The Dawn of Ad Hoc Arbitration in Mainland China: A Real Possibility?

Mainland China has embarked on a process of aligning its arbitration practice more to international norms, notably through the introduction of ad hoc arbitration.

This form of arbitration is widely recognised for its adaptability, cost-effectiveness and ability to be tailored to the specific needs of disputing parties.

Mainland China has traditionally favoured institutional arbitration over ad hoc arbitration, which to date is not yet officially recognised by national legislation. But restrictions surrounding it have notably relaxed in recent years.

The inception of acceptance was the promulgation of the Opinions on Provision of Judicial Support for the Development of Pilot Free Trade Zones by the Supreme People's Court (SPC) on 30 December 2016. This document introduced the concept of "Three Specific Elements", i.e., enterprises registered in the Pilot Free Trade Zones (Trade Zones) may submit their disputes for ad hoc arbitration (1) to arbitrators who meet the qualification requirements set forth in the PRC Arbitration Law¹; (2) under mutually agreed rules; and (3) at a location within Mainland China designated by the authority.

Subsequently, Zhuhai Hengqin in Guangdong Province, one of the Trade Zones, became the first to publish a set of ad hoc arbitration rules (Hengqin Rules).

Furthermore, the Revised PRC Arbitration Law (Consultation Draft) released in July 2021 proposed allowing ad hoc arbitration² for foreign-related commercial disputes, sparking a comprehensive debate on the acceptance of ad hoc arbitration in Mainland China.

This trend has gained momentum in the past two years. Both Shanghai City and Hainan Trade Zone have introduced regional legal frameworks to provide policy and legislation support for ad hoc arbitration. Leading domestic arbitration institutions are also offering specialised services for ad hoc arbitration.

Most recently, in August 2024, Shanghai rendered the country's inaugural foreign-related maritime ad hoc arbitral award³.

Keeping a close eye on latest developments, this Legal Update comprehensively reviews the progress of ad hoc arbitration in Mainland China.

Shanghai Pioneers Foreign-Related Maritime Ad Hoc Arbitration

The first foreign-related maritime ad hoc arbitral award in Mainland China arose from a dispute over an international shipping crew service management contract between two Shanghai-registered enterprises. To resolve the dispute, the parties agreed to ad hoc arbitration in Shanghai, set their own rules and procedures, and selected a maritime expert as the arbitrator.

The rendering of this ad hoc arbitral award was part of Shanghai's initiative to establish itself as an international commercial arbitration centre.

Over the past year, various entities, including the Standing Committee of the Shanghai People's Congress, Shanghai Judicial Bureau and High People's Court, have been issuing legal documentation⁴ to facilitate the development of ad hoc arbitration through legislation, policy implementation and judicial assistance, thereby creating a legal framework for ad hoc arbitration in Shanghai:-

• This legal framework applies to foreign-related commercial and maritime arbitrations seated in Shanghai. Parties can tailor their own procedures or adopt one of the established arbitration rules. Arbitrators can be chosen from the lists of arbitrators published by the Shanghai Arbitration Association (SAA), or the domestic or foreign arbitration institutions registered in Shanghai. The SAA and these institutions can also appoint other individuals as arbitrators in accordance with the PRC Arbitration Law.⁵
• The framework covers disputes between (1) enterprises registered in Shanghai; (2) enterprises registered in Shanghai Pudong New Area and entities established within or outside Mainland China; and (3) enterprises registered in Trade Zones. Foreign enterprises (including those registered in Hong Kong SAR, Macau SAR and Taiwan Region) can also submit disputes between them to ad hoc arbitration seated in Shanghai.
• Judicial assistance is available, such as ruling on the validity of arbitration clause, application of interim measures (e.g., preservation of assets or evidence), and the setting aside and enforcement of arbitral award.

Ad Hoc Arbitration in Trade Zones

Hainan Trade Zone also achieved a significant milestone in 2024 with its first ad hoc arbitration heard on 15 July 2024⁶ under the provincial legislation supporting international commercial arbitration⁷.

Under this legislation:-

• Ad hoc arbitration is available for commercial disputes between (1) enterprises registered in Hainan Trade Zone, (2) enterprises registered in Hainan Trade Zone and foreign enterprises (including those registered in Hong Kong SAR, Macau SAR and Taiwan Region) and (3) foreign enterprises.
• Parties may decide whether their case will be heard by one or three arbitrators. They may choose arbitrators from the lists published by the Hainan Arbitration Association (HAA) or the domestic or foreign arbitration institutions registered in Hainan Trade Zone. The HAA and these institutions can also appoint other individuals as arbitrators in accordance with the PRC Arbitration Law⁸. Procedures can be agreed upon by the parties or determined by the tribunal in the absence of an agreement.
• Parties may seek interim measures (such as assets or evidence preservation) from the people's court before commencement of or during the proceedings. Review of validity of arbitration agreement, application for interim measures, and application for award annulment or enforcement, will be handled by a competent court in Hainan Trade Zone. Local courts can also aid in evidence collection upon request from arbitration institutions or tribunals.

The Greater Bay Area is another region at the forefront of ad hoc arbitration. Shenzhen, the nation's leading Special Economic Zone, introduced regulations in August 2020⁹ facilitating the development of ad hoc arbitration within the city, expanding the scope of ad hoc arbitration beyond Trade Zones to Special Economic Zones. Zhuhai also introduced regulations in May 2021¹⁰ allowing the Zhuhai Court of International Arbitration to offer various services to support ad hoc arbitration proceedings.

Ad Hoc Arbitration Rules Published by Leading Arbitration Institutions

The China International Economic and Trade Arbitration Commission (CIETAC) introduced a new set of arbitration rules earlier this year¹¹.

Article 2(7) of the new rules offers a wide range of administrative and support services for ad hoc arbitration – such as appointing arbitrators, addressing challenges to arbitrators, providing case hearing services, scrutinising draft arbitral awards and managing arbitrators’ remuneration.

In March 2022, China Maritime Law Association also published a set of rules for ad hoc arbitration (CMLA Rules)¹². On the same day, China Maritime Arbitration Commission (CMAC) issued a set of service rules¹³ setting out the services to be provided supporting ad hoc arbitration proceedings conducted under the CMLA Rules. In June 2023, CMAC published on its website a redacted arbitral award rendered under the CMLA Rules.¹⁴

Interim Measures for Ad Hoc Arbitration

The current laws of Mainland China do not provide a legal framework for interim measures in extraterritorial arbitration proceedings (whether institutional or ad hoc) but there are two exceptions:-

• Hong Kong SAR is the only jurisdiction where arbitration proceedings seated there may take advantage of interim measures of Mainland Chinese courts under the Arrangement Concerning Mutual Assistance in Court-Ordered Interim Measures in Aid of Arbitral Proceedings. However, this arrangement excludes ad hoc arbitrations, as it only applies to proceedings administered by designated arbitration institutions in Hong Kong.¹⁵
• The Law on Special Procedures in Maritime Proceedings and its judicial interpretations seem to allow parties in extraterritorial maritime arbitrations (including ad hoc arbitrations¹⁶) to apply for the preservation of specific maritime assets, such as ships, cargo, bunker fuel and ship materials.

Except where specifically highlighted in this Legal Update, the current laws of Mainland China also do not generally provide a legal framework for interim measures in ad hoc arbitration proceedings seated within the country.

Enforcement of Ad Hoc Arbitral Award

Foreign Ad Hoc Arbitral Award

Article 543 of the SPC’s Interpretation of the Civil Procedural Law requires the people's courts to handle application for recognition and enforcement of foreign ad hoc arbitral award the same way as foreign institutional arbitral award. In a guiding judgment published by the SPC earlier this year, the people's court upheld an ad hoc arbitral award rendered under the expedited procedure in Sweden.¹⁷

The same approach applies to the recognition and enforcement of ad hoc arbitral awards made in Hong Kong SAR, Macao SAR and Taiwan Region in accordance with their respective mutual recognition and enforcement arrangements with Mainland China.¹⁸

Ad Hoc Arbitral Award Rendered within Mainland China

At present, only some regions within Mainland China have arrangements in place endorsing the enforcement of ad hoc arbitral awards rendered within the country, as highlighted in this Legal Update.

As regards extraterritorial enforcement via the New York Convention, Article 5 of the New York Convention requires an arbitration agreement to be valid under its governing law. The issue here is that the PRC Arbitration Law only validates institutional arbitration agreements.

Ad hoc arbitrations conducted pursuant to legislation such as those promulgated by Shanghai and Hainan mentioned above may be viewed as complying with the requirement under Article 5 of the New York Convention. However, the position is less clear for ad hoc arbitrations conducted pursuant to rules lacking legislative backing, such as the Hengqin Rules and CMLA Rules.

The enforceability of Mainland China ad hoc arbitral awards in Hong Kong SAR remains uncertain because the existing arrangements only apply to arbitral awards rendered pursuant to the PRC Arbitration Law which only recognises institutional arbitration.

Conclusion

The introduction of ad hoc arbitration in Shanghai and Hainan signifies a major advancement in Mainland China's arbitration landscape.

The first foreign-related maritime ad hoc arbitral award in Shanghai has heightened anticipation of the broader acceptance of ad hoc arbitration generally across the country.

It is encouraging to see that certain features of the current design of Mainland China's ad hoc arbitration align with international standards – including robust party autonomy and comprehensive judicial assistance.

However, the absence of a unified legal framework poses uncertainties over issues such as the recognition and enforcement of ad hoc arbitral awards, thereby deterring parties from opting for ad hoc arbitration.

To foster the development of ad hoc arbitration in Mainland China, it is anticipated that the authorities will in the near future introduce suitable revisions to the PRC Arbitration Law. We will continue to monitor and report on these developments.