Ad hoc arbitration in China

As one of the largest economies, China has been dedicated to a pro-arbitration jurisdiction, promoted by a favorable policy environment. As the original form of arbitration, ad hoc arbitration widely exists in international practice. However, the current arbitration law of the People’s Republic of China (‘arbitration law’) only provides for institutional arbitration whereas ad hoc arbitration clause has long been regarded as invalid under China’s arbitration law. The past few decades have seen significant developments and debates on this topic and this article focuses on key trends relevant to foreigners who plan to do business in China.

The status quo: ad hoc arbitration is generally prohibited

The United Nations Convention on the recognition and enforcement of foreign arbitral awards (the ‘New York Convention’) provides for ad hoc arbitration and China acceded to this convention in 1987. As for the ad hoc arbitral awards rendered outside the territory of the People’s Republic of China (‘PRC’), the court will recognise and enforce the awards if either party files an application according to article 545 of the Interpretation of the Supreme People’s Court on the application of the civil procedure law.

In contrast, a valid arbitration agreement shall include a designated arbitration commission according to article 16 of the arbitration law. It means that if the parties agree to designate an ad hoc arbitration tribunal to conduct arbitral proceedings in China, the arbitration agreement, unless expressly governed by other laws, shall be deemed invalid.

The changing landscape: ad hoc arbitration is gradually recognised

With the development of arbitration practice and the implementation of the Belt and Road Initiative, the need for China’s arbitration legislation to be in line with international practice has become increasingly important. In terms of ad hoc arbitration, China has made a series of attempts to change.

Exceptions have been made in the pilot free trade zones, which pioneers an unprecedented degree of openness in relation to foreign investment and international trade in both goods and services covering areas such as Shanghai, Tianjin, and Guangdong. According to the opinions on providing judicial safeguard for the development of pilot free trade zones issued by the Supreme People’s Court, courts may recognise the validity of ad hoc arbitration agreements with a specific seat of arbitration, specific arbitration rules, and specific arbitrators. Accordingly, arbitration in the pilot free trade zones is no longer confined to institutional arbitration and ad hoc arbitration is a viable choice provided that the above three conditions are satisfied.

A following question is posed after the introduction of this rule. The valid ad hoc arbitration agreement shall designate specific arbitration rules. With the absence of the rules of ad hoc arbitration in China’s arbitration institutions previously, parties might have to designate rules of foreign arbitration institutions. To solve this problem, a series of ad hoc arbitration rules were promulgated by Hengqin Pilot Free Trade Zone Administrative Committee in association with Zhuhai Court of International Arbitration in 2017, and China Maritime Law Association in association with China Maritime Arbitration Commission in 2022.

Besides, a designation of specific arbitrators is also needed for a valid ad hoc arbitration agreement whereas no rules for appointment of ad hoc arbitrators can be found in China’s arbitration law. In practice, the parties usually designate institutional arbitration rules which provide rules on the appointment and challenge of arbitrators. In comparison, for some jurisdictions, in exceptional cases when arbitrators cannot be appointed or removed according to the parties’ agreement, a resort can be made to the arbitration legislation. For example, section 24 of the United Kingdom Arbitration Act 1996 expressly delegates courts the power to appoint or remove arbitrators.

At this point, even though a comprehensive regime for ad hoc arbitration has not yet been established, the above documents show that the government is gradually changing its position on ad hoc arbitration.

The future: proposed amendments to the arbitration law

The draft amendment to arbitration law (‘the draft amendment’) was released on 30 July 2021, which ad hoc arbitration is mentioned in the following parts:

  • The recognition of foreign-related ad hoc arbitration. A broader range of ad hoc arbitration is recognised beyond the boundary of the pilot free trade zone although the legality of ad hoc arbitration is only confined to ‘foreign-related’ disputes. For the recognition and enforcement of the ad hoc arbitral awards, the parties may file an application to the Intermediate People’s Court with jurisdiction, the same as the institutional arbitral awards.
  • A detailed rule for the formation of ad hoc arbitral tribunals. If the arbitral tribunal cannot be formed on time or if the parties need to decide on the challenge of arbitrators, the parties may designate an arbitration institution to assist in the formation of the tribunal and the challenge of arbitrators. Failing which the parties may resort to the Intermediate People’s Court at the place of arbitration for assistance. The court’s decision on the formation of the arbitral tribunal shall be final.
  • A filing system for awards rendered by ad hoc arbitral tribunals. The service record and the ad hoc arbitral award shall be filed to the Intermediate People’s Court at the place of arbitration within 30 days of the service.

There is an ongoing discussion on the draft amendment. The consensus is that institutional arbitration and ad hoc arbitration should be regulated in a universal manner in the legislation. However, people hold different opinions on several matters, including: whether the legality of ad hoc arbitration should be confined to foreign-related matters? Whether the legislation should provide uniform arbitration rules for ad hoc arbitration?

The above questions are still waiting to be answered in the final version of the legislation. But what is certain is that the draft amendment is to be considered a milestone development in the arbitration legislation of PRC.