CIETAC Opens Doors to Financial Arbitration

China’s oldest and most eminent arbitration body, the China International Economic and Trade Arbitration Commission (CIETAC), has recently released the Arbitration Rules for Financial Disputes (Financial Arbitration Rules). The official implementation of the new rules started on 8 May 2003. The move comes amidst growing competition amongst Chinese arbitration institutions. According to statistics, the 133 arbitration institutions in China last year heard a total of 17,959 cases, an increase of not less than 48 percent. However, the 2002 annual report of CIETAC shows that CIETAC did not profit from the upsurge: it accepted 684 cases in 2002 which represented a decrease from the 731 cases accepted the year earlier. The decline was mainly attributable to a drop in the number of foreign-related cases which fell from 553 in 2001 to 468 last year. The total of domestic cases rose from 178 to 216 cases in the same period. On the positive side, the value of the amounts in dispute in the cases before CIETAC last year rose with about 6.9 percent to a total of RMB 11,283 million despite the drop off in the overall number of cases. 

The principal reason why CIETAC is seeing its foreign-related caseload diminish is that reforms implemented in recent years permit most domestic arbitration bodies in China to hear foreign-related cases. CIETAC is therefore no longer the sole venue to arbitrate this type of dispute. Confronted with ever stronger competition, CIETAC has over the years made various attempts at expanding its jurisdiction. In 1998, the CIETAC Arbitration Rules were amended to permit CIETAC to hear cases involving foreign investment enterprises. In 2000, its jurisdiction was further expanded by a new amendment which permitted CIETAC to hear domestic disputes. CIETAC has also tried to diversify into new territory by becoming involved in other forms of alternative dispute resolution. In 2000 it established a Domain Name Dispute Resolution Center which is authorized to resolve disputes involving Internet domain names in China. 

The adoption of the Financial Arbitration Rules by CIETAC ties in with these attempts to gain market share by carving out a new niche for its arbitration role. And CIETAC will not stop there. It has indicated it has plans to draw up rules to govern disputes regarding securities. 

Advantages of Financial Arbitration

There are many advantages to arbitration which make it an ideal venue for resolving financial disputes. Financial disputes, such as those involving documentary credit, benefit from a process of swift and impartial resolution by experts who are familiar with the documentary evidence and the practices of the trade of the financial transactions concerned. Financial arbitration rules can further allow parties to the dispute to elect procedures best fitted to the nature of the financial transaction at hand. Arbitration proceedings also have the advantage of being conducted in camera thus preserving the confidentiality of the arrangements between the parties. Moreover, in many instances, arbitration will be less adversarial than litigation and may therefore help preserve the future business relationship between the parties. Parties in financial arbitration proceedings will also benefit from important cost savings when compared to litigation. This is particularly important when the amounts in dispute are not very high. Since there exists a dependable mechanism for enforcement in most countries, arbitration represents a valuable alternative to court action. These numerous benefits explain why in many jurisdictions financial arbitration is gradually gaining wider acceptance. For instance, the International Court of Arbitration of the International Chamber of Commerce has adopted the Rules for Documentary Instruments Dispute Resolution Expertise to allow for arbitration regarding documentary letters of credit. In the US, the American Arbitration Association has adopted the Commercial Financial Disputes Arbitration Rules for arbitrations involving commercial financial disputes.

Arguments for Financial Arbitration in China

In China there is an even stronger urgency to establishing a special forum for the resolution of financial disputes. Its financial sector is going through rapid changes and developments across the board and the increasing number and complexity of transactions is providing a fertile breeding ground for disputes. Many of the complex disputes that are arising in this burgeoning sector are being heard by courts which often lack the necessary skill and expertise to deal with the issues involved. This often means that litigants are required to expend much time and effort in briefing the court on issues that experts in the relevant field would grasp immediately. Even then, court judgements may be handed down which seem to run contrary to internationally accepted practices in the trade. In addition, financial arbitration in China will not only mean more expertise but it will also provide a more neutral forum for the resolution of financial disputes in the country.

Swiftness

CIETAC’s recently published Financial Arbitration Rules aim to fill this demand for an avenue for the quick, expert and objective resolution of disputes regarding financial transactions. This goal is mainly achieved by imposing stricter deadlines and allowing more flexibility in the proceedings than are provided under the ordinary CIETAC Arbitration Rules. A financial arbitration under the Financial Arbitration Rules can be completed within 45 days of the formation of the arbitration tribunal as opposed to the nine months usually required to complete an arbitration under the CIETAC Arbitration Rules (see table for comparison of timelines for arbitration under the two sets of Rules).

Table: Timelines for arbitration

Target of the Financial Arbitration Rules

The Financial Arbitration Rules can be invoked for disputes involving financial transactions on the currency market, capital market, foreign exchange market, gold market and insurance market. The concept of financial transactions is defined very broadly and includes local or foreign currency financing, assignment or sale of local or foreign currency financial instruments and documents, etc. Disputes that may be submitted under the Financial Arbitration include disputes solely between financial institutions or between financial institutions and other legal persons or natural persons. 

Although the scope of the Financial Arbitration Rules covers the banking, securities and insurance sectors, the principal target seems to be banking transactions as is suggested by the non-exhaustive list of financial transactions mentioned in the Rules. The list includes loans, deposit certificates, guarantees, letters of credit, negotiable instruments, fund transactions, fund trusts, bonds, foreign exchange collection and remittance, factoring and reimbursement agreements between banks. There are several indications that insurance disputes are considered a less important area for financial arbitration under the Financial Arbitration Rules than banking and securities. No insurance-related transactions are included in the exemplary list of financial transactions. There are also only seven insurance law experts included in the list of arbitrators attached to the Financial Arbitration Rules thus only offering the parties a limited choice of arbitrators. This deficiency is remedied to a certain extent by the discretion of CIETAC to permit selection of arbitrators from another arbitration panel designated by it. It remains to be seen whether all or only certain types of insurance transactions will be deemed arbitrable matter under the Financial Arbitration Rules. The decision on whether a dispute is a financial dispute arbitrable under the Financial Arbitration Rules lies ultimately with CIETAC. Securities-related disputes also do not seem to be the prime target of the Financial Arbitration Rules. This may be due to the fact that CIETAC may have plans to issue a separate set of rules to govern arbitration in this area.

Appointment of Arbitrators

The arbitration tribunal hearing a dispute under the Financial Arbitration Rules must comprise one or three arbitrators. If the parties have failed to agree on the number of arbitrators who are to make up the tribunal, the Chairman of CIETAC will decide on the number of arbitrators. The procedures for appointment of arbitrators are similar to those found in the CIETAC Arbitration Rules except that the Rules require all arbitrators to be appointed within seven working days after the parties have received the notice of arbitration.

When the parties or the Chairman of CIETAC select arbitrators, they may do so from CIETAC’s list of financial arbitrators or from other lists of arbitrators designated by CIETAC. The arbitrators appointed by the parties shall be confirmed by CIETAC and CIETAC is not required to provide grounds for its decision to grant or refuse confirmation of these arbitrators. A list of financial arbitrators who are experts in various areas of finance is attached to the Rules.

Flexibility in Proceedings

The Financial Arbitration Rules do not prescribe detailed rules for how the arbitration should be conducted but rather leave the arbitration tribunal free to conduct the arbitration proceedings in the manner it deems fit. This is only subject to the requirements that the tribunal ensure that the parties are treated fairly and are given a reasonable opportunity to present their case.

The parties may agree or the arbitration tribunal may determine a time limit for presenting evidence. In the absence of such time limit, the parties must present all evidence to the Secretariat at least three working days prior to the first hearing of the case.

Procedure

Financial arbitration under the Financial Arbitration Rules does not necessarily require hearings as is standard under the CIETAC Arbitration Rules. Whether a hearing is held will depend on the agreement between the parties or the decision of the arbitration tribunal. If a hearing is held, the CIETAC Secretariat must advise the parties 10 working days prior to the hearing. 

The fact that arbitration under the Financial Arbitration Rules may not always involve a hearing makes the preparation of accurate and complete written submissions all the more crucial for parties to a financial arbitration. Coupled with the significant tightening of time limits for the submission of a defence and counterclaim (although extensions may be granted) under the Financial Arbitration Rules, parties may find it difficult to fully present their case. It remains to be seen whether as a result of this parties may only elect to arbitrate under the Financial Arbitration Rules when the matter at issue is well documented from the start and does not require the preparation of extensive documentary evidence. It should be noted that the time problem may be remedied, however, if the parties can agree to a longer time limit for submitting documents. 

Site and governing law

The provisions of the Financial Arbitration Rules with respect to the locus and governing law are the same as provided under the CIETAC Arbitration Rules. Unless the parties have agreed otherwise, the site for the arbitration will be the place where CIETAC or its sub-commission is located. In principle, the parties may agree upon the venue of the hearing to be situated overseas.

Unless there are mandatory requirements under the law, the parties may agree on the substantive law applicable to the dispute if the case involves a foreign element. In the absence of an agreement between the parties, the arbitration tribunal will decide on the proper substantive law in light of the contractual terms, the practice in the relevant industry and the standards of the trade.

Arbitration fees

CIETAC used to have two sets of standards for the arbitration fees it charges, one for arbitration cases involving a foreign element and one for domestic cases. With the enactment of the Financial Arbitration Rules there is now a third arbitration fee schedule which applies solely to the arbitration of financial disputes. The fees under the new schedule are lower than those charged by CIETAC for the arbitration of disputes involving a foreign element under the CIETAC Arbitration Rules (see table). When compared to the CIETAC domestic case fee schedule, the size of the claim will determine which fee schedule is less costly. For instance, the cost for a claim involving an amount of RMB 10 million would amount to RMB 102,500 under the Financial Arbitration Rules whereas under the international and domestic fee schedules of CIETAC the cost would respectively total RMB 220,000 and RMB 121,550. For cases involving higher amounts, the fees under the Financial Arbitration Rules may actually be more advantageous than those under the domestic arbitration fee schedule. This cost advantage may be one of the factors attracting local and foreign parties to choose arbitration under the Financial Arbitration Rules rather than under the CIETAC Arbitration Rules.

Table: Comparison of fees under CIETAC Arbitration Rules and Financial Arbitration Rules (unit: RMB).

Application of Financial Arbitration Rules 

When parties choose to submit their dispute to CIETAC for arbitration the Financial Arbitration Rules will only be applied if the parties have agreed to the use of the Financial Arbitration Rules. Such agreement may have been reached by the parties prior to the dispute or after the dispute arose. In the absence of an agreement, CIETAC will use the CIETAC Arbitration Rules.

The Financial Arbitration Rules provide that in the event of a discrepancy between the Financial Arbitration Rules and the CIETAC Arbitration Rules, the Financial Arbitration Rules will prevail. Matters not addressed in the Financial Arbitration Rules must be handled in accordance with the CIETAC Arbitration Rules.

Are these arbitration rules of interest to foreign parties?

Many foreign parties or foreign-invested parties may be interested in ensuring a quick resolution of disputes arising out of their financial transactions in China. This would include parties to letters of credit, foreign-invested banks, fund managers and to a lesser extent insurance companies in China. The advantages of financial arbitration referred to earlier may be an important factor for such parties to decide to include a financial arbitration clause in their agreements. 

The Financial Arbitration Rules are clearly drafted to achieve the aim of quick and flexible proceedings. The fact that the venue of the hearing may be overseas and that foreign law may serve as the governing law to resolve the disputes are features that are attractive to foreign parties. It could be argued that the list of 89 arbitrators sitting on the financial arbitration panel is fairly limited and that a foreign bank and insurer in China would probably prefer to choose from a wider list in order to ensure that there are no conflicts of interest. The list is also only made up of local arbitrators. This is in contrast to the list of arbitrators under the CIETAC Arbitration Rules which allows parties to an international dispute to choose from about 500 arbitrators, a third of which are Hong Kong and foreign lawyers. However, the Financial Arbitration Rules explicitly allow CIETAC to designate other lists of arbitrators from which the parties may appoint arbitrators. This apparently means that arbitrators on CIETAC’s general list of arbitrators may also be appointed to serve on an arbitration tribunal hearing a case under the Rules. It is not clear from the Financial Arbitration Rules whether there are any situations in which CIETAC would refuse parties to choose arbitrators from another arbitration panel.

Obviously, foreign parties choosing arbitration under the Financial Arbitration Rules will be confronted with the shortcomings appertaining to all foreign-related arbitration in China. The most obvious obstacle is that any award rendered will need to be enforced by a local court which may be locally biased. However, in recent years the Supreme People’s Court has stepped up control over the enforcement of foreign-related awards by allowing only courts of a certain level to hear cases related to the validity of foreign-related arbitration awards and by imposing reporting requirements on the courts hearing such cases. Moreover, it is clear that despite the possibility of an overseas venue, in most cases it can be expected that the arbitration venue will be in China because the other party may withhold its agreement to arbitration outside China.

Conclusion

The Financial Arbitration Rules offer domestic and foreign parties entering into financial transactions in China the opportunity to choose a speedy and cost-effective alternative to litigation or arbitration under standard rules. The greater flexibility and swiftness in the proceedings may be a strong reason for banks, securities houses, insurance companies and other parties to consider including in their financial agreements an arbitration clause which refers disputes for arbitration under the Financial Arbitration Rules. The Financial Arbitration Rules may also have given CIETAC the ammunition it needs to maintain its position as China’s foremost arbitration body.

Whilst every effort has been made to ensure the accuracy of this publication, it is intended to provide general guidance and not definitive legal advice.

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