Innovation, new rules and case law drive up sophistication of arbitration in Greater China

The start of 2024 has seen the new rules of both the China International Economic and Trade Arbitration Commission (CIETAC) and the Shanghai International Arbitration Centre (SHIAC) become effective. Both sets of new rules have been updated to address recent developments in international arbitration and showcase the two institutions’ continued efforts in modernising and internationalising their arbitration services.

Take the updated rules of Beijing-based CIETAC for example: they have incorporated provisions such as third-party funding and early dismissal of disputes among other changes. These improved provisions are aimed at providing parties with further means to effectively and efficiently resolve disputes in a world of increasingly complex, multi-party and cross border disputes. The changes will also mean CIETAC is better placed to be chosen to administer disputes that may be generated by the ‘Belt and Road Initiative’ projects.

In Hong Kong, the Hong Kong International Arbitration Centre (HKIAC) has continued to be one of the most preferred seats for cross-border disputes and international parties. According to HKIAC’s 2022 annual report (59-page / 5.68MB PDF), 50% of respondents selected Hong Kong as the top three most preferred institutions in the world, showing an increase of 22% since 2018. Its 2021 arbitration caseload was increasingly international, with 83.1% of all arbitrations having at least one party that was not from Hong Kong.

To further strengthen its leading position, HKIAC has recently taken some sophisticated measures to promote collaboration in arbitration through international initiatives, such as its unique joint administration mechanism with the Tashkent International Arbitration Centre (TIAC) in Uzbekistan. In September 2023, the two institutions launched the TIAC-HKIAC Cross-Institutional Arbitration Rules (the TIAC-HKIAC Rules). Under the arrangement, the two centres will jointly administer cases, combining the benefits of HKIAC’s extensive experience in international arbitrations and high-quality decision on procedural matters with TIAC’s cost-effective service and regional expertise in the CIS region.

In addition to developments associated with Greater China’s leading arbitration centres, the regional landscape for international arbitration is also evolving with several key trends. They include the continuing growth in the sophistication of arbitration with third party funding and the recently implemented success fee arrangements in Hong Kong, and effectiveness of the interim measures arrangement between PRC and Hong Kong which allows any party to arbitral proceedings seated in Hong Kong, prior to issuing an arbitral award, apply to mainland courts for interim measures.

Third-party funding and success fee arrangements

In mainland China, the Beijing Fourth Intermediate People’s Court handed down a landmark decision in relation to third party funding in November 2022. In its judgment for Ruili Airlines Co Ltd and Others v CLC Aircraft Leasing (Tianjin) Co Ltd, the court confirmed the legitimacy of the third party funding agreement in arbitration and set out guidance on the standards of judicial review regarding challenges to an arbitral award relating to a third-party funding arrangement.  

The addition of third party funding rules in CIETAC’s new edition of its arbitration rules (79 pages/259 KB) is a reflection of this judgment and is of particular importance. The rules require any funding party to disclose to the CIETAC Arbitration Court the existence of any third party funding arrangement without delay. The required disclosure includes the nature of the third party’s financial interest, the name and address of the funder, and any other relevant information.

In Hong Kong, third party funding for arbitration and related court proceedings has been permitted since February 2019. More recently, the SAR has brought into force legislation to permit lawyers in Hong Kong to charge success fees and use other outcome-related fee structures for arbitration.

Interim measures arrangement between PRC and Hong Kong

Hong Kong’s position as a popular dispute resolution venue for China-related matters has benefited from the interim measures arrangement between PRC and Hong Kong, which came into effect on 1 October 2019. The arrangement enables parties to arbitration proceedings seated in Hong Kong to apply to mainland Chinese courts for interim measures, such as for the preservation of assets, the preservation of evidence and the preservation of conduct.

As of 26 January 2024, HKIAC reported that it was aware of 71 decisions issued by mainland courts, 67 of which granted applications for preservation of assets whilst four rejected the application. The total value of assets preserved by the 67 decisions amounted to RMB 16.3 billion (US$2.29bn). The majority of the applicants for interim measures were foreign parties, which was 79.8%, while most, or 61% of the respondents were mainland Chinese parties.

Growing case law in Hong Kong

Hong Kong continues to be a strong international and regional arbitration hub with a growing body case law. In one of the most significant recent cases, Hong Kong’s Court of Final Appeal confirmed that compliance with multi-tier dispute clauses is a matter of admissibility not jurisdiction.

The case, which involved a multi-tiered dispute resolution clause in a contract between C, a Hong Kong company, and D, a Thai company, turned on whether compliance with a contractual requirement to first refer the dispute to the parties’ respective CEOs for resolution was a ‘condition precedent’ to arbitration – and, if so, whether such a condition precedent is an issue of admissibility or jurisdiction.

The decision highlights Hong Kong as a pro-arbitration jurisdiction where courts will be slow to intervene in the arbitral process, showcasing how Hong Kong sits in line with other international arbitration hubs, where party autonomy, uniformity between the arbitral regimes of different countries, and using arbitration as a “one stop shop” for dispute resolution is encouraged.

Other key changes

From January this year, foreign states will no longer be immune from suit or execution in Hong Kong regarding commercial activities. The change in the position on sovereign immunity in Hong Kong from absolute to restrictive comes after the change in the PRC’s position on this issue by its new sovereign immunity law, which was adopted on 1 September 2023.

It was already the case before the new law that foreign states cannot claim immunity from the jurisdiction of Hong Kong seated arbitral tribunals, and the new law does not change this. However, it will expand the scope to enforce arbitral awards and court judgments against foreign states in relation to commercial transactions and execute against commercial assets of foreign states. The new law expressly does not allow waiver of immunity for arbitration-related proceedings in relation to commercial activities.

The Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance is expected to bring important changes to cross-border enforcement of judgments between Hong Kong and mainland China. The new law came into force on 29 January 2024 and provides a more comprehensive mechanism for reciprocal recognition and enforcement of judgments in civil and commercial matters between the two jurisdictions, leading to a reduction in time and legal costs on judgment enforcement.

However, proceedings for the confirmation of the validity of an arbitration agreement or for an order to set aside an arbitral award, or the recognition or enforcement of an arbitral award, are excluded from the new regime.

Finally, mainland China is in the midst of significant development in recognition of the need to internationalise the existing laws relating to arbitration. As always, great care is taken and consultation is sought widely before any change is implemented.  After a flurry of public activity and consultation in 2021 and 2022 on a new China arbitration law, work continued largely behind closed doors during 2023. Whilst too early to tell, 2024 could be the year that further developments are announced.