New Shanghai Free Trade Zone Arbitration Rules

The Shanghai International Arbitration Center's (SHIAC) "China (Shanghai) Pilot Free Trade Zone Arbitration Rules" (FTZ Arbitration Rules) took effect on May 1, 2014. The FTZ Arbitration Rules adopt some recent developments in international arbitration practice and rules of several other international arbitration institutions. Key features of the FTZ Arbitration Rules are highlighted below.

Application

Unless otherwise agreed by the parties, the FTZ Arbitration Rules apply to disputes referred to SHIAC where the parties, subject matter or legal facts relating to the establishment, change or termination of civil and commercial relationships relate to the Shanghai Pilot Free Trade Zone (FTZ) or where the parties specifically elect to use the FTZ Arbitration Rules. Unless the parties agree otherwise, they also apply to disputes referred to the FTZ Court of Arbitration founded by SHIAC in October 2013.

Interim Measures and Emergency Arbitrator

The FTZ Arbitration Rules have several provisions relating to the administration of certain interim measures, which include injunctive relief, preservation of property and protection of evidence. They provide that, where SHIAC receives an application for interim measures from a party to arbitration before the commencement of arbitration proceedings, it will submit them to a competent court for execution within three days of its receipt.

The FTZ Arbitration Rules also provide for an emergency arbitration tribunal regime to deal with applications for interim measures from the parties after the commencement of an arbitration but prior to the establishment of the formal arbitration tribunal. In this regime, the chairman of SHIAC will designate a sole arbitrator to form the emergency arbitration tribunal within three days of the approval of the application by SHIAC, and an emergency arbitrator will then assume the disclosure and challenge obligations pursuant to the FTZ Arbitration Rules. The emergency arbitration tribunal will dissolve when the formal arbitration tribunal is constituted, and the emergency arbitrator will not be eligible for appointment as a member of the formal arbitration tribunal unless otherwise agreed by the parties.

The FTZ Arbitration Rules expressly empower the arbitration tribunal (including the emergency arbitration tribunal), upon application from a party, to adopt interim measures in accordance with applicable laws where the interim measures are to be adopted.

Under current law in the People's Republic of China (PRC), the adoption of interim measures must be ordered by a court in order for them to be enforceable. However, the Shanghai No. 2 Intermediate Court recently confirmed that it will take quick action on applications for interim measures from parties to SHIAC arbitrations.

Appointment of Outside Arbitrators

The PRC Arbitration Law requires all arbitration commissions to establish and maintain a list of arbitrators. Although it does not specifically limit the selection of arbitrators to those on a list, this has been the practice followed in China. The FTZ Arbitration Rules allow the parties, within 15 days of receipt of the arbitration notice, to nominate as their designated arbitrators individuals who are not on the SHIAC list, or as the chief arbitrator or sole arbitrator of a panel, subject to the approval of the chairman of SHIAC. In the event that such nominations are not approved, the parties will select arbitrators from the panel of SHIAC or authorize the chairman of SHIAC to select arbitrators on their behalf within five days.

Consolidation of Arbitrations

In response to the rise of multi-party and multi-contract disputes in recent years, the FTZ Arbitration Rules allow the arbitration tribunal to consolidate two or more parallel arbitrations into a single arbitration where (i) the pending arbitrations involve the same or relevant subject matter, (ii) there is consent from the parties, and (iii) the constitution of those arbitration tribunals are the same. If such a consolidation is made, all arbitration proceedings will be consolidated into the arbitration proceeding that commenced first unless the parties agree otherwise. However, the arbitration tribunal will render separate awards for all parallel cases unless the parties request a joint award.

The consolidation of arbitrations may lower the risk of inconsistent results from parallel proceedings as well as reduce the overall length and costs of arbitrations.

Joinder of Third Parties

Joinder of third parties to arbitration proceedings is a concept recently added to the arbitration rules of some of the world's leading arbitration institutions, such as United Nations Commission on International Trade Law, London Court of International Arbitration, International Chamber of Commerce and Singapore International Arbitration Centre.

Joinder is possible in arbitration proceedings governed by the FTZ Arbitration Rules. If a party applies to add a third party under the same arbitration agreement to an arbitration before the establishment of the arbitration tribunal, the application will be decided by the secretariat of SHIAC. If agreed to by the secretariat, the multiple claimants/respondents will jointly appoint a single arbitrator. If a joint appointment is not made, the chairman of SHIAC will appoint all arbitrators of the case irrespective of whether the parties have previously appointed their arbitrators. If an application to add a third party is filed after the arbitration tribunal is established, the arbitration tribunal may decide to approve the application if the third party waives its right to re-appoint the arbitrator and confirms the existing arbitration proceedings.

The addition of a third party to an arbitration requires the consent of the third party. Alternatively, a third party can directly apply to join the arbitration proceedings if it obtains the consent of the exiting parties. The application will be determined by the arbitration tribunal or by the secretariat of SHIAC before the establishment of the arbitral tribunal.

Mediation

In China, mediation is often utilized by arbitration tribunals to facilitate the settlement of disputes during arbitration proceedings. The PRC Arbitration Law endorses this practice but is silent on the use of mediation prior to the establishment of the arbitration tribunal. The FTZ Arbitration Rules now fill this gap by providing that, if a party applies for mediation during an arbitration proceeding, the chairman of SHIAC will, within three days upon receipt of consent from the other party, designate one member of the panel to mediate the dispute. If the mediation is successful, the parties may ask the arbitration tribunal to issue an award based on the settlement agreement concluded.

In order to ensure the impartiality and independent judgment, the mediator will not be eligible to serve as an arbitrator on a subsequent arbitration tribunal unless otherwise agreed by the parties, and any views, opinions or statements made by one party during the mediation process cannot be used against that party during subsequent arbitration proceedings if the mediation fails.

Summary Procedure

Under the FTZ Arbitration Rules, a special summary procedure will be used for cases where the amount in dispute does not exceed RMB1 million unless otherwise agreed by the parties. The summary procedure can also be used in cases over RMB1 million if agreed by the parties. A single arbitrator will be appointed to hear summary procedure cases, and awards will be rendered within three months of the appointment of the sole arbitrator, as opposed to six months under the standard procedure.

The FTZ Arbitration Rules also create a special category of "low-value" cases for summary procedure where the amount in dispute is no more than RMB100,000. For such cases, awards will be rendered within 45 days after the appointment.

Since the FTZ is expected to see a lot of new investment activities in the coming years, it is likely that disputes will arise. The issuance of the FTZ Arbitration Rules may prove to be a timely and useful development.