FRONTIERS OF LAW IN CHINA

FRONTIERS OF LAW IN CHINA VOL. 9 MARCH 2014 NO. 1 DOI 10.3868/s050-003-014-0005-8 INCORPORATION OF UNCITRAL MODEL LAW ON INTERNATIONAL COMMERCIAL ARBITRATION: IN PERSPECTIVE OF CHINA HU Yong, * XIAO Xiaowen ** Globalization has enabled China to rationalize and institutionalize its economic and political system. China has been quite successful in accommodating globalization in its legal reform. As China becomes one of the important trade players in the international market, the commercial disputes between Chinese companies and foreign trade-partners to be resolved through the arbitration are arising substantially. To an extent, China s accession to the World Trade Organization (WTO) has sped up its legal reform in the past decades. However, there are some deficiencies with respect to the mechanism and legislation of China s arbitration law that arguably is not responsive to the norms of the United Nations Commission on International Trade (UNCITRAL) Model Law (1985) and its Amendment (2006). This paper provides an overview of arbitration in China from the legislative and practical perspectives, covering the arbitration s evolution history and problems before and after 1994. The paper focuses on some important issues in China s Arbitration Law ( CAL ), evaluating its legislative defects which are inconsistent with the Model Law and its Amendment, clarifying how the Model Law was incorporated into China s CAL. Some legislative amendments are recommended for CAL s modernization and its practices, to align it with international arbitration norms in the future. INTRODUCTION... 83 I. CHINESE ARBITRATION LAW (1994)... 85 A. Glimpse at Chinese Arbitration System Before 1994... 85 B. Background of Chinese Arbitration Law (1995)... 86 C. Summary on Some Inconsistent Rules... 88 II. NORMATIVE ANALYSIS ON INTERIM MEASURES AND ENFORCEMENT OF AWARDS... 89 A. Interim Measures... 89 B. Normative Analysis on Enforcement of Awards... 90 1. Judicial Improvement... 90 2. Realistic Embarrassment... 90 3. Lack of Coordination... 91 * ( 胡勇 ) Senior Lecturer, at International Business Faculty, Beijing Normal University, Zhuhai 519087, China; Ph.D student at Faculty of Law, University of Macau. Contact: huyongccnu@hotmail.com ** ( 肖小文 ) Associate Professor, at Franchise Management School, Beijing Normal University, Zhuhai 519087, China. Contact: mikexiao@126.com

2014] INCORPORATION OF UNCITRAL MODEL LAW IN PERSPECTIVE OF CHINA 83 C. Relationship Between the Court and Arbitral Tribunal... 92 III. IMPACT OF UNCITRAL MODEL LAW... 92 A. Arbitration Agreement: Valid or Invalid... 93 B. Interim Measures... 94 1. Partial Incorporation of the Model Law... 94 2. Power of Granting... 95 C. Challenge System... 97 D. Recognition and Enforcement of Awards... 97 E. Ad Hoc Arbitration... 99 1. Brief Comment: Advantages and Disadvantages... 99 2. Unfair Position Between Chinese and Foreign Parties... 99 IV. PROPOSAL FOR FUTURE AMENDMENT... 101 A. Form of Arbitration Agreement... 101 B. Interim Measures... 101 C. Admittance of Ad Hoc Arbitration... 103 D. Detailed Provisions to Recognize and Enforce the Awards... 103 CONCLUSION... 104 INTRODUCTION Over the past two decades, unprecedented quantity of foreign direct investment has flowed into China. 1 Since China has currently surpassed America as the world s top destination of foreign direct investment (FDI), commercial disputes between foreign traders and Chinese parties are on the rise significantly. At the state level, WTO dispute settlement could resolve state-to-state trade or other government-related commercial disputes, however, how would the disputes be resolved between private Chinese parties and foreign partners? China s accession to the WTO in 2001 has initiated a fundamental legislative reform, and there are some achievements in the legal system in China. Some law scholars believe China s entry into WTO has contributed substantially to a more fair and transparent litigation system. 2 In most cases, however, few foreign legal persons or partners have trust in Chinese litigation rules, doubting of their independence and professionalism. 3 Therefore, arbitration is a reasonable option to settle disputes between foreign and Chinese parties in China. The rising arbitration cases have been largely handled by the China International 1 See Deepak Sethi, William Q. Judge & Qian Sun, FDI distribution within China: An integrative conceptual framework for analyzing intra-country FDI variations, 28(2) Asia Pacific Journal of Management 325 (2011). 2 See Christian Kraft, Joining the WTO: the impact of trade, competition and redistributive conflicts on China s accession to the World Trade Organization, Peter Lang Publishing Inc. (New York), at 273 (2007). 3 See ZHENG Yongnian, Globalization and State Transformation in China, Cambridge University Press (Cambridge), at 189 95 (2004).

84 FRONTIERS OF LAW IN CHINA [Vol. 9: 82 Economic and Trade Arbitration Commission (CIETAC). 4 Here is the statistics for international arbitration tribunals regarding cases handled from 2004 to 2010. 5 It indicates that an even larger surge of cases for arbitration between 2008 and 2009 (see Table 1). Table 1 Cases for International Arbitration Tribunals (2004 2010) AAA CIETAC HKIAC ICC KCAB LCIA SIAC SCC 2010 888 1,352 835 793 52 237 140 197 2009 836 1,482 754 817 78 232 114 215 2008 703 * 1,230 602 663 47 213 * 71 * 176 2007 621 * 1,118 448 599 59 137 * 70 * 84 2006 586 * 981 394 593 47 133 * 65 * 141 2005 580 * 979 281 521 53 118 45 * 56 2004 614 * 850 280 561 46 87 48 * 50 Source: http://www.hkiac.org/index.php/tc/hkiac/statistics/17-statistics-2004-2010 The full names for arbitrational tribunals are as below (see Table 2). Table 2 Full Names for Arbitrational Tribunals AAA CIETAC HKIAC ICC KCAB LCIA SIAC SCC American Arbitration Association China International Economic and Trade Arbitration Commission Hong Kong International Arbitration Centre International Chamber of Commerce The Korean Commercial Arbitration Board London Court of International Arbitration Singapore International Arbitration Centre Arbitration Institute of the Stockholm Chamber of Commerce Conclusively, it is internationally accepted that CIETAC is widely credited by the foreign business community as a relatively inexpensive, expeditious, and fair tribunal in China. In the context of international arbitration, the Model Law and its Amendment 4 The name of the Foreign Trade Arbitration Commission was re-named as the Foreign Economic and Trade Arbitration Commission on 26 February 1980, the purpose of which was to increase the Commission s jurisdictions over the disputes in order to keep pace with economic development of China at that time. After that, the Commission was empowered to arbitrate not only on trade disputes with foreign companies and individuals, but also on disputes arising from other economic activities between China and foreign countries, such as joint ventures, international financing, etc. In 1988, the Commission was renamed the China International Economic and Trade Arbitration Commission (CIETAC) to handle cases covering the whole range of international economic and trade disputes. http://www.cietac.org/index.cms (last visited Sept. 4, 2012). 5 In 2010, China ranked the first of the number of new submissions of 486 new cases. See CIETAC, Working Report (2009 2010), 1, delivered at a seminar on arbitration in Beijing, Sept. 15 16, 2010.

2014] INCORPORATION OF UNCITRAL MODEL LAW IN PERSPECTIVE OF CHINA 85 provides an important role to China for the Chinese legislators to revise CAL. This paper explores China s arbitration rules and its development from legislative and practical perspectives. The first part of this paper gives a brief introduction of China s arbitration system. The second part deals with analysis on the arbitration rules before the enactment of CAL, focusing on several key issues regarding interim measures, enforcement of awards from the perspective of the Civil Procedure Law of 2013 ( CPL ) and CIETAC. The third part explores how the Model Law was incorporated into CAL, critically evaluating the impact of the Model Law on CAL. The fourth part recommends proposals to China s CAL amendment in future. I. CHINESE ARBITRATION LAW (1994) Although the arbitration is not part of the national court system, it nevertheless fulfills the same role as litigation in the national court system. The result is that the enforcement of arbitral award follows the same or similar to the enforcement of the court rulings. Therefore, the state has a strong interest in controlling relevant rules of arbitration, thus the Chinese litigation rules influenced early arbitration system substantially. A. Glimpse at Chinese Arbitration System Before 1994 On 6 May 1954, soon after the foundation of the People s Republic of China, the then Administration Council of the Central Government (now the State Council) promulgated the Decision on the Establishment of the China Foreign Trade Arbitration Commission (CFTAC) 6 within the China Council for the Promotion of International Trade (CCPIT). 7 As early as 1979, Chinese law provided arbitration as an efficient approach to handle international commercial and FDI disputes. 8 Before 1994, there was no special arbitration law on the international arbitration procedures which, however, were mainly regulated by the arbitration rules ( CFTAC Rules ). Similar to many countries, the close connection between the court system and arbitration is indicated in the fact that arbitration rules are found in the Code of Civil Procedure in China. 9 There are some provisions in CPL (1982, 1991 & 2013) governing international arbitration as mentioned later in this paper. Yet there were mandatory domestic arbitrations conducted by some 6 In China, an arbitration commission is different from an arbitral tribunal, and the former has the power to organize the latter to hear specific cases. 7 See the Civil Law Department of the Legislative Affairs Commission of the Standing Committee of the National People s Congress of China, 中华人民共和国仲裁法全书 (Pandect on the Arbitration Law of the PRC), Law Press (Beijing), at 72 (1995). 8 For example, Law of the People s Republic of China on Joint Venture Using Chinese and Foreign Investment (1979) sets forth certain clauses to settle disputes with arbitration. 9 The code of civil procedure is named the Civil Procedure Law in most cases here in China, and shortened as CPL later in this paper. The latest amended CPL came into effect on 1 January 2013.

86 FRONTIERS OF LAW IN CHINA [Vol. 9: 82 domestic arbitration commissions (i.e. institutions) attached to the State Administration of Industry and Commerce and its subordinate agencies, which are different from international arbitrations. For instance, with respect to the finality of awards, the parties could bring the same dispute to the local court if the parties are dissatisfied with the arbitral award. Lots of early arbitration rules provided by the then commissions (i.e. institutions) above are actually inconsistent with the nature of arbitration as internationally recognized, such as no arbitration agreement was required in order to arbitrate and the arbitral award was not final. 10 These proceedings were considered as arbitration but they were, in effect, administrative proceedings to settle commercial disputes, involving arbitration, administration and adjudication, which is far from the nature of arbitration. 11 In the international arena, since 1950s, China has adopted, as a matter of international practice, the system of voluntary arbitration with a final binding award. In 1956 and 1959, respectively, the first two Chinese international arbitration institutions CIETAC and Maritime Arbitration Commission (CMAC) 12 were founded under the auspices of CCPIT and the China Chamber of International Commerce (CCIC). Since their founding, CIETAC and CMAC have heard all international arbitration cases. 13 As there was no uniform law on the procedures of domestic arbitration, and all arbitration cases was handled by one of the government agencies, the State Administration of Industry and Commerce, through its local branches, pursuant to the procedures which were not systematically uniform nationwide. Particularly, without a harmonized national arbitration law, domestic arbitration cases were handled by arbitration commissions (i.e. institutions) set up at the local municipal level which are dependent on and influenced by local authorities or government bodies. Therefore, the efficiency and fairness was in doubt under the disordered framework of arbitration in China. B. Background of Chinese Arbitration Law (1995) In order to underscore the increasing internationalization and modernization of 10 See Marie Kidwell & James Brown, China: a perspective on international arbitration in China, recent developments and CIETAC arbitration, 20(5) Const. L.J. 253 61 (2004). 11 Id. 12 In parallel with the establishment of FTAC, a special arbitral body was established for the resolution of maritime dispute, viz. the Maritime Arbitration Commission, on 1 May 1959 in accordance with the Decision of the State Council Concerning the Establishment of a Maritime Arbitration Commission within the China Council for the Promotion of International Trade. See Jingzhou TAO, Arbitration Law and Practice in China, Kluwer L. Int l (The Netherlands), at 18 (2004). 13 REN Jianxin, Mediation, Conciliation, Arbitration and Litigation in the People s Republic of China, 15 Int l Law 395 (1987).

2014] INCORPORATION OF UNCITRAL MODEL LAW IN PERSPECTIVE OF CHINA 87 Chinese arbitration after Deng initiated the economic reform, CCPIT replaced CFTAC with CIETAC and replaced MAC with CMAC in 1988 after the ratification by the State Council. 14 The State Council extended the scope of CIETAC s arbitration to cover all the disputes arising from international economic trade and empowered CIETAC to amend the Rules of Arbitration in accordance with: (1) laws of China; (2) international conventions concluded by or involving China; and (3) international customs. 15 In general, the legal framework governing dispute resolution in China consists of various legal sources including: 16 the Model Law, New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereinafter, the Convention ), 17 General Principles of the Civil Law, CPL, CAL and Contract Law. However, systematically speaking, a comprehensive law of arbitration is urgently needed to harmonize different sources of domestic and international arbitration rules in order to handle disputes efficiently. The year of 1995 was a milestone for arbitration in China, significantly in the history of legislation, the first Chinese Arbitration Law (CAL) came into effect. From the international perspective, China incorporated most of the Model Law s rules into its arbitration law. 18 Furthermore, CAL revised CIETAC and CMAC Rules which served as the fundamental legal rules of arbitral tribunals and the manner with which an arbitral tribunal is to be conducted. 19 Additionally, CPL (2013) provided for foreign economic and trade arbitration in its Chapters 28 and 29. CAL s enactment is positively affected by the fact that China became a signatory to the Convention. 20 During the period, China s 14 See Charmian Wang, Arbitrating Business Disputes in Beijing An Examination Focusing on CIETAC s New Arbitration Rules, (1) Commercial Dispute Resolution Journal 39, 39 (1994). 15 In 1956, CTETAC formulated arbitration rules called the Provisional Rules of Arbitration Procedure. CIETAC amended these rules in 1988, 1994, 1995, 1998 and 2000 to meet the changing needs of arbitration parties. The current arbitration rules were adopted on 1 October 2000. According to these rules, CIETAC takes cognizance of cases over international, foreign-related and domestic disputes of a contractual or non-contractual nature in accordance with an arbitration agreement between the parties to submit their dispute to CIETAC for arbitration. 16 The State Council, Reply Concerning the Renaming of the Foreign Economic and Trade Arbitration Commission as the China International Economic and Trade Arbitration Commission and the Amendment of Its Arbitration Rules, Gazette of the State Council of the PRC, Jun. 21 1988. 17 On 2 December 1986 the NPC of China declared to adhere to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, at www.uncitral.org/uncitral/en/uncitral_texts/ arbitration/nyconvention_status.html (last visited Jul. 8, 2012). 18 On 1 September 1995, the first Arbitration Law of PRC went into effect. In addition, the Arbitration Rules of CIETAC (CIETAC Rules) was revised with effect on 1 October 1995. 19 CIETAC s Arbitration Rules were again amended in March 1994 in order to clarify and streamline its process and strengthen its attraction to foreign investors to comply with the new law. 20 The Model Law, together with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Arbitration Rules of the United Nations Commission on International Trade Law recommended by the General Assembly in its Resolution 31/98 of 15 December 1976, significantly contributes to the establishment of a unified legal framework for the fair arbitral rules in China.

88 FRONTIERS OF LAW IN CHINA [Vol. 9: 82 foreign economic and trade arbitration began to be international. With the enactment of CPL (1991), the arbitration system was further revised. In conclusion, with the enactment of CAL, a modern and international arbitration system was finally established in China. C. Summary on Some Inconsistent Rules Under the new Chinese Arbitration Law, domestic arbitration cases are to be handled by arbitral commissions (i.e. institutions) set up at the municipal level which are independent of and not subordinate to any government or administrative sectors. Each local arbitration commission (i.e. institutions) is a member of the newly-formed China Arbitration Association, a self-regulated organization charged with supervising its members, arbitrators and related matters throughout China. As a result, the fairer and more efficient arbitrative practices were expected because of less influence from judicial and governmental sectors. 21 Unfortunately, there are still lots of mandatory provisions in CAL and implemented by CIETAC which are criticized for being inconsistent with international rules in the Model Law and its Amendment. It is necessary to note some CAL provisions of such concern as the following: The free selection of arbitrators is restricted in various ways, for example, what s the reasoning behind the clause Arbitrator s qualification must meet at least one of following conditions: (1) they have been engaged in arbitration for at least eight years; (2) they have worked as a lawyer for at least eight years; (3) they have been a judge for at least eight years. 22 The question raised in my perspective is that why the length of years is not 5 or 10 or whatever. According to rules from CAL and CIETAC, dispute parties are required to choose only an arbitrator on a panel list though the case may be in need of special expert. 23 Additionally, CAL or CIETAC rules do not require the parties to exchange evidence and witness lists, or draw up a list of issues together. 24 This will lead the arbitration proceedings in an inefficient manner. Also, the arbitration proceedings regarding the crucial subject of evidence taking are strictly regulated and considerably affected by the court s litigation procedures as well. As to interim measures, if one party applies for property preservation, the arbitral tribunal has no power to order the application, however, shall submit to the State s local court the application of the party in accordance with the relevant provisions of CPL (2013). 25 With respect to the award enforcement, CAL provides a variety of means of recourse for setting aside awards which feature lots of disparities from international customs. Furthermore, an arbitration 21 CAL (1995), art. 8 22 CAL (1995), art. 13. 23 CAL (1995), arts. 31, 32. 24 CAL (1995), sec. 3. 25 CAL (1995), art. 28.

2014] INCORPORATION OF UNCITRAL MODEL LAW IN PERSPECTIVE OF CHINA 89 agreement between the parties is required and should be in a written form, which is, in nature, against the Model Law s relevant rules. II. NORMATIVE ANALYSIS ON INTERIM MEASURES AND ENFORCEMENT OF AWARDS As far as the effective constitution of arbitration is concerned, the procedural and substantive rules concerning interim measures and enforcement of awards are paramountly important. Before China enacted CAL, the relevant rules in China s arbitration system covering these two aspects did not work well as desired. A. Interim Measures As the temporary measure granted at any time prior to the issuance of the award, an interim measure makes sure that the final award be enforceable. However, sometimes an application for interim measure may, conversely, be issued to destabilize the other party, or even indirectly, to destroy the whole arbitration proceedings. For example, one party s application for interim measure may distract the arbitral tribunal and the other party from the principal claim issues. Consequently, interim measures can thus turn to be a delaying trick that has little benefit to the rapid conclusion of the proceedings. In terms of the power to apply interim measures, the Model Law conferred on arbitral tribunal wide power to grant interim measures sought by the party with application. Regarding the court s power, the principle of Article 5 of the Model Law provides that the court intervention should be excluded in principle, save only where it is made permissible by the Model Law. Meanwhile, Article 9 of the Model Law grants the parties chances to apply for interim measures. Before the promulgation of CAL, there was no appropriate mechanism to guide when and how interim measures are applied, while before China enacted CPL (1982), CIETAC formulated the Provisional Rules of Arbitration (1956), of which Article 15 provides that responding to one party s application, the arbitral commissions have power to take interim measures on assets relevant to subject matter in dispute. 26 It is concluded that the then arbitration rules delegated the awards power to the arbitration commissions. However, to be consistent with CPL, later revision of CIETAC arbitration rules (1988) provides that the arbitration commission shall submit the application of interim measure to local intermediary court. Furthermore it is ineffective in protecting the party s right during the arbitration proceedings as there is only one form of interim measure asset preservation provided by CPL or CIETAC arbitration rules (1988). The procedures or criteria concerning the application of interim measures are not available at all in the CIETAC arbitration rules (1988). 26 ZHAO Jing, 中国国际经济贸易仲裁委员会仲裁规则释义与适用指南 (Interpretation and Application Guide of CIETAC s Rules), Law Press (Beijing), at 301 (2006).

90 FRONTIERS OF LAW IN CHINA [Vol. 9: 82 B. Normative Analysis on Enforcement of Awards 1. Judicial Improvement. Before the enactment of CPL (1991), the 1982 Trial CPL provides, subject to certain restrictions, 27 for the enforcement of foreign arbitral awards through the mechanism of judicial assistance, which considerably made proceedings of enforcement less efficient and not in pace with international practice. Since China s accession to the New York Convention in 1987, arbitral awards made by arbitral tribunals seated in China have been recognized and enforced in most countries. Article 269 of CPL (1991) is concerned with the enforcement in China of arbitral awards issued by foreign arbitration institutions. 28 It states as follows: If an award made by a foreign arbitration agency requires the recognition and enforcement by a court of China, the party concerned shall directly apply to the intermediate court in the place where the subject of execution has its domicile or where its property is located. The court shall deal with the matter in accordance with relevant provisions of international treaties concluded or acceded to by the People s Republic of China or on the principle of reciprocity. While the vast majority of international arbitral awards have been recognized and enforced in China, arbitration enforcement record published and unpublished in China indicated that there were some obstacles to foreign parties seeking to enforce an arbitration award in China, for the reasons that the Convention is not generally recognized by Chinese local judiciary, and the local protectionism are frequently reported as barriers of enforcement, and other legislative or practical barriers to enforce awards. 29 2. Realistic Embarrassment. The promulgated civil procedure law contained procedural difficulties in place in the enforcement of arbitration awards in China by providing more excuses for local courts to avoid their obligation in enforcement cases. Under Article 260 of CPL on the statutory grounds to set aside foreign-related arbitral awards, it is provided that a court can nullify a foreign-related arbitral award if the party seeking to void the award can prove that: (1) No arbitration agreement was ever reached; (2) the respondent was not given notice of the appointment of an arbitrator or of arbitration proceedings, or was otherwise unable to present its case for reasons beyond its control; (3) the composition of arbitral tribunal or arbitral procedure was not in accordance with applicable arbitration rules; or (4) the subject matter dealt with in the award was beyond the scope of arbitration agreement or the jurisdiction of the arbitral tribunal. 30 All those provisions are consistently incorporated by CAL late in 1994, 27 See Jingzhou TAO, Arbitration Law and Practice in China, Kluwer Law International (The Hague/London/New York), at 135 36 (2004). 28 Same provision is provided in Article 283 in the latest amended version of CPL (2013). 29 See Xiaomin Sun & Ying Zen, Settling Out of Court, 23(5) Chinese Business Rev. 50 (1996). 30 Same provision is provided in Article 274 in the latest amended version of CPL (2013).

2014] INCORPORATION OF UNCITRAL MODEL LAW IN PERSPECTIVE OF CHINA 91 however, which is inconsistent with the provisions concerning the grounds for refusing recognition or enforcement provided in the Model Law. Although the legal grounds on which Chinese courts can refuse enforcement of a foreign arbitral award are limited legislatively, frequently foreign parties are unable to enforce the arbitral award in reality. 31 One of the significant cases in which an Intermediate People s Court of China dealt with the recognition and enforcement of a foreign arbitral award pursuant to the Convention was the case Guangzhou Ocean Shipping Company v. Marships of Connecticut Company Ltd. (Oct. 17, 1990). 32 This case ruled that the award enforcement was granted in favor of the Chinese party against the assets located in the Mainland of China in favor of a foreign company. This case also ruled the enforceability of ad hoc awards in accordance with the Convention. However, when hearing the enforcement of awards from the tribunal seated in a foreign country against a Chinese party, the whole proceedings did not work well, and problems of regional protectionism arise. 33 One typical example is the case Revpower Ltd. v. Shanghai Far East Aero-Technology Import and Export Corporation (Mar. 1, 1996). Another case is Food Industries Planning & Servicing Ltd. v. China Hua Yang Technology and Trade Corporation (Nov. 17, 1997), 34 where it took two years for the foreign applicant to obtain enforcement of the award against the Chinese party. 3. Lack of Coordination. The procedures for requesting Chinese courts to enforce arbitration awards are relatively straightforward, however, getting the courts to act is not easy. From the perspective of legal history, China s application of legal principles remains un-harmonized, the enforcement of awards is not an exceptional case. Lack of coordination between CIETAC and Chinese courts, insufficient funding of the court departments in charge of enforcing awards and judgments also cause problems for the enforcement of awards. 35 There are no detailed procedural and substantive rules to coordinate the rules regarding arbitral awards and enforcement. CIETAC provides only one harsh article which states that where one party fails to carry out the award, the other party may apply 31 See Randall Peerenboom, Seek Truth from Facts: An Empirical Study of Enforcement of Arbitral Awards in the PRC, 49 AJ Comp. L. 249 327 (2001). 32 See Yearbook Commercial Arbitration (XVII), at 485 87 (1992). 33 XIAO Yongping & HU Yongqing, 加入 WTO 与我国仲裁法律制度的改革 (Entry of WTO and China s Arbitration Law Reform), (2) 中国法学 (China Legal Science) 13, 53 (2001). 34 See Yearbook Commercial Arbitration (XXIII), at 641 43 (1998). 35 In reality, the lack of cooperation between courts and arbitral tribunals arises not only in cases involving foreign parties, a Chinese business organization seated in Shanghai, for instance, would find it very difficult to convince a Guangzhou s local court to cooperate in enforcing an award against a Guangzhou enterprise.

92 FRONTIERS OF LAW IN CHINA [Vol. 9: 82 to a competent court for enforcement of the award in accordance with the law. 36 Most literature indicated that the main reason for non-enforcement of arbitral award in China is Chinese defending party lacks of assets by illegal transfer of assets to another company, a problem that to some extent is lawful, happens in most international cases. While there are hardly any legal measures to do when the defending party is insolvent under the law in China. 37 Logically, it is the defect in the CPL and CIETAC rules on interim measure that creates opportunities for the defending party to dispose of his assets with bad will during the process of arbitration. C. Relationship Between the Court and Arbitral Tribunal Before the CAL was adopted, domestic arbitration was conducted under the territorial jurisdiction system. Arbitral awards were enforced very inefficiently because of local protectionism. One of CAL s aims is to finish up the Chinese local protectionism and adopt a more free-will principle. Looking back to early 1991, CPL provided two approaches to govern the arbitration procedures. With respect to domestic arbitrations, the court may supervise the arbitration s procedural legality and review the legality of substantial issues as well, and has power to rescind the award if any defective factors are found. Concerning foreign-related arbitrations, the court supervises the procedural issues only. If any procedure is defective, the court may set aside the arbitration award. Even the arbitration award is set aside, the award exists also if the parties agree later, the award may still be enforced by the court. The similar approach was adopted in CAL without considerable changes. 38 With its review function, the court plays an important role in assisting arbitration commissions. When the validity of arbitration agreement is disputed, both the arbitration commission and the court may rule on the issue. However, if one party applies to the court for a decision while the other party applies to the court, the court was placed in priority to make the decision. 39 Because it is the court not the arbitral commission that is deemed as the judicial organ, since the arbitral commission s power is interpreted in an intensively restrictive approach in China. III. IMPACT OF UNCITRAL MODEL LAW China s globalization process goes with the growth of international commercial 36 CIETAC, Arbitration Rules, art. 53. The latest arbitration rules were revised and adopted by the China Council for the Promotion of International Trade/China Chamber of International Commerce on 3 February 2012, effective as of 1 May 2012. 37 Randall Peerenboom, Enforcement of Arbitral Awards in China, 28 The China Business Rev. 812 (2001). 38 CAL (1995), arts. 58, 71. 39 CAL (1995), art. 20.

2014] INCORPORATION OF UNCITRAL MODEL LAW IN PERSPECTIVE OF CHINA 93 arbitration in the past decades. As cross-border business transactions increase, arbitration boomed as a result of the parties desire to have less costly, greater speed and fair resolution of their disputes. 40 The Model Law has had a major impact on the Chinese arbitration legislation. The parties in an international contract have trust only in the arbitration law familiar to their own arbitration law. To the Chinese party, the foreign party in China will deem Chinese arbitration rules less favorable if the Model law is not incorporated into CAL. As Lord Justice Kerr, President of the Chartered Institute of Arbitrators, concluded in his Alexander lecture, the concept rooted in the Model Law is to finish up the situation of widening the parties choice of venue, and thus their choice of arbitration clauses for incorporation into their contracts. In so far as more states will have legislation in accordance with the Model Law, all parties may find it easier to accept arbitration. 41 A. Arbitration Agreement: Valid or Invalid According to CAL s relevant provision, the arbitration agreement must be specified and valid, and the subject matter should be arbitrable, if it is unclear and the disputing parties cannot reach an agreement to make it clear afterwards, the arbitration agreement shall be deemed invalid. In terms of arbitration agreement s form, an unequivocal commitment to arbitrate is a vital element to a valid agreement and also an underlying component of the Model Law, which requires an arbitration agreement to be in writing. 42 Also, as the Model Law defines an arbitration agreement as in the form of an arbitration clause in a contract or in the form of a separate agreement. Therefore, CAL consistently makes the arbitration clause separable from the contract in which it is contained. 43 Accordingly, the rescission, termination or invalidity of the contract does not affect the validity of the arbitration agreement. 44 Unfortunately, up to now, CAL has only accepted only one form of arbitration agreement (writing), as which shall include the arbitration clauses provided in the contract and any other written form of agreement concluded before or after the dispute providing for submission to arbitration. 45 However, the Model Law accepts that there is a valid agreement even if its content is recorded in any form. The arbitration agreement or contract can be concluded orally, by conduct, or by other means. An electronic 40 See Fiona D Souza, The Recognition and Enforcement of Commercial Arbitral Awards in the People s Republic of China, 30 Fordham Int l L.J. 1318 59 (2007). 41 Michael Kerr, Arbitration and the Courts: The UNCITRAL Model Law, 34 Int l & Comp. L.Q. 7 (1985). 42 Id. 43 CAL (1995), art. 19. 44 Id. 45 CAL (1995), art. 16.

94 FRONTIERS OF LAW IN CHINA [Vol. 9: 82 communication suffices if the information contained therein is accessible so as to be usable for subsequent reference. 46 In practice, if there is no writing agreement, China s arbitral commission definitely will refuse the application from the claiming party, even if instead of writing commercial partners could have reached the arbitration agreement in various forms before or in the process of business transaction. As far as the specificity requirement in the writing arbitration agreement, if the clause fails to designate an arbitration commission, the arbitration agreement shall be void, although the parties expressed the intention to settle the dispute with arbitration. 47 However, this defective arbitration agreement with apparent expression of arbitration as dispute settlement may be enforced in Hong Kong, one of the Special Administrative Regions in China. 48 As a highly favorable way of dispute resolution compared to litigation complexity in national courts, arbitration provides the parties freedom to choose the arbitral tribunal which will decide their dispute and a confidential forum based on the laws and criteria the parties choose. 49 B. Interim Measures 1. Partial Incorporation of the Model Law. Preservative measures may be applied to the arbitration tribunal if either party has a reason to worry about the prospect of enforcing the award. 50 As discussed above, however, the occasionally improper use of interim measure can be allowed without legal restrictions. In order to realize the natural advantages of interim measure, the application of interim measure must be restricted within reasonable grounds. It is thus the duty of the arbitrator, in exercising his power, to assess whether such relief should be granted and to deny improper applications. However, arbitral commission s application of CAL standard to assess whether such relief should be granted remains obscure. Despite the omission of certain arbitration rules, including those of CAL and even the Model Law on the situation required for the granting of interim measures, it can be seen in practice that arbitral tribunals require certain elements to be proved, in particular a prima facie case, risk of irreparable harm, the availability of the relief sought, an assessment of the risk that the decision on the merits would be predetermined by granting the measure and 46 UNCITRAL Model Law (1985), art. 7. 47 CAL (1995), art. 18. As there are numbers of arbitral tribunals seated in China, the arbitration agreement contained specific venue for arbitration, while if there is not the name of a specific arbitration institution, the arbitration agreement will be deemed void. 48 Neil Kaplan, Jill Spruce & Michael J. Moser, Hong Kong and China Arbitration: Cases and Materials, Butterworths Asia (Hong Kong), at 221 24 (1994). 49 See Margaret L. Moses, The Principles and Practice of International Commercial Arbitration, Cambridge University Press (Cambridge), at 1 3 (2008). It outlines consensual agreements, non-governmental decision-makers, final and binding awards as defining characteristics of international commercial arbitration. 50 See fn. 31.

2014] INCORPORATION OF UNCITRAL MODEL LAW IN PERSPECTIVE OF CHINA 95 finally the provision of security. The lack of available criteria does provide the parties with more freedom and the arbitrators with greater flexibility, however, providing such criteria in future s revision of CAL would result in greater transparency and reduce the risk of any abuse of interim measures. In order to protect the parties before the award is made, the Model Law provides for interim measures available to an arbitral tribunal. 51 Regarding interim measures, whether in the form of an award or in another form, by which, at any time before the issuance of the award by which the dispute is finally decided, arbitral tribunal has the power to issue the order to maintain the status quo pending determination or preventing from certain action or preserve assets or other forms of measures. Similarly, CAL provides two forms of interim measure for the arbitral tribunal. With respect to property preservation, 52 the article provides that if one of the parties applies for property preservation, the arbitration commission shall submit to a court the application in accordance with the relevant provisions listed in CPL. Similar provision was found in Article 46 regarding evidence preservation in CAL 53 and additionally, a specific article regarding measures in foreign-related arbitration may be found in CAL. 54 If a party applies for property preservation, arbitration tribunal shall submit to a court the application of the party in accordance with the relevant provisions of CPL. If a property preservation order is unfounded, the applicant shall compensate the counterparty against whom the order was made for any losses sustained as a result of the implementation of the property preservation order. Another statutory provision with regard to property preservation in arbitration is provided in CPL, which assists the procedure of interim measure. 55 2. Power of Granting. In compliance with Article 17 of interim measures and preliminary orders in the Model Law, China embodies partially the rule mentioned above in CAL. In another word, arbitral tribunal in China has no power to issue interim measures and preliminary orders as well. It is unfortunate to conclude that CAL and CPL is inconsistent with the Model Law, as a result, the court in China has no legislative source to recognize and enforce interim measures or preliminary order issued by domestic and foreign arbitral tribunals. Also, it is not Chinese arbitral tribunal that has the power to make a decision on the application. 56 Under CAL, it is the tribunal s obligation to pass on without delay the application to China s local court in the place where the other party resides or the said assets or the evidence are located. The court shall make a decision in accordance with legal procedures. If the court rules to apply preservative measures 51 UNCITRAL Model Law (1985), art. 17. 52 See fn. 25. 53 CAL (1995), art. 46. 54 CAL (1995), art. 68. 55 CPL (1991), art. 258; and CPL (2013), art. 272. 56 Id.

96 FRONTIERS OF LAW IN CHINA [Vol. 9: 82 against the claimant, a security or guarantee may be required to be set. In case of a loss by the claimant due to measures which prove wrongly taken, the applicant shall be liable for compensation of the loss. 57 In my view of point, it is not a reasonable ground that the arbitral tribunal has no power to issue the application of interim measures or preliminary order. On the one hand, the case is more familiar to arbitral tribunal, which may assess comprehensively all relevant factors including the applicant s probability of winning, balance of results between application and no application of interim measures, the importance of evidences concerned, and possibility of asset s transfer or destruction of evidence and so on, which may not be considered properly by the local court when deciding the application of interim measures. 58 In Chinese arbitration experience, lots of applications of interim measures are granted by the court after the applicant offers proper security, resulting into the situation that the interim measure that should not be necessarily granted is granted. On the other hand, one of the purposes for the parties to choose arbitration is to avoid litigation intervention, the power of granting interim measures from the court in CAL is incompatible with the essence of the Model Law. When it comes to the power to order interim measures in international practice, most international arbitration institutions and countries permit arbitral tribunals to apply the interim measures. For instance, the International Chamber of Commerce (ICC) Arbitration Rules authorizes the arbitral tribunal to grant any interim measures it deems appropriate. 59 The Rules of the Arbitration Institute of the Stockholm Chamber of Commerce also permit the arbitral tribunal to grant any interim measures it deems appropriate. 60 The American Arbitration Association (AAA) International Arbitration Rules permit the arbitrator to grant all such appropriate interim measures of protection by means of final, interlocutory or partial orders and awards upon the application of a party. 61 57 See fn. 25. 58 See ZHAO Jian, 国际商事仲裁的司法监督 (Judicial Supervision on International Commercial Arbitration), Law Press (Beijing), at 137 38 (2000). 59 Rafal Morek, Interim Measures in Arbitration Law and Practice in Central and Eastern Europe: The Need for Further Harmonization, Maklu Publishers (Antwerp-Apeldoorn), at 77 (2007). 60 See Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, at http://www.blplaw. com/media/pdfs/scc_rules_2004_eng%5b1%5d.pdf (last visited Sept. 24, 2013). 61 Article 21 of the new AAA International Arbitration Rules, entitled Interim Measures of Protection, provides that: (1) At the request of any party, the tribunal may take whatever interim measures it deems necessary in respect of the subject matter of the dispute, including measures for the conservation of the goods which are the subject matter in dispute, such as ordering their deposit with a third person or the sale of perishable goods. (2) Such interim measures may be taken in the form of an interim award and the tribunal may require security for the costs of such measures. (3) A request for interim measures addressed by a party to a judicial authority shall not be deemed incompatible with the agreement to arbitrate or a waiver of the right to arbitrate. See also Michael F. Hoellering, Interim Measures and Arbitration: The Situation in the United States, 6 Arbitration Journal 22 23 (1991).

2014] INCORPORATION OF UNCITRAL MODEL LAW IN PERSPECTIVE OF CHINA 97 C. Challenge System For grounds of challenge, in order to reach a fair and justified award, if any person is approached in connection with his/her possible appointment as an arbitrator, he/she shall disclose any circumstances likely to give a rise to justifiable doubts as to his/her impartiality or independence. An arbitrator, from the time of his appointment and during the arbitral process, shall disclose any such circumstances without delay to the parties unless they have already been informed of them by him. 62 Influenced by the Model Law, CAL states that the arbitration tribunal may be composed of three arbitrators, or one commonly chosen arbitrator may sit alone to hear the dispute. 63 After the composition of the tribunal, either party has the right to challenge any member of the tribunal, if he has reason to do so, at any time before the first hearing or before the last hearing, if the cause for the challenge is only known to the challenging party after the first hearing. However, it is the chairman of the Arbitration Commission who makes a decision on the challenge. 64 In addition to being challenged by either party, if an arbitrator has an interest in the dispute, he/she is obliged to apply for withdrawal before being involved in arbitrating the dispute. If an arbitrator is found to conduct a private interview with either party or his agent, or accepts an invitation by the latter to a dinner, or takes a gift from the latter, he/she shall be disciplined, or subject to legal sanction if the behavior violates the relevant laws. 65 If a challenge is sustained, the parties may apply to review the proceedings, which shall be ruled by the tribunal. D. Recognition and Enforcement of Awards In China, arbitral award is final and binding on the parties and can be enforced by the court in terms of legislation. CAL, however, does not set up a mechanism for the recognition and enforcement of foreign arbitral awards. Chinese legislators merely provide relevant provisions in CPL, which in conjunction with the judicial interpretations made by the Supreme People s Court (SPC). Furthermore, SPC issued judicial interpretations for efficiently enforcing arbitration awards, providing that the case concerning one party s application for the enforcement of award should be heard by Chinese intermediate courts. 66 Since the implementation of CAL, SPC has released a dozen of judicial interpretations, provisions and binding replies to deal with certain issues concerning on the application of enforcement of the arbitral award for local courts. Although foreign awards 62 UNCITRAL Model Law (1985), art. 12. 63 CAL (1995), art. 30. 64 CAL (1995), art. 32. 65 CAL (1995), art. 37. 66 See Statutory Interpretation Concerning China s Arbitration Law, the Supreme Court, art. 29, Aug. 23, 2006, at http://www.court.gov.cn/lawdata/explain/executive/200609080001.htm (last visited Dec. 10, 2012).

98 FRONTIERS OF LAW IN CHINA [Vol. 9: 82 are binding, Chinese local courts may entertain an application to set them aside. 67 An application to set aside an award must be submitted within six months of receipt of the award. 68 The grounds for setting aside an award include: (1) the absence of an arbitration agreement; (2) the award exceeded the scope of the arbitration agreement or went beyond the arbitration commission s authority; (3) a defect in the formation of the tribunal or in the arbitration procedure; (4) forged evidence; (5) one party concealed evidence; (6) certain misconducts by the arbitrators; 69 and (7) violation of the public interest. 70 If the court grants an application to set aside an award, it may, instead, remit the matter to the tribunal for re-arbitration within a certain time period. 71 It is noteworthy that, for foreign parties seeking to vindicate their rights through arbitration, obtaining a favorable arbitral award is only the first step in a long and precarious process. As one foreign legal practitioner concluded that The enforcement problems are legendary for victorious parties seeking to enforce awards in China. 72 Despite the limited grounds upon which a Chinese court can legitimately deny enforcement of an arbitral award, prevailing parties are routinely able to enforce arbitral awards. In a legal text, the award issued by the tribunal seated in a foreign country is not easy to enforce in China. The court may refuse to enforce an award on the grounds of refusal prescribed in CPL. 73 It may also enforce or deny enforcement as required by conventions to which China has acceded. 74 Specifically, grounds of refusal are contained in CPL, which provides as follows: If the person against whom the application is made provides evidence which proves that the arbitration award made by the foreign affairs arbitration agency of China involves any of certain circumstances, the people s court shall, after examination and verification by a collegial panel, order to refuse the enforcement of the award. 75 67 CAL (1995), art. 58. 68 CAL (1995), art. 59. 69 See fn. 25. 70 The public interest is central to social policy, general welfare and government s benefit. In China, the definition or interpretation of public interest is debatable without any defined norms, therefore, various levels of legal authorities takes different judicial understanding of public interest. 71 CAL (1995), art. 61. For more discussion about the subject of re-arbitration in China, see Li Liu, Setting Aside an Arbitration Award in the People s Republic of China, XTT(1) Am. Rev. Int l. Arb. 31 (2001). 72 Fredrick Brown & Catherine A. Rogers, The Role of Arbitration in Resolving Transnational Disputes: A Survey of Trends in The People s Republic of China, 15 Berkeley J. Int l L. 329, 341 (1997). 73 CPL (1991), art. 217; and similar provision is provided in CPL (2013), art. 237. 74 China acceded to the New York Convention in 1987 with two formal reservations: (1) It only applies on the basis of reciprocity; and (2) it only applies to disputes deemed commercial under Chinese law. When asked to enforce awards from the other jurisdiction, Chinese courts may refuse enforcement under the circumstances very similar to those enumerated in the Arbitration Law and the New York Convention. 75 See CPL (1991), art. 260(4); and Special Stipulations for Civil Procedures Involving Foreign Interests, at http://en.chinacourt.org/public/detail.php?id=2694 (last visited Sept. 24, 2013).