Shanghai Introduces Rules for Ad Hoc Arbitration in International Cases

Over the past decade, the booming development of international trade and the increasing influence of the Belt and Road Initiative have highlighted the importance of a diversified commercial dispute resolution regime, with arbitration remaining the most preferred mechanism for resolving international commercial disputes.

Globally, although ad hoc arbitration is the original form, institutional arbitration has gained greater popularity. It is generally agreed that ad hoc arbitration excels in flexibility, efficiency, and sometimes cost-effectiveness, while institutional arbitration offers advantages such as a mature set of arbitration rules, experienced case administrators, readily available hearing facilities, an internal mechanism for appointing arbitrators, and sometimes, a scrutiny procedure to ensure the quality of the final award. These advantages facilitate the orderly conduct of arbitration proceedings and reduce the likelihood of procedural errors or paralysis. Thus, inexperienced counsel or arbitrators often prefer institutional arbitration for the support and guidance it provides.

However, ad hoc arbitration has long been absent in China and under Chinese law. More practically, ad hoc arbitration has never been a viable option in Mainland China due to historical deficiencies in the Chinese Arbitration Law (1995). There has been significant literature and debate in recent years on whether and why ad hoc arbitration should be permitted in the Mainland. Although the Chinese Supreme People’s Court (SPC) has issued judicial interpretations making some progressive developments, they have not significantly changed the landscape.

Despite the popularity of institutional arbitration, ad hoc arbitration remains appealing due to its flexibility and better accommodation of party autonomy. Most countries support ad hoc arbitration within their legal frameworks. However, China has been unique in making ad hoc arbitration practically impossible. The Arbitration Law of the People’s Republic of China monopolizes institutional arbitration and leaves no room for ad hoc arbitration.

The Arbitration Law, which remains effective as of the date of this article, explicitly requires in Article 16 that a valid arbitration agreement must include: (i) an expression of the parties’ intention to submit to arbitration, (ii) the matters to be arbitrated, and (iii) the arbitration institution chosen by the parties. Article 18 states that if an arbitration agreement lacks or has unclear provisions regarding the arbitration institution, the parties may reach a supplementary agreement; otherwise, the arbitration agreement is null and void.

Articles 16 and 18 create a barrier to ad hoc arbitration by requiring an arbitration agreement to specify an arbitration institution to be valid. Chinese courts also uphold this interpretation in their judicial practices. However, this does not prevent parties from conducting ad hoc arbitration in China if they voluntarily perform the arbitral awards without needing court confirmation of the arbitration agreement’s validity.

On June 24, 2024, the Shanghai Bureau of Justice issued rules to facilitate ad hoc arbitration in commercial and maritime cases involving a foreign element. These new rules allow parties to create ad hoc arbitrations to resolve specific disputes under certain conditions.

Firstly, ad hoc arbitration is permitted in Shanghai to resolve foreign-complicated trade and merchant shipping disputes between: a) enterprises registered in Shanghai; b) an enterprise registered in Pudong New District (Shanghai) and a foreign counterparty; and c) enterprises registered in free trade zones. Additionally, ad hoc arbitration is allowed for trade and merchant shipping disputes between foreign enterprises, as well as enterprises from Hong Kong SAR, Macau SAR, and Taiwan.

Secondly, ad hoc arbitration is only permitted for trade (commercial) disputes and merchant shipping disputes involving a foreign element. If no foreign element is present in the dispute, ad hoc arbitration is not yet permitted.

Currently, the PRC Arbitration Law does not allow ad hoc arbitration, but as an experiment, it is allowed in Shanghai, Shenzhen, and the Hengqin Special Zone. In 2023, a specially created ad hoc arbitration was used for the first time in Shanghai to resolve a dispute.

China’s efforts to enhance its pro-arbitration image and evolve into an international arbitration center are evident in its emerging laws and practices. The SPC is dedicated to this goal, and the national legislature is also being pushed to grant leave for ad hoc arbitration.