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International arbitration institutions such as the International Chamber of Commerce have been pressing mainland China for years to recognise clearly their ability to conduct arbitrations in the country.
The volume of disputes involving foreign investors is increasing because of the massive investment under way.
However, investors and other parties are effectively barred from conducting arbitration with mainland Chinese parties within the country under the rules of international institutions such as the ICC, the American Arbitration Association and the London Court of International Arbitration if they wish to have an award that may be enforced on the mainland.
This is because mainland Chinese law requires even those categories of “foreign related” disputes that could be conducted overseas to be heard by an designated “arbitration commission” if conducted in mainland China.
This expression has been interpreted by Chinese courts to require the appointment of a mainland Chinese registered arbitration commission.
To date all of these have been mainland Chinese bodies, such as China International Economic and Trade Arbitration Commission, mainland China’s pre-eminent arbitration institution.
There had been hope that a recent Supreme Peoples Court “Interpretation on Certain Issues with respect to the Application of the Arbitration Law by the People’s Court” (the “2006 Interpretation”), which took effect on September 7, would address this problem.
However, it does not. The general view continues to be that mainland Chinese law does not clearly permit arbitrations involving Chinese parties to be conducted in the country under the rules of foreign institutions.
This matters because a key feature of arbitration is the principle of party autonomy, which allows the parties to determine the procedures governing the conduct of their dispute and which institution will administer it.
The current lack of clarity of mainland Chinese law on this issue means that prudent parties conducting an arbitration in the country will probably select a mainland Chinese arbitration commission, potentially limiting the parties’ choice of arbitrators and the procedures available for conducting arbitration.
A number of parties have taken the risk and agreed to conduct arbitrations under the rules of international institutions.
However, some have found themselves caught up in protracted litigation before Chinese courts, defending challenges brought against recognition and enforceability of the award by the unsuccessful party, with no recovery in sight.
An alternative venue may be Hong Kong, as the grounds for challenging the validity of Hong Kong awards are narrower than those available with respect to mainland Chinese awards.
The writer is a partner of White & Case LLP and the head of White & Case’s Asian dispute resolution practice. She is also a member of the ICC Hong Kong Standing Commission on Arbitration.