gives guidance to the courts of the Mainland in dealing with an application in relation to interim measures assistance from parties in arbitral proceedings in HKSAR.

 

The Arrangement by its effect brings judicial assistance between the Mainland and the HKSAR even closer in the arbitration field. Meanwhile, it reflects the heightened levels of interregional arbitration cooperation within Asia Pacific and the growing overseas recognition of the quality and credibility of the arbitral and judicial system in Mainland China in general. As a result of the mutual judicial recognition and cooperation, the number of interregional arbitration cases between Mainland China and HKSAR will continue to surge in the future.

 

B. Further Opening-up and Introduction of Overseas Arbitration Institutions

 

Mainland China authorities have announced a bundle of laws and rules in support of further internationalization of arbitration. For example , the Administrative Measures for Establishing Business Offices by Overseas Arbitration Institutions in Lin-gang Special Area of China (Shanghai) Pilot Free Trade Zone (境外仲裁机构在中国(上海)自由贸易试验区临港新片区设立业务机构管理办法) (the “Administrative Measures”), coming into force on January 1, 2020, allow overseas arbitration institutions to set up offices in Lin-gang Special Area, a newly added part of the Shanghai PFTZ launched in August 2019, and administer foreign-related arbitration cases in Mainland China. In fact, as early as in 2015, the Plan of Further Deepen Reform and Opening-up of China (Shanghai) Pilot Free Trade Zone (进一步深化中国(上海)自由贸易试验区改革开放方案) announced by the State Council already permitted “renowned international commercial dispute resolution institutions” to set up representative offices in the PFTZs. But the Administrative Measures for the first time make it clear that overseas arbitration institutions may administer cases in Mainland China through their PFTZ offices and what types of disputes they may handle.

 

The introduction of well-established international arbitration institutions into the market is no doubt a big step towards further opening-up and internationalization. It may strengthen the foreign investors’ faith in Mainland China arbitration practice and spur Mainland China arbitration institutions to continuously align their services with international standards. It is also interesting to see how these international arbitration institutions will explore and adapt to Mainland China market.

 

C. Reinforcement of Institutional Innovations and Developments

 

Innovations and developments made by Mainland China arbitration institutions in 2019 will likely be reinforced and witness market response in 2020. For example, Shenzhen Court for International Arbitration (“SCIA”), a major arbitration institution based in Shenzhen, introduced an optional “internal” appellate procedure for arbitration proceedings, being the first in Mainland China. Normally, the arbitration procedure is single-instance and an arbitral award would be treated as final and binding, subject to very restricted judicial review only. The optional appellate procedures would allow the parties, upon agreement, to refer a matter for which an award has been rendered to SCIA to an appellate tribunal for rehearing. This innovative mechanism would provide greater leeway for parties to seek substantive review of arbitral awards without costing the efficiency and finality of arbitral proceedings. However, it is worth noting that the application of the optional appellate procedure is conditional upon that it is not “prohibited by the laws of the place of arbitration”. As stipulated by the Arbitration Law of the People’s Republic of China (the “PRC Arbitration Law”) single-instance arbitral awards are mandatorily final, such appellate arbitration is not allowed under the Chinese laws. Therefore, for those who intend to submit their cases to SCIA’s optional appellate procedure, it is advisable to choose jurisdictions in which “internal” appeals within arbitration proceedings are permitted, for instance, the US, the UK, France, Singapore and HKSAR.

 

D. More Reform and Innovation in Sight: Ad Hoc Arbitration

 

It is possible to see more reforms and innovations in 2020 with the biggest story perhaps being the ad hoc arbitration.

 

Ad hoc arbitration is prima facie disallowed under the PRC Arbitration Law, according to which for an arbitration clause to be valid it must refer to a designated arbitration institution. But the Supreme People’s Court Opinions on the Provision of Judicial Safeguards for the Construction of Pilot Free Trade Zones (最高人民法院关于为自由贸易试验区建设提供司法保障的意见) promulgated in 2016 seems to be an approval for ad hoc arbitration as it permits the companies registered in PFTZs to submit disputes for arbitration at a designated place in Mainland China, in accordance with designated arbitration rules and by designated person(s). However, it did not set out any clear and practicable legal framework and left the issue of potential conflict between ad hoc arbitration and the mandatory requirement regarding designated arbitration institution unaddressed. In 2019, some progress was finally made with the promulgation of the Supreme People’s Court Opinions on the Provision of Further Judicial Safeguards for the Construction of One Belt One Road (最高人民法院关于人民法院进一步为“一带一路”建设提供司法服务和保障的意见), in which the Supreme People’s Court vowed to explore the practical mode of ad hoc arbitration within PTFZs. From the judiciary’s manifested intention and approving attitude, it is possible that we may see more cases and hopefully new rules about ad hoc arbitration in the future.

 

E. Popularization of the Use of Online Arbitration Services

 

Online arbitration has been in practice but not widely used in Mainland China. However, it is predictable that amid the COVID-19 outbreak, online arbitration will quickly become a popular alternative for both end-users and arbitration institutions having regard to current international travel bans, inter-city traffic restrictions across the country and the risk of contagion by physical gatherings.  

 

In fact, On February 4, 2020, CIETAC has conducted its first online Hearing where parties from Shanghai, Shenzhen and Wuhan participated the Hearing via video conference with the assistance of CIETAC Hubei Sub-Commission, Shanghai Sub-Commission and South Sub-Commission. It is possible that governmental policies encouraging the use of online arbitration may follow as part of the overall strategy to contain the spread of coronavirus. This may further boost the growth of arbitration given online arbitration has even easier access, lower costs, higher transparency and greater procedural flexibility compared to the traditional arbitration.

 

However, as a matter of good practice, it is recommended to treat online arbitration with caution since this mechanism is still developing with technical and legal issues yet to be addressed. Firstly, it would be problematic for the tribunal to verify the identities of the parties in the proceedings whose only presence in the virtual hearing room may just be a disembodied voice. Even video conferences are not safer in this regard as they can be easily edited with video face replacement software. The second issue arises in relation to the verification of the authenticity and legitimacy of evidence as the parties would have to submit evidence and other documents electronically. Surely digital signatures and other technologies such as blockchain would be helpful, but not every end-user of arbitration can use these. In addition, data security and confidentiality of arbitration would be another big concern. The electronic records or data stream generated during the online arbitration could be easily shared or distributed by one party without the other party’s knowledge and consent, or even hijacked by a third party. Therefore, more technological and institutional innovations are needed to make online arbitration a more practical option.

 

 

IV. Conclusion

 

Despite the COVID-19 outbreak, practitioners still have the confidence that the prospects of arbitration in Mainland China in 2020 is promising with the growth of the market volume, the progress of internationalization, the use of online arbitration, and etc.

 

[Note] 

[1] See, e.g., CIETAC, CIETAC’s Emergence Notice of the Work Arrangement During Novel Coronavirus Defense Period, January 28, 2020, available at .

[2] See, CIETAC, CIETAC Annual Work Report(中国国际经济贸易仲裁委员会2019年工作报告), January 21, 2020, available at < http://www.cietac.org/index.php?m=Article&a=show&id=16445>.

[3] Same as note 2.

[4] See, BAC, Remain True to Original Aspirations and Moving with Dreams: BAC 2019 Annual Work Report Meeting was Successfully Held (“不忘初心,与梦同行”——北仲“2019年工作报告会”成功举办), January 20, 2020, available at .

[5] Same as note 2.

[6] Same as note 2.

[7] Same as note 4.

[8] Wilson Wei Huo, Mutual Assistance Gets Closer, China Law & Practice, September 9, 2019, available at < https://www.chinalawandpractice.com/2019/09/09/mutual-assistance-gets-closer/>.