In Depth: China Embarks on Reform of 30-Year-Old Arbitration Law

17 Jan 2025

By Qin Jianxing and Guo Xin

China is revising its Arbitration Law for the first time since it took effect in 1995.

China established its civil and commercial arbitration system back in 1995, when its Arbitration Law which took effect.

However, it’s faced several challenges, including excessive administrative influence, limited foreign-related mechanisms, and shortcomings in internal governance.

Now, the country is revising the law for the first time. In July 2021, the Ministry of Justice released a draft amendment for public consultation. After three years of deliberation, the State Council gave preliminary approval to the draft in July. It was submitted to the legislature for review in November.

Updated procedures

Arbitration and court proceedings can both deliver binding and enforceable rulings, a representative of an international arbitration institution’s Chinese branch told Caixin. Arbitration awards are enforceable internationally under the 1958 New York Convention, which has been signed by more than 170 countries and regions.

Nevertheless, arbitration differs in key ways. Arbitration commissions — the permanent administrative bodies that set up and oversee specific tribunals that handle individual cases — are not public authorities, and the parties involved can choose their arbitrators and the rules to be applied. Arbitration also offers confidentiality, as hearings are not public, the representative said.

The draft changes to the law make initiating arbitration easier and expand the powers of arbitration tribunals.

For instance, the draft expands the scenarios under which parties’ arbitration agreements can be recognized, making the system more flexible. It states that if one party applies for arbitration, citing the existence of an arbitration agreement, it will be valid as long as the other party does not contest the existence of the agreement before the first scheduled hearing.

The draft also allows arbitration tribunals the right to determine their own jurisdiction, which is an international norm. Under the current law, if one of the parties challenges the validity of an arbitration agreement, the issue can be decided by either an arbitration commission or a court. The draft gives arbitration tribunals the authority to make that determination themselves.

Unclear legal status

The legal status of arbitration institutions in China has long been ambiguous. While the country’s Arbitration Law states that arbitration commissions should operate independently from government agencies, many function as public institutions in reality and have close ties to local governments.

Interviewees told Caixin that arbitration commissions vary widely across the country. Prominent bodies like the Beijing Arbitration Commission and the Shenzhen Court of International Arbitration have carved out competitive positions in the market. But many others are far less popular due to heavy local government influence and rely on public funding to stay afloat. These government-backed commissions often employ civil servants or other government employees.

However, the draft law formalizes external administrative oversight. Article 23 specifies that the Ministry of Justice will oversee and guide national arbitration efforts, improve supervision, and implement management systems. Provincial-level judicial departments will be tasked with supervising arbitration within their jurisdictions, with the authority to penalize arbitration commissions and their staff for violations.

Article 23 has sparked significant controversy. Fu Yulin, director of the International Arbitration Research Center at Peking University, expressed concerns that if this provision becomes law, it could pave the way for even more administrative interference in arbitration.

She also argued that arbitration procedures should be based on mutual consent between parties and that the courts, not administrative bodies, should determine if the law has been violated. She recommended removing Article 23 or at least revising the section that grants provincial judicial departments this authority.

When China’s Arbitration Law was enacted, it stipulated the creation of the China Arbitration Association as a self-regulatory body to oversee arbitration commissions. The association was tasked with supervising misconduct by commissions, their members, and arbitrators according to its charter — a provision that remains in the latest draft.

But progress in establishing the association has been slow. It wasn’t until Oct. 14, 2022, that it was officially registered with the Ministry of Civil Affairs. The association has yet to begin substantive operations, according to industry insiders.

Corruption concerns

In July 2019, a series of high-profile corruption cases at the Guangzhou Arbitration Commission brought attention to serious institutional flaws within arbitration bodies.

On July 9, it was announced that Chen Zhongqian, who had served as the commission’s director for nearly 14 years and was also a standing member of the Guangzhou municipal political consultative conference, was under investigation for corruption. Less than a week later, Wang Xiaoli, the commission’s Communist Party secretary, was also placed under investigation. Four months later, Li Feixiao, the commission’s deputy director, voluntarily surrendered to the authorities.

The scandal prompted Zhang Wei, then-associate professor at the Guangzhou Party School’s political and legal studies department, to publish an analysis outlining the systemic issues within the commission.

She pointed to the concentration of power in the hands of commission directors as a major driver of corruption and criticized the practice of commission members also serving as arbitrators, describing it as a fundamental conflict of roles and responsibilities, given commissions often have close ties to the local authorities.

Concerns over the excessive power of arbitration commission directors largely focus on their authority to appoint presiding arbitrators.

Under the current law, arbitration tribunals have three members, with each party selecting one arbitrator or authorizing the commission director to do so on their behalf. The third arbitrator is either jointly selected by the parties or appointed by the commission director. The third arbitrator presides over hearings and can act as a tie-breaker if the two party-chosen arbitrators cannot reach consensus.

In practice, the presiding arbitrator is almost always chosen by the commission director, creating opportunities for corruption as parties vie for an edge.

To address these concerns, the draft offers a new mechanism. If the parties agree, the third arbitrator can be jointly selected by the two arbitrators already appointed by each party.

The draft also outlines ways commissions can strengthen internal oversight by establishing democratic decision-making processes among commission directors and formal complaint-handling mechanisms. It also calls for stricter external supervision to prevent misconduct.

Enhancing foreign arbitration

The draft’s inclusion of a specific system for foreign-related disputes has also drawn significant attention.

According to the draft, in cases involving foreign-related maritime disputes or disputes between foreign-related companies registered in free-trade pilot zones approved by the State Council, the parties will have the option to choose arbitration by an arbitration commission or to independently form an ad hoc arbitration tribunal within China.

This change toward international norms marks a departure from the current law, which limits arbitration to specific institutions, and allows for more flexibility by permitting ad hoc arbitration tribunals that are not tied to any particular institution.

Hainan became the first region in China to allow ad hoc arbitration under local legislation that took effect on July 1. The new rules permit commercial disputes between entities registered in the Hainan Free Trade Port to be resolved through ad hoc arbitration.

The draft also clarifies that arbitration commissions and tribunals can handle international investment arbitration cases in line with relevant treaties and agreements, as well as arbitration rules mutually agreed upon by the parties.

However, interviewees told Caixin that excessive government intervention in the arbitration process could undermine international confidence in Chinese arbitration institutions. This, in turn, could deter foreign parties from choosing China as an arbitration venue, negatively impacting the global competitiveness of the country’s arbitration system. They hope that the next phase of the legislative process will address these concerns.

Contact reporter Guo Xin (xinguo@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.

Image: Maksym– stock.adobe.com