Arbitration Looks East
The recent QMUL survey has found that Asian jurisdictions, including those in China, have made enormous strides in the arbitration sphere. Disputes lawyers feel that not only are the results unsurprising, but they also expect to see further growth in the near future.
The School of International Arbitration at the Queen Mary University of London recently released the results of its twelfth major empirical International Arbitration Survey, and its fifth in partnership with White & Case. The 2021 International Arbitration Survey, which polled 1,200 respondents, found that Hong Kong, Beijing and Shanghai are now among the top 10 preferred seats for arbitration globally.
China also had three of the top seven spots when it came to the most preferred seats of arbitration worldwide, with Hong Kong, Beijing and Shanghai ranking third, sixth and seventh, respectively. Some respondents also picked Shenzhen as their preferred seat of arbitration.
Two of the five most preferred arbitral institutions this year also come from Greater China. The Hong Kong International Arbitration Centre (HKIAC) ranked third, while China International Economic and Trade Arbitration Commission (CIETAC) made the list for the first time, ranking fifth. All this indicated that arbitration is becoming a preferred method of resolving disputes in China, while arbitration institutions based here are also more recognized worldwide.
The increasing number of arbitration filings is the most notable trend in Chinese arbitration in 2020. “ We’ve seen a significant increase in the number of arbitration cases during the past year,” Zhou Qi, director of the management committee at East & Concord Partners and a senior arbitrator at CIETAC, tells ALB. “Whether as an arbitrator or an agent, I feel the tension of scheduling.”
CIETAC’s data backs up Zhou’s views. CIETAC accepted 3,615 cases in 2020, representing an 8.5 percent year-on-year increase. It also accepted 863 cases in the first quarter of 2021, representing a 24 percent year-on-year increase. Meanwhile, the amount in disputes was also significantly increased and reached 112.13 billion yuan ($17.5 billion) in 2020, topping the 100-billion-yuan mark for the first time.
HKIAC has experienced similar trends. Yang Ling, HKIAC’s deputy secretary-general and chief representative of its Shanghai office, tells ALB that the institution accepted 318 new arbitration filings in 2020 and the total amount in disputes was $8.8 billion, both figures being record highs.
“Since 2019, the global economic downturn has already led to more disputes and the pandemic amplified the trend.”
—Zhou Qi, East & Concord Partners
One reason for the recent rise in caseloads and claim amounts could be the increase in disputes brought about by the impact of the COVID-19 pandemic on business activities, but it is not limited to this. However, Zhou points out that, since 2019, the global economic downturn has already led to more disputes and the pandemic amplified the trend. Separately, Yang points out that cross-border deal making and investments have stayed active during the past few years, laying the foundation for more arbitration filings.
MORE COMPLEX CASES
“The three main changes from the perspective of arbitration institution are: the arbitration cases are getting more difficult, more complicated and more international.”
—Wang Chengjie, CIETAC
Apart from the growth in caseloads, the Chinese arbitration arena has seen other changes during the past year. Wang Chengjie, Vice Chairman and Secretary-General of CIETAC, tells ALB the three main changes from the perspective of arbitration institutions: the arbitration cases are getting more difficult, more complicated and more international.
Wang explains that “the increase of the number of contracts, the number of parties and amount in dispute involved in a single case (including consolidated arbitration cases)” reflect the increasing difficulty and complexity of arbitration cases. “CIETAC accepted 502 cases that involved multiple contracts, 915 cases that involve more than two parties and 203 cases with disputed amount over RMB100 million. Among them, 14 were cases with disputed amount over 1 billion yuan,” he says.
Arbitration cases are also involving more foreign parties, being reflected by the number of foreign-related cases, the scope of nationalities of the parties, and the applicable laws and arbitration rules. Take CIETAC as an example, the number of foreign-related cases accepted by CIETAC in 2020 increased by 20 percent year-on-year and the parties in these cases came from 76 countries and regions. At the same time, the agreed-upon foreign laws were applied in arbitrations included the laws of Hong Kong, the Cayman Islands and South Korea, as well as British law. Some parties even agreed to apply arbitration rules of other institutions and CIETAC Financial Disputes Arbitration Rules to their cases.
Speaking of changes in the type of cases, Wang says “new types of cases, including disputes arising from equity investment, equity transfers, innovative finance and various service contracts, have been on an upward trajectory.”
Zhou, on the other hand, reflects on his team’s practice in handling arbitration cases during the past year. He says the cases are not “too difficult to handle” when it comes to facts and legal principles.
He shares the same view with CIETAC on the types of cases that are now going to arbitration. “There is a significant increase in investment-related disputes, including disputes related to capital increases and share expansions, equity transfers or valuation adjustment mechanisms (VAM). Some disputes also arise from “the establishment of fund companies and natural persons investing in fund products,” he says, adding that these are triggered by policy changes in capital markets and investments. The increase in disputes over VAM-related investments was the most notable.
“There have always been investment-related disputes,” Zhou says. “The difference is that compared with disputes in the past, disputes nowadays generally involve VAM, which is a new type of transaction,” which reflects how arbitration mirrors trends in the business world.
Although CIETAC has registered more foreign-related arbitration cases over the past year, East & Concord Partners has not handled as many due to travel restrictions and the slowdown in outbound investment by Chinese firms during the pandemic, Zhou says.
The trend last year was in stark contrast to that of several years ago. “In the past years, we handled quite a number of foreign-related cases as many Chinese firms were encouraged by the government’s policy to seek opportunities outward,” Zhou says. “But the Sino-U.S. relations, the global landscape and the pandemic have affected outbound deals, which has certainly weighed on foreign-related arbitration cases.”
However, Zhou also points out that one may not jump to conclusions based on what happened in a short period. “Both government policies and arbitral institutions have been preparing for the internationalization of arbitration for the past three to four years,” he says. He remains confident that the internationalization progress of China’s arbitration will carry forward into the future.
Yang shares the same view. In the past few years, HKIAC and its Shanghai office have been cultivating talent in mainland China to handle foreign-related arbitration cases.
Although the pandemic has brought about various side effects, Yang tells ALB that it has also created opportunities. HKIAC has launched online international arbitration courses in collaboration with law schools at several local universities since the beginning of the pandemic and each course attracted thousands of students globally.
“While a large number of Chinese parties are in arbitration cases in foreign counties, there are not enough Chinese lawyers specializing in such matters or arbitrators.”
—Yang Ling, HKIAC
As a former university lecturer, Yang tells ALB that “international arbitration is not so highly promoted in Chinese universities” and “while a large number of Chinese parties are in arbitration cases in foreign counties, there are not enough Chinese lawyers specializing in such matters or arbitrators.” It has only become a trend recently that China’s legal sector strives to promote foreign-related legal services and train lawyers to handle foreign-related cases. Yang believes international commercial arbitration poses the best opportunity to put foreign-related legal services in practice and export Chinese law to other jurisdictions.
Although the pandemic has slowed exchanges between mainland China and other jurisdictions on arbitration, mainland China and Hong Kong have collaborated a lot on this front during the past two years. The achievement was mainly attributable to the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings effective from 2019, as well as the Supplemental Arrangement Concerning Mutual Enforcement of Arbitral Awards that came just into effect May 2021.
Yang tells ALB that under the Interim Measures Arrangement, parties are able to apply for interim measures with the help of six arbitral institutions in Hong Kong, and HKIAC is currently the only institution with relevant experience. “HKIAC has handled 44 cases to apply to 21 mainland courts in 17 cities for interim measures,” she says.
The Supplemental Arrangement, introduced via the Arbitration Ordinance that was amended in May 2021, “was also very effective.” For example, the Supplemental Arrangement now further facilitate mutual enforcement by cancelling the priority of property execution in mainland China and Hong Kong and allowing simultaneous execution in two jurisdictions to enhance efficiency.
Yang notes that the two arrangements will continue to promote the development of arbitration in Hong Kong. For example, Hong Kong is currently the only jurisdiction able to apply to mainland courts for interim measures. “You will see that Hong Kong will outperform other jurisdictions thanks to the favourable factors that promote arbitration there,” she says.
THE DEVELOPMENT OF VIRTUAL HEARINGS
Another notable new trend in arbitration in the past year that cannot be ignored is the rapid development of virtual hearings.
Although almost all the arbitral tribunals in mainland China have resumed in-person arbitration hearings, Zhou tells ALB that if both parties agree, cases involving foreign agents or expert witnesses that are in the backlog can be settled through a virtual hearing, which has become a new “standard” option in the post-pandemic era.
CIETAC’s Wang says virtual hearing is a product of the double challenge of “a significant increase in caseloads and the pandemic.” In the past year, CIETAC proactively encouraged online case filing and set up a virtual hearing system, which led to that the four-time year-on-year increase in the number of cases registered online and the number of virtual hearings reached 347.
Offline operations have also resumed at a different pace in HKIAC’s Hong Kong, Shanghai and Seoul offices as the pandemic has unfolded differently in these places. However, Yang points out changes in the workplace have not impacted the management of cases as “HKIAC has adopted technology years ago.”
For example, HKIAC encourages case registration via emails since 2008, and the staff is required to reply within 24 to 48 hours. The opening of hearings has been the biggest challenge during the pandemic. To help address the issue, HKIAC issued virtual hearing services guidelines at the beginning of the pandemic and provided parties with customized virtual hearing services catering to different laws, languages and time zones. It also created a new position called the hearing manager to offer services throughout the hearing.
Yang believes the pandemic provides an opportunity for arbitral institutions to provide more precise services to users and eventually become “a comprehensive dispute resolution services provider.” For example, the International Court of Arbitration of International Chamber of Commerce, Singapore International Arbitration Centre, the High Court of the Hong Kong SAR, the British Virgin Islands court etc. all have access to HKIAC’s virtual hearings.
Yang believes that in the post-pandemic era, virtual hearing will remain its popularity. Similarly, CIETAC has set smart arbitration as one of its goals, and it will continue to undergo digitalization and update rules for virtual arbitration.
THE RISE OF MEDIATION
Although arbitration institutions are literally named by “arbitration”, mediation has also become an important part of work of arbitration institutions in recent years after many countries signed the United Nations Convention on International Settlement Agreements Resulting from Mediation (i.e., the Singapore Convention on Mediation) and China’s increasing emphasis on constructing diversified dispute resolution systems.
Both CIETAC and the HKIAC attach great importance to mediation. Wang says CIETAC “is trying to promote the development of mediation as an independent dispute resolution method.” Yang, on the other hand, says “mediation will become a nonnegligible method to resolve disputes as the business world further grows. Mediation has great advantages due to its flexibility and strong confidentiality.”
CIETAC has made many efforts to develop mediation in the past few years. For example, it establish a mediation center and issued CIETAC Mediation Center Mediation Rules in 2018; set up the Panel of mediators with extensive professional coverage (including 188 mediators from both within and outside China); issued and implemented the CIETAC Mediation Rules for Investment Disputes under the CEPA Investment Agreements and hired 55 relevant mediators with one thirds of whom from Hong Kong and Macau; strengthen exchanges with domestic courts, and actively participated in the construction of the cohesive mechanism of diversified dispute resolution methods which includes arbitration, litigation mediation and so forth; signed strategic cooperation agreements and memoranda on several aspects of mediation with hundreds of institutions at home and abroad; actively participated in domestic and foreign conferences related to mediation, shared its mediation experience to contributed to the formation and development of mediation rules, and organized numerous lectures, forums and other activities themed on mediation.
CIETAC undertook all these efforts to meet the future demand of the business community, and “to provide ‘one-stop’ services for commercial disputes.”
However, Yang also points out that it will take a long time for mediation to become a preferred option in dispute resolution. “It takes collaborative efforts from institutions, users, the government and judiciaries to promote a dispute resolution method, as it involves changing people’s perception and the system,” she says.
Moving forward, Zhou says that arbitration has its advantages under the current geopolitical situation, especially the unpredictable Sino-US relations. “Litigation is a system under national sovereignty, while arbitration is a way to resolve civil disputes,” he says. “When judicial activities are affected by political conflicts, and business activities and disputes are still ongoing, arbitration plays a more important role.”
He also expects that high-level arbitration cases might increase in number in the future. Political uncertainty will lead to “a change in business environment and investors will suffer losses,” resulting in more disputes between investors and governments. However, Zhou says “Chinese arbitral institutions do not have a wealth of experience in dealing with such cases. These cases are different from commercial arbitration and will have a greater impact.”
Yang points out that mainland China will further open its arbitration market. Shanghai, Beijing and Hainan provinces have recently issued successive policies to encourage foreign arbitral institutions to launch branches in mainland China. While examples remain to be seen, the move will definitely “trigger complex legal issues. It will also involve administrative agencies, the Supreme People's Court, and local judicial departments, as well as the acceptance of the parties,” Yang says. However, she believes the subject is worth the attention.
Speaking of the following year, Wang says CIETAC will continue to improve itself, contribute to the industry and serve the overall interests of the nation. In terms of internal improvement, CIETAC will improve its internal governance structure, study and revise arbitration rules, improve its level of smart arbitration services, strengthen its ability to analyze cases with big data, optimize case management and strengthen the construction of its team of arbitrators.
As for its efforts in leading the industry, CIETAC will release annual reports and research findings based on its rich experience, while proactively taking part in amending the law, including the Arbitration Law. Given that CIETAC ranked fifth on the list this year and to take advantage of this good momentum, it will “extensively carry out international arbitration exchanges, strengthen its industry leadership and discourse right.”
In terms of serving the overall interests of China, CIETAC will focus on national development strategies such as the domestic and international dual cycle, the "14th Five-Year Plan" and the long-term goals to 2035, vigorously explore to develop its business in emerging fields to make positive contribution to the construction of a new system for a fully open economy.
To contact the editorial team, please email ALBEditor@thomsonreuters.com.