Shanghai Allows Foreign Institutions to Administer “Foreign-Related” Arbitrations

The content first appeared on Global Arbitration Review.

Shanghai is to allow foreign arbitral institutions to register in a free trade zone and administer “foreign-related” arbitrations seated in mainland China. Craig Celniker, Sarah Thomas, Cheryl Zhu and Nicole Tsui of Morrison Foerster consider whether the move is a step towards the liberalisation of China’s arbitration landscape or a missed opportunity.

On 19 October, the Shanghai Municipal Bureau of Justice (Shanghai BOJ) passed administrative regulations permitting foreign (non-mainland Chinese) arbitral institutions to register in the new Lingang area of the Shanghai Pilot Free Trade Zone. Once registered, the institutions will be permitted to administer foreign-related civil and commercial arbitrations seated in mainland China. This development follows the issuance by the PRC State Council of a high-level free trade zone (FTZ) plan in August, which envisaged an expansion in the functions exercised by foreign arbitral institutions operating in mainland China. 

At present, the PRC Arbitration Law provides that only arbitration commissions registered with the judicial administrative department of a Chinese province, autonomous region or municipality directly under the central government are permitted to administer arbitrations seated in mainland China or refer applications for interim measures to the Chinese courts. While the PRC Arbitration Law does not expressly prohibit foreign arbitral institutions from operating in mainland China, no foreign arbitral institution has succeeded in registering in practice. As a result, entities obliged to arbitrate in mainland China (ie, in most disputes between domestic PRC entities) have been restricted to Chinese arbitration commissions.

In recent years, a number of foreign institutions (including the ICC, the HKIAC and SIAC) have established representative offices in the Shanghai FTZ (although not in the new Lingang area). These representative offices have been limited to liaison activities and have not been permitted to administer PRC-seated arbitrations.

On 6 August, the PRC State Council issued its FTZ plan, which indicated that (once registered) foreign arbitral institutions would be able to lawfully administer PRC-seated civil and commercial arbitrations and to refer applications for interim measures (such as preservation of property, preservation of evidence and preservation of conduct) to the Chinese courts. The FTZ plan did not state any requirement of a “foreign-related element” and thus pointed to a significant liberalisation in the permissible activities of foreign arbitral institutions in mainland China.

The Shanghai BOJ issued the administrative regulations last month following a 10-week public consultation period. The regulations seek to provide instructions on the registration procedures and clarify the scope of cases eligible for acceptance by foreign arbitral institutions. Article 5 of the regulations defines foreign arbitral institutions as arbitral institutions established in foreign countries and in Hong Kong, Macau and Taiwan. To be eligible to register, the relevant institution must, among other things, have been established and operated overseas for at least five years; and be well known and have substantive experience in the administration of disputes (article 6). The relevant foreign institution must register with the Shanghai BOJ (article 4).

Interestingly, article 14 of the regulations provides that registered foreign arbitral institutions shall be entitled to lawfully administer only “foreign-related” civil and commercial arbitral disputes. Although the FTZ plan had not indicated any limitations, article 24 of the regulations clarifies that any dispute being administered by a foreign institution must have a “foreign-related element.” The regulations refer to the general provisions of PRC law for guidance on factors indicating a foreign-related element. Prior interpretations of the Supreme People’s Court have identified relevant factors as including: 

• whether the parties have Chinese nationality or a place of domicile outside the PRC;
• whether the relevant assets are located outside the PRC; or
• whether the contractual relationship was formed, performed, terminated or altered outside the PRC.

Surprisingly, and in contrast to the FTZ plan, the Shanghai BOJ’s administrative regulations do not state that foreign arbitral institutions shall be entitled to refer applications for interim measures to the Chinese courts. However, foreign arbitral institutions will likely be able to do so given the clear position taken in the FTZ plan. This may be the subject of a future interpretation or opinion by the Supreme People’s Court.      

Article 25 provides that the regulations will enter into force on 1 January 2020 for a period of three years. The regulations do not address whether foreign arbitral institutions will be able to apply before this date. It remains to be seen what (if any) impact registration will have upon arbitration agreements entered into prior to 1 January 2020 or upon ongoing PRC-seated arbitrations already being administered by foreign arbitral institutions. It also remains to be seen whether awards resulting from PRC-seated arbitrations administered by foreign arbitral institutions will be treated as domestic or non-domestic under mainland China’s set-aside and enforcement regimes.

Viewed optimistically, this development may well mark an (albeit small) step towards liberalisation of the Chinese arbitration landscape. However, the limitation to disputes with a foreign-related element makes this development of limited use to international parties. Foreign arbitral institutions are already able to lawfully administer such disputes outside mainland China. Disappointingly, the regulations fail to open up new options for international parties operating in mainland China through wholly foreign-owned enterprises and foreign-invested entities, which are generally required to arbitrate their disputes with other PRC entities in mainland China using Chinese arbitration commissions.

The benefits of this development are only likely to be felt by the minority of parties who meet or whose contract meets the foreign-related element test, and who desire a foreign administering institution but are willing to accept a PRC seat to ensure the availability of interim measures from the Chinese courts. Given that the Chinese courts have been obliged since 1 October to receive applications for interim measures in support of certain Hong Kong-seated arbitrations, this development is unlikely to draw many arbitrations of foreign-related disputes to mainland China.