Shanghai allows foreign arbitration in Lin Gang area

The Shanghai Municipal Bureau of Justice released the Administrative Measures on Business Offices Established by Foreign Arbitral institutions within the Lin Gang Area of China (Shanghai) Free Trade Zone (the “Administrative Measures”) on 19 October 2019. The Administrative Measures will take effect on 1 January 2020 and be terminated on 31 December 2022.

Applicable scope

The Administrative Measures apply to the establishment and management of foreign arbitral institutions’ business offices within the Lin Gang area. Under the Administrative Measures, foreign arbitral institutions refer to non-profit-making arbitration institutions legally established in foreign countries, including Hong Kong, Macao and Taiwan, as well as institutions established by international organisations that China has joined.

Background

Disputes containing a foreign element, inter alia disputes between a Chinese and a foreign contractual party, can be submitted to foreign arbitration. Since China has become a contracting state to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) on 22 April 1987, arbitration awards rendered by a foreign arbitration institution in another contracting state to the New York Convention have been acknowledged and enforced in China. However, traditionally foreign arbitration institutions were not permitted to administer disputes in the territory of China. Awards issued by them were facing risks in terms of acknowledgment and enforcement in China.

Changes to the situation seem underway. On 27 July 2019, the State Council released the Circular on Issuing the Overall Plan for the New Lin Gang Area of the China (Shanghai) Pilot Free Trade Zone (the “Circular”). Article 2.4 of the Circular provides that in order to improve fair competition and investment, the State Council encourages the establishment of judicial organisations for the purposes of international commercial dispute resolution within Lin Gang.

In order to implement the State Council’s Circular, on 20 August 2019, the Shanghai government released the Administrative Measures of the Lin Gang Area in China (Shanghai) Free Trade Zone. Article 13 provides that after foreign well-known arbitration and dispute resolution institutions are registered with the municipal bureau of justice and are reported to the Ministry of Justice for filing, they can set up business offices in the Lin Gang area to conduct arbitration activities on civil and commercial disputes arising in the fields of international business, maritime affairs and investment.

In order to set out the detailed requirements for establishing and managing the aforementioned business offices of foreign arbitral institutions, the Shanghai Municipal Bureau of Justice released the Administrative Measures.

Summary of the Administrative Measures

The Administrative Measures provide that the competent authority in charge of the registration of the business offices of foreign arbitral institutions will be the Shanghai Municipal Bureau of Justice. In addition, the Administrative Measures clarify the qualification conditions, materials, formatting requirements and review proceedings for the establishment, change of registration and de-registration of business offices of the foreign arbitral institutions. In particular, the Administrative Measures set out the business scope of the business offices of foreign arbitral institutions, which include

(1) acceptance of cases, trials, hearings and rulings;

(2) case management and services; and

(3) business consulting, guidance, training and seminars.

Analysis and Conclusion

Prior to the adoption of the Administrative Measures, although foreign arbitration institutions have established representative offices in the Shanghai Free Trade Zone, these were largely focused on promotion and logistical support rather than administering cases seated in China. The adoption of the Administrative Measures will be seen to bolster some certainty in this area and shows that foreign arbitration institutions may now be comfortable in administering cases seated in China, subject to the relevant successful registrations.

However, some uncertainty still lingers. In particular, the status of enforceability of awards are yet to be clearly defined. China has, in the past, had an issue surrounding the uncertainty of whether an arbitration award made by a foreign arbitration institution within China will be deemed 'domestic' or 'non-domestic' pursuant to the New York Convention. The categorisation of whether the award is deemed 'domestic' or 'non-domestic' is important as, under PRC law, the status of enforcement of these awards may differ.

Although the international business community will undoubtedly want a clearer indication on the status and categorisation of arbitral awards, the adoption of the Administrative Measures shows an important step towards the internationalisation of Chinese business and will bolster international confidence in China's dispute resolution system. More legislative guidance on the enforcement of awards will be highly welcome.