China Update: Understanding and Application of “Three Specific” Ad Hoc Arbitrations

On June 24, 2024, the Shanghai High People’s Court issued the Provisions of the Shanghai High People’s Court on the Centralized Jurisdiction of Judicial Cases Involving “Three Specified” Ad Hoc Arbitration and Arbitration Cases Involving “Overseas Arbitration Business Institutions” (the “Provisions”), marking a new stage in the development of ad hoc arbitration in China.

Arbitration can be divided into institutional arbitration and ad hoc arbitration, based on whether there is a special permanent establishment to administer the procedures for arbitration activities. Based on the place of arbitration, ad hoc arbitration can be further divided into overseas ad hoc arbitration and domestic ad hoc arbitration.

Article 543 of the Judicial Interpretation of the Civil Procedure Law stipulates that the rules for the recognition and enforcement of overseas ad hoc arbitral awards and arbitral awards of foreign institutions are consistent with those of overseas institutions. In other words, China does not deny the validity of an arbitration agreement only because the parties have agreed to an overseas ad hoc arbitration, for example, Guiding Case No. 200 of the Supreme People’s Court. However, the situation is different for domestic ad hoc arbitrations. According to the Arbitration Law and the Civil Procedure Law, the selection of an arbitration commission is one of the prerequisites for the validity of an arbitration agreement. In this case, the court denied in principle the validity of the arbitration clause that agreed to arbitrate in China. However, on the one hand, this rule is not conducive to giving full play to the advantages of the ad hoc arbitration system in China, and on the other hand, it also leads to the difference in the effectiveness of domestic and foreign ad hoc arbitral awards.

In order to solve this problem, on 30 December 2016, the Supreme People’s Court promulgated the Opinions of the Supreme People’s Court on Providing Judicial Safeguards for the Construction of Pilot Free Trade Zones (the “Opinions”), creating the “three specifics” principle, that is, “if an enterprise registered in a pilot free trade zone agrees with each other to arbitrate the relevant dispute at a specific location in the Mainland, in accordance with specific arbitration rules, and by a specific person, the arbitration agreement may be deemed valid”, providing a legal basis for the development of ad hoc arbitration in China. On July 30, 2021, Articles 91 to 93 of the Arbitration Law (Amendment) (Draft for Comments) promulgated by the Ministry of Justice put forward the concept of ad hoc arbitration rules in line with China’s national conditions.

On this basis, in order to promote the construction of an international commercial arbitration center, Shanghai attaches great importance to the innovation and implementation of ad hoc arbitration mechanisms, and has intensively issued relevant guiding documents, including but not limited to the Regulations of Shanghai Municipality on Promoting the Construction of an International Commercial Arbitration Center, the Special Action Plan for Shanghai Courts to Further Promote the Construction of a Law-based Business Environment (Version 7.0), the Measures for the Promotion of Foreign-related Commercial and Maritime Ad Hoc Arbitration in Shanghai (for Trial Implementation) (the “Promotion Measures”), and the aforementioned Provisions. Among them, the Measures provide a relatively detailed institutional framework for the implementation of ad hoc arbitration.

II. Scope of Application and Requirements of “Three Specified” Ad Hoc Arbitrations

The “three specified” ad hoc arbitrations are a limitation of the ad hoc arbitrations commonly used in international arbitration, and are a limited liberalization of ad hoc arbitrations in China where the seat of arbitration is in the Mainland.

(1) The type of case to be applied

China implements a “dual-track system” for domestic ad hoc arbitration, that is, only parties to commercial maritime disputes with foreign-related elements are granted the right to choose ad hoc arbitration; Commercial and maritime disputes that do not have foreign-related elements are not within the scope of application of the “Three Specifics” ad hoc arbitration rules for the time being.

For example, Article 2 of the Measures clarifies that “ad hoc arbitration as used in these Measures refers to arbitration activities conducted by specific persons in accordance with specific arbitration rules in accordance with the provisions of Paragraph 1 of Article 20 of the Regulations in the commercial and maritime fields with foreign-related elements”.

In terms of the rules for determining foreign-related factors, they are mainly found in Article 1 of the Interpretation (I) of the Supreme People’s Court on Several Issues Concerning the Application of the Law of the People’s Republic of China on the Application of Laws to Foreign-Related Civil Relations), Article 520 of the Judicial Interpretation of the Civil Procedure Law, and Article 3 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Establishment of International Commercial Courts. In a nutshell, the foreign-related factors of an arbitration agreement mainly include whether one of the four aspects of the civil relationship, namely the subject of the civil relationship, the place of habitual residence, the subject matter and the legal facts, has extraterritorial elements, and also includes catch-all clauses in other circumstances that can be recognized as foreign-related civil relations.

(2) The scope of applicable entities

The SPC clarified in the Opinions that arbitration agreements between enterprises registered in the Pilot Free Trade Zone are applicable. In the Promotion Measures, the scope of the subject is further expanded to: between enterprises registered in Shanghai, between enterprises registered in Pudong New Area of Shanghai and domestic and foreign parties, between enterprises registered in domestic pilot free trade zones, and between foreign, Hong Kong, Macao and Taiwan enterprises.

(3) III. Specific applicable requirements

First, the specific seat of arbitration.

In practice, as an important legal concept, the seat of arbitration can not only be used as a criterion for determining the nationality of an arbitral award, but also determine where the court has the right to judicially supervise and review the facts of the award, and in the long run, it will also affect the recognition and enforcement of the award abroad.^[1]The Opinions briefly require that the seat of arbitration should be a specific place in the Mainland, but does not clarify whether it is limited to a certain place within the Pilot Free Trade Zone or includes other locations in the Mainland. The Measures provide clearer guidance, i.e., the parties should agree that the seat of arbitration should be Shanghai.

Second, specific arbitrators.

Specific arbitrators shall be understood separately between Chinese arbitrators and foreign arbitrators. If the seat of arbitration is in the Mainland or Shanghai, the domicile of the ad hoc arbitral award is China, and it shall not exceed the mandatory provisions on the qualification of arbitrators in China’s current arbitration legislation, i.e., Article 13 of the Arbitration Law, which stipulates that a Chinese arbitrator shall possess one of the qualifications of the “38 and 2 highs”. For foreign arbitrators, with reference to Article 67 of the Arbitration Law, they should have the corresponding knowledge of law, economy and trade, or science and technology.^[2]

The Facilitation Measures further strengthen the operability of this aspect, i.e., the use of a specific scope of the roster or the appointment of institutions on behalf of the arbitrators. In the case of the former, the arbitrators may be selected from the list of arbitrators recommended for ad hoc arbitration published by the Shanghai Arbitration Association, or from the list of arbitrators from the list of arbitrators registered in Shanghai and the business institutions established by well-known overseas arbitration and dispute resolution institutions. In the case of the latter, the first step should be to appoint the agreed arbitration institution or request the Shanghai Arbitration Association to assist in the appointment. The second way is mainly to deal with the possible deadlock in ad hoc arbitration.

Third, specific arbitration rules.

The parties may agree on detailed arbitration procedures on their own, but in practice, the parties usually agree to apply internationally accepted arbitration rules, such as the UNCITRAL Arbitration Rules. At present, the existing ad hoc arbitration rules in China mainly include the Ad Hoc Arbitration Rules of the Hengqin Pilot Free Trade Zone issued by the Zhuhai International Arbitration Court, the Ad Hoc Arbitration Rules for Docking Ad Hoc Arbitration and Institutional Arbitration issued by the China Internet Arbitration Alliance, the Ad Hoc Arbitration Rules of the China Maritime Law Association, the Ad Hoc Arbitration Service Rules of the China Maritime Law Association, and the Working Rules of the Hainan Court of International Arbitration for Assisting Ad Hoc Arbitration (Trial) issued by the Hainan International Arbitration Court. It is worth noting that the parties should ensure that the arbitration rules agreed upon by them should be feasible and avoid the mixing and mismatch of arbitration institutions and arbitration rules.

(4) 3. Coordination between specific ad hoc arbitration and arbitration institutions

The involvement of an arbitral institution in ad hoc arbitration does not necessarily mean that an ad hoc arbitration will be transformed into an institutional arbitration, but should depend on the specific role of the arbitral institution and the degree of involvement. Articles 9 and 10 of the Measures provide that arbitration institutions are encouraged to formulate guidelines for ad hoc arbitration services and provide arbitration services including assistance in the formation of tribunals, services for the secretary of the arbitral tribunal, and assistance in handling interim measures such as preservation. At present, arbitration institutions such as the China Maritime Arbitration Commission and the Shanghai International Arbitration Center have issued guidelines on ad hoc arbitration assistance services.

It should also be noted that at present, the regulation of the “three specified” ad hoc arbitration is mainly concentrated at the level of local legislation, and different regions may have different provisions. In addition to Shanghai, on 1 July 2024, the Several Provisions on the Development of International Commercial Arbitration in the Hainan Free Trade Port (the “Hainan Regulations”) came into effect. According to Articles 16 to 20 of the Hainan Regulations, the Hainan Free Trade Port may be used as the seat of arbitration for ad hoc arbitration between enterprises registered in the Hainan Free Trade Port, between enterprises registered in the Hainan Free Trade Port and foreign or Hong Kong, Macao and Taiwan enterprises, and between foreign, Hong Kong, Macao and Taiwan enterprises. It is worth noting that the second paragraph of Article 18 of the Hainan Provisions provides for the remedy of the parties failing to agree on an ad hoc arbitration rules, which may be understood as a breakthrough in the restriction of “specific arbitration rules”.

3. Model Clauses for “Three Specified” Ad Hoc Arbitration Agreements

In practice, the formulation of model clauses is of great significance in guiding the parties on how to agree on ad hoc arbitration, and it is suggested that the following forms may be adopted:

“[Necessary part] All disputes arising out of or in connection with this Agreement shall be resolved by arbitration in Shanghai, and the Interim Arbitration Rules of the China Maritime Law Association shall apply. The appointed arbitrator is the Shanghai Headquarters of the China Maritime Arbitration Commission.

【Recommended Part】The arbitral tribunal shall consist of one (1) arbitrator and the language of the arbitration shall be Chinese. The arbitration agreement shall be governed by the laws of the People’s Republic of China, and this Agreement shall be governed by the laws of the People’s Republic of China as the substantive law. The arbitral award shall be final and the parties agree that the arbitral award may be made public in an appropriate manner by the appointing arbitrator after it has been declassified. ”

IV. Conclusion

As mentioned by the Ministry of Justice in the Explanation on the > of the <People’s Republic of China Arbitration Law (Amendment) (Draft for Comments), ad hoc arbitration, as the “original” form of arbitration and international practice, is widely existing in the international community and recognized by national laws and international conventions. Considering that China has acceded to the New York Convention and that foreign ad hoc arbitral awards can be recognized and enforced in China, domestic and foreign arbitrations should be treated equally, and it is indeed necessary to add provisions on the “ad hoc arbitration” system.

Prior to the promulgation of the revision of the Arbitration Law, the three types of ad hoc arbitration were a beneficial and transitional arrangement in the process of introducing the ad hoc arbitration mechanism in China, which imposed restrictions on the types of disputes, applicable subjects and applicable conditions of international ad hoc arbitration, so as to ensure the controllability of the exploratory stage. In light of the content of this article, the parties should pay special attention to the provisions of different local regulations on the scope and conditions of the “three specific” arbitrations when agreeing on the three specific ad hoc arbitration agreements, so as to avoid adverse consequences caused by the invalidity of the arbitration agreement.

Footnote:

[1] Zhao Xiuwen, International Commercial Arbitration Law, Chinese University Press, 2008, p. 394

[2] Zhang Jian, “The Significance and Limits of the “Three Specifics” on Arbitration”, People’s Justice, 2019, Issue 28, p. 43

Anjie Broad, China, a Transatlantic Law International Affiliated Firm.  

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