As I promised, today I am going to explain more in detail Arbitration. This Alternative Dispute Resolution mechanism is the most formal one.
To begin it is necessary to make clear that Arbitration is a private dispute resolution procedure based in contract in which an arbitrator or a panel of arbitrators hears a dispute and render a decision known as an “arbitration award,” which, in most cases, is binding on the parties. Since China opened its door to foreign investors, arbitration has been one of the major vehicles resolving disputes arising from FDIs (Foreign Direct Investments) and foreign trade. Arbitration is a more formal dispute resolution process than both negotiation and mediation, and it involves qualified and independent third parties (i.e., arbitrators) reaching a determination (i.e. the arbitration award). It is important to note that, unlike litigation, there is usually no automatic right to arbitrate if there is not a specific clause in the contract or separate arbitral agreement between the parties. Usually a well-drafted arbitration clause will not only facilitate a more efficient arbitration, but it also may deter breaches of the agreement reached by the parties and thus reduce the likelihood of a litigation in case the business cannot be carried out in the planned way. A good arbitration clause can be deemed the most important provision in a contract when it comes to avoiding costly and time-consuming disputes.
This form of ADR is regulated by its dedicated Law and by the Civil Procedure Law.
Content of the Arbitration Law:
In 1994 China promulgated its Arbitration Law (available at the following web-site: http://www.cietac.org/index/references/Laws/47607b540fddd47f001.cms), establishing a general framework for arbitration; its purpose was to consolidate the laws on arbitration and to bring them more into line with international standards. According to the Arbitration Law, contractual disputes and disputes involving the rights and interest of property between citizens, legal person and other organizations that are equal subjects may be resolved by arbitration. (However, Disputes involving marriage, adoption, guardianship, support and succession, as well as administrative disputes that must be handled by administrative organs, are not to be arbitrated, see Article 3 of the Arbitration Law, 1994). Apart from the “General” and “Supplementary” stipulations, the Arbitration Law contains provisions on: (i) the requirements for a valid arbitration agreement (Articles 16–20), (ii) the arbitration proceedings, how to apply for arbitration (Articles 21–29), how the arbitral tribunal is formed (Articles 30–38), how the hearing is conducted and how an award is made (Articles 39–57), (iii) the application for setting aside an arbitral award (Articles 58–61), (iv) the enforcement of arbitral awards (Articles 62–64), and (v) arbitrations involving foreign elements (Articles 65–73). These provisions apply to the arbitration of disputes arising from foreign economic relations and trade, transportation and maritime affairs. Specifically, foreign-related arbitration commission may appoint foreign nationals who have professional knowledge in law, economics, trade, science or technology as arbitrators. It is quite clear from Article 65 that where no relevant special provisions governing foreign-related arbitration are included in the Arbitration Law, the provision of the Arbitration Law will apply to domestic and foreign-related arbitrations equally.
It is worth noting that parties may apply for the cancellation of the arbitral award with the Intermediate People’s Court in case one of the following circumstances occur: (1) there is no agreement for arbitration; (2) The matters ruled are out of the scope of the agreement for arbitration or the limits of authority of an arbitration commission; (3) The composition of the arbitration tribunal or the arbitration proceedings violate the legal proceedings; (4) The evidences on which the ruling is based are forged; (5) Things that have an impact on the impartiality of ruling have been discovered concealed by the opposite party; (6) Arbitrators have accepted bribes, resorted to deception for personal gains or perverted the law in the ruling (Article 58, Arbitration Law). These circumstances are similar to the ones contained in Article 258 of the Civil Procedure Law (revised, 2007) in relation to the enforceability of the arbitration award.
The Arbitration Law also states that the parties concerned shall execute the arbitral award. If one of the parties refuses to execute the award, the other party may apply for enforcement with the people’s court according to the relevant provisions of the Civil Procedure Law. The people’s court with which the application is filed should enforce it (see Art. 62, Arbitration Law).
Article 65 is of crucial importance for foreign investors; in fact it disposes that the clauses contained in this section of the Law apply to arbitration of disputes arising from foreign economic cooperation and trade, transportation and maritime matters. Furthermore Articles 66 and 67 provide for indications about the formation of the arbitral commission with reference to the CIETAC (http://www.cietac.org/) and CMAC models under the CCPIT (or “CCOIC”).
Arbitration in the Civil Procedure Law:
Then Arbitration is also considered in the Civil Procedure Law (ex Article 255, revised Procedure Law, 2007) where it is stated that in the case of a dispute arising from the foreign economic, trade, transport or maritime activities of China, if the parties have had an arbitration clause in the contract concerned or have subsequently reached a written arbitration agreement stipulating the submission of the dispute for arbitration to an arbitral organ in the People’s Republic of China handling cases involving foreign element, or to any other arbitral body, they may not bring an action in a people’s court. If the parties have not had an arbitration clause in the contract concerned or have not subsequently reached a written arbitration agreement, they may bring an action in a people’s court.
It is interesting to note that a people’s court shall, after examination and verification by a collegial panel of the court, make a written order not to allow the enforcement of the award rendered by an arbitral organ of the People’s Republic of China handling cases involving foreign element in the following circumstances:
(1) the parties have not had an arbitration clause in the contract or have not subsequently reached a written arbitration agreement;
(2) the party against whom the application for enforcement is made was not given notice for the appointment of an arbitrator or for the inception of the arbitration proceedings or was unable to present his/her case due to causes for which he/she is not responsible;
(3) the composition of the arbitration tribunal or the procedure for arbitration was not in conformity with the rules of arbitration; or
(4) the matters dealt with by the award fall outside the scope of the arbitration agreement or which the arbitral organ was not empowered to arbitrate.
If the people’s court determines that the enforcement of the award goes against the social and public interest of the country, the people’s court shall make a written order not to allow the enforcement of the arbitral award.
The words of this law blog entry complete the part regarding this particular method of ADR, however, the theme is not exhausted yet. So with the next “entry” I will start examining litigation, very briefly, then I will offer my thoughts about the factors to be considered when choosing One method of ADR.
(I did not mentioned before, however, some of my entries are extracted from my work titled M&A and Takeovers in China, so if some of you is interested in having the complete series of entries and more, please visit: http://www.kluwerlaw.com/Catalogue/titleinfo.htm?ProdID=9041140484).
Cristiano Rizzi