What opportunities and challenges do the amendments create for foreign arbitration? What are the implications for various stakeholders? Will they bring the arbitration practice in China more in line with transnational standards?

Herbert Smith Freehills China International Business and Economic Law (CIBEL) Centre member Associate Professor Kun Fan believes the amendments reflect the change of attitude from the top-down approach to view arbitration as a service industry driven by market forces, and shares her views on how these initiatives will make China a more appealing hub for foreign arbitration in her latest article ‘The 2021 Proposed Amendments to the Arbitration Law of China: A New Era of Arbitration?’

Granting market access for ad hoc arbitration and foreign arbitration institutions

Unlike the Arbitration Law of 1995 which has de facto excluded ad hoc arbitration and created uncertainties and inconsistent court practices regarding foreign arbitration institutions administering arbitration in China, the 2021 Draft Amendment expressly permits ad hoc arbitration in China for ‘commercial disputes with foreign-related elements’ and allows foreign arbitration institutions to set up business divisions in China to ‘conduct foreign-related arbitration business’.

Associate Professor Kun Fan points out it might be a compromise that the amendment only allows ad hoc arbitration and foreign arbitration institutions in China for foreign-related arbitrations, but it does give more autonomy to the parties and still ensures some level of quality control.

Recognising the seat of arbitration

The lack of recognition of the ‘seat of arbitration’ under Chinese Law has caused confusion in judicial practice, says Associate Professor Kun Fan.

The good news is the 2021 Draft Amendment officially recognises the ‘seat of arbitration,’  distinguishes the legal concept from the physical venue of the hearing, and clarifies that the nationality of an arbitral award should be determined by the seat of arbitration, rather than the location of the arbitration institution.

However, it is worth noting that the 2021 Draft Amendment empowers the arbitral tribunal to determine the seat of arbitration in the absence of parties’ agreement only with respect to ‘foreign-related’ arbitration, and it does not provide for any definition of ‘foreign-related’ arbitration.

“Hopefully, a more consistent approach can be taken in the later versions of the proposed amendment.” says Associate Professor Kun Fan.

Unifying the grounds for setting aside domestic and foreign-related awards

“If the seat of arbitration is in China, under the current Arbitration Law, different standards of review for setting aside applications apply to domestic and foreign-related arbitral awards.” says Associate Professor Kun Fan.

“While the grounds for setting aside a foreign-related arbitral award are largely consistent with the Model Law, a domestic award may be subject to substantive review by a PRC court.”

The 2021 Draft Amendment unifies the grounds for setting aside domestic and foreign-related arbitral awards and should help to avoid confusion caused by the application of different standards to different types of awards, with some courts erroneously setting aside foreign-related awards after reviewing the substance of the award.

Final thoughts

With the rapid economic development in China, several provisions in the Arbitration Law have become outdated and may hinder further development of arbitration in China.

The 2021 Draft Amendment proposes a number of ground-breaking changes to the existing arbitration regime in China. Associate Professor Kun Fan believes it reflects China’s adaptations towards transnational standards as a result of the marketization of arbitration.

“After all, arbitration is developed by businesspeople through practice within the business community, and it needs to meet the users’ expectations.” she concludes.

Discover more key features of the 2021 proposed amendments in Associate Professor Kun Fan’s full article here. You can read more of her research at SSRN and LinkedIn.