Since Shanghai launched the first ever pilot Free-Trade Zone (FTZ) on the mainland on Sep. 29, 2013, the test bed has witnessed continuous reforms, ranging from convertibility of the yuan to further liberalisation of interest and new policies on foreign direct investment and taxation.

As a result of the efficiency, transparency, investor-friendly policies  and reforms, the Shanghai FTZ is believed to have received a skyrocketing amount of investment and trade.

The 29-square-kilometre pilot zone is attracting an increasing number of companies on a daily basis. By the end of March this year, 7,772 companies had already set up offices in the FTZ, including 7,111 domestic companies with a total registered capital of 150.3 billion yuan and 661 overseas-invested companies with a total registered capital of $3.3 billion. Among the overseas-invested firms, 271 are from Hong Kong, 57 from Taiwan, 54 from the U.S., 37 from Japan, 32 from Singapore and 28 from South Korea.

However, with more and more companies being set up,  the number of commercial disputes will also rise. As a result, arbitrations accompanied by reasonable costs, effectiveness, parties' autonomy, confidentiality, and enforceability have won increasing favour from companies.

Commercial disputes in the FTZ will focus on three types: traditional disputes in trade, logistics and intermediary services; disputes in new fields brought by industrial updates such as financing lease, futures and financial derivatives, as well as FTZ-unique commercial disputes such as offshore trade and offshore finance; andnewly opened service fields in the FTZ, such as medical services, entertainment and gaming consoles, according to Huang Wen, deputy secretary-general of the Shanghai International Economic and Trade Arbitration Commission (SIETAC).

To improve the legal environment, the FTZ announced the first set of arbitration rules in April, with a series of innovative provisions, which took effect on May 1, following the establishment of the Shanghai FTZ Court of Arbitration last October.

Afterwards, the Shanghai No.2 Intermediate People's Court gave detailed guidelines regarding the rules on May 4, providing additional legal teeth to them.

Innovative rules

Besides introducing internationally advanced arbitration rules with greater flexibility in China , the SIETAC (the same as Shanghai International Arbitration Center, or the SHIAC) is quite openminded, with the hope of transferring China’s administrated arbitration system in the Shanghai FTZ  and aligning the system with international commercial arbitration, notes Gu Weiwei, a Shanghai-based partner with Global Law Office (GLO) who has participated in the release of the new arbitration rules.

As a result, the new arbitration rules, after nine revisions, are believed to include many breakthroughs and be in line with advanced global dispute arbitration.

Brenda Horrigan, partner and Shanghai office head at Herbert Smith Freehills, views the interim measures in the FTZ arbitration rules as innovative, and particularly highlights the provisions regarding the application for and granting of interim measures before and during arbitration proceedings, as well as the provisions for establishment of an emergency tribunal for the purpose of granting interim remedies.

“The introduction of these provisions shows the arbitration institution's efforts towards offering better assistance to parties in circumstances where urgent measures are needed to preserve the relevant evidence and/or properties,” says Horrigan.

This is new to the PRC as it reserves the power of interim measures to peoples’ courts according to PRC Civil Procedure Law and the PRC Arbitration Law, she says, noting that it remains to be seen how such innovations in the FTZ rules would be implemented in practice for arbitrations seated in China.

Shen Dongmei-May Shen, a Shanghai-based partner with Global Law Office, sees the interim measures as a big progress, and notes another innovative provision in that disputing parties are allowed to choose arbitrators who are not on the arbitrators list, rather than just from a “fixed roll.”

“However, the implementation of such innovative rules needs judiciary coordination and support. It also takes time to see new cases appear, which will use the new arbitration rules,” Shen noted.

Besides highlighting the provisions on interim measures, Denning Jin, a Shanghai-based partner with King & Wood Mallesons, also lists the “rules of evidence” in the new FTZ arbitration rules as innovative.

The provisions on the rules of evidence allow parties to agree on matters or rules related to evidence. The agreement between parties shall prevail except when the agreement is inoperative. For example, parties may agree to use the International Bar Association (IBA) Rules on the Taking of Evidence in arbitration proceedings before SHIAC in the FTZ.  The evidence rules granting broader discretion to the tribunals, says Jin.

The combination between arbitration and mediation and the procedure for small-sum disputes are also believed to be advanced provisions in the new FTZ arbitration rules.

Positive effects

GLO expects the new FTZ arbitration rules, with innovative provisions in favour of protecting the lawful rights of parties involved, will attract companies from outside the FTZ in the future, especially foreign companies operating in China.

The new rules will play a leading and exemplary role for jurisdictions outside the FTZ and the rules can be widely used both for companies in the FTZ and outside, so China’s legislator will be pushed to revise the PRC Arbitration Law, says Shen.

This view is also shared by KWM’s Jin.

Jin also believes that the new rules will lead to more competition between SHIAC in the FTZ and other arbitration institutions. The competition between institutions will benefit the parties as it is expected to result in improved services and arbitral proceedings.

Law firms will benefit a lot from rising opportunities, lawyers agree.

There is hope that the FTZ arbitration rules, as with the Shanghai FTZ itself, will bring great opportunities to law firms in China, says Horrigan. “Law firms are starting to invest in lawyers with expertise in international trade and international dispute resolution, which we anticipate will be in increasing demand with the establishment of the FTZ and the developments in China generally.”

Shen from GLO believes local law firms will benefit even more from the new rules.

With the new rules, local law firms, which lack experience in handling international business disputes but have a good understanding of China’s business and judicial environments, are able to get international expertise without going abroad, Shen says.

Local law firms need to enhance their abilities to deal with international commercial arbitration through learning from, and cooperating with, experienced peers so as to improve their competitiveness, she suggests.

Law firms need to enhance the ability to combine expertise in Chinese law, language skills and the capability of working with a multicultural arbitration team in order to seize the market, Jin notes.

Attitude change expected

The release of the new rules also comes as Chinese companies become increasingly willing to choose arbitration services when disputes happen.

Among previous China-related overseas arbitration cases, 90 percent defendants are Chinese enterprises and foreign parties always win, says Shen, noting that language barriers, nationality discriminations and unfamiliarity with the other party’s judicial environment add to Chinese enterprises’ conservative attitude towards arbitration.

The new FTZ arbitration rules will enable Chinese enterprises to hire Chinese lawyers for arbitration, Shen notes. “As more Chinese enterprises accumulate experience and talents in dispute settlement, more Chinese firms will choose arbitration when they get involved in disputes.”

Chinese companies are definitely becoming much more active participants in arbitration, both as respondents and claimants, notes HSF’s Horrigan. “We expect this trend to continue as Chinese companies become increasingly international.”

One advantage of arbitration is that the place of arbitration is negotiable and, therefore, depends on the negotiating power of each party.  In many Sino-foreign international transactions, international companies prefer arbitration in a neutral venue with Western legal traditions, such as Hong Kong and Singapore, while Chinese companies prefer arbitration in Beijing, Shanghai or Shenzhen, according to Jin.

“The new FTZ rules provide a new option to the parties. They include  improved provisions and are closer to international standards, diminishing some of the objections to choosing an arbitration venue in China,” he says.

New arbitration centre

Lawyers agree that Shanghai has the potential to be Asia’s arbitration centre, thanks to its superior location, strong commercial environment, large number of high-quality legal professionals and capital resources, as well as increased internationality.

However, Singapore and Hong Kong are also vying for the same position, with both the Hong Kong International Arbitration Centre (HKIAC) and the Singapore International Arbitration Centre (SIAC) coming to Shanghai to promote their arbitration systems.

For arbitrations in Asia, Hong Kong and Singapore have been popular choices as arbitration venues because of their convenient geographical locations, the excellent conference facilities offered, and  the ease of access to professional service providers such translators and real-time transcription providers. For arbitrations on the mainland, the traditional choice for HSF clients has been CIETAC, says Horrigan.

She notes that “Shanghai definitely possesses great potential to grow significantly in influence, though we don't see the city as an immediate competitor to Hong Kong and Singapore at this time. In terms of Chinese foreign-related disputes or purely foreign disputes, Shanghai might be perceived as being "too close" and, therefore, Hong Kong and Singapore are preferred as perhaps more impartial venues.”

There is still a big gap between Shanghai and other arbitration cities, says Shen. “Shanghai has a shorter arbitration history and less experience compared to Hong Kong and Singapore.  Although arbitration history in Australia is not that old, it shares its culture with other Western countries. So companies from these countries may be inclined to choose Australia for arbitration.”

From the legal environment perspective, Hong Kong, Singapore and Australia have the perfect legal systems, while China still has a long way to go, says Shen.

Shen also believes that Shanghai’s advantages are not enough, as the improvement of soft environment, including judiciary, administrative and legal enforcement as well as legal services in the city is indispensable.

“Shanghai needs to break administrative monopoly and participate in fair competition with an open mind so as to win international recognition,” suggests Shen.