The Rise of Arbitration in China

Arbitration courts are springing up throughout China. In 2021 alone, it was reported that over 415,000 disputes were filed for arbitration throughout the country.

With China’s commercial opening to the outside world came new legal concepts to which the Chinese needed to adapt in order to do business on an international level. Many of those new and barely addressed areas of law were in contract law and labor law.

Astonishingly for what is now the world's second largest economy, the People's Republic of China did not have a contract law until December of 1981, and even then, the law covered only domestic Chinese entities. It was not until March of 1985 that China enacted a contract law covering transactions between Chinese and foreign companies. Both laws have been updated since.

With the Chinese government deciding that both growth and stability relied upon financial strength, engaging with the rest of the world commercially seemed to be inevitable, if not wholly welcome.

With laws come lawsuits. China was woefully unprepared for the advent of disputes between parties to a contract that opening up to international business would bring. Matters between home-grown Chinese enterprises had generally been handled by ad hoc meetings, with Chinese Communist Party officials having the last say in the resolution of a disagreement.

The rise of disputes has led to another phenomenon in the Chinese legal landscape: arbitration courts.

Arbitration as a tool for the resolution of disputes is not a new concept. Fans of its benefits go back as far as the Biblical King Solomon, the American Bar Association reports. However, there have also been detractors and opponents to the use of arbitration in commercial and international cases. Arbitration is seen by some as an interloper into the system of traditional litigation, replacing what is usually a more time-consuming and expensive process with what is supposed to be a quicker, less costly private system to resolve disputes.

Internationally, however, a legally binding arbitration process has been welcomed by nations around the world, and China is quickly catching up to that trend.

I recently had the opportunity to attend an informal hearing at an arbitration court in Beijing.  Several points stood out.

First, although this court was in a far-flung rural district of Beijing, its interior was professionally fitted, and very much in keeping with the aesthetic concept of a Western court. Dark wood paneling and moldings graced the small room. The arbitrator was clothed in all black, her flowing skirt nearly robe-like. She only needed a white wig, and the scene would have rivaled any British court.

Second, the hearing was not staged for me, as a foreigner, to pass positive review upon. My Chinese colleague and I were called to attend only the evening before. This was not a proceeding that had been set up to either impress or influence me. If nothing else, there wasn't time.

Third, I was invited to testify on the matter at hand, in Mandarin, a rare occurrence in the Chinese legal landscape. The arbitrator was a skilled inquisitor, obviously experienced in adjudicating complex and consequential cases.

Arbitration with Chinese Characteristics

With China following arbitration trends found in the rest of the world, what could go wrong?

As with most institutions in China, nothing is free from the ever-watchful eye of the Chinese Communist Party (CCP). The effect of that pervasive and ubiquitous presence brings politics into play.

The Arbitration Law of China, enacted nearly 30 years ago in 1994, requires that arbitrators must meet one of several conditions. They must have been engaged in arbitration work, or have worked as a lawyer or a judge, all for at least eight years. Additionally – and importantly – they may also qualify by virtue of having been engaged “in legal research or legal education” while in possession of a “senior professional title.” No period of experience is mentioned for that condition. Finally, the law allows one to qualify by having “the knowledge of law, engaged in the professional work in the field of economy and trade, etc., possessing a senior professional title or having an equivalent professional level.” And again, no period of experience is required.

In other words, the door is open to anyone who may not have legal experience but can prove having had a “senior” role in business at some point in his or her career. This wider scope gives political appointees a path into the arbitration world.

The size of China's arbitration caseload is growing exponentially. The greater the potential impact on Chinese society that any institution has, the greater the oversight by the CCP will become.

As Shanghai lawyer Lyndon Lin wrote in a post for the International Bar Association,  "most arbitration institutions in mainland China are quasi-governmental. Arbitration practice in mainland China is still deeply influenced by Chinese civil litigation practice. For instance in certain cases, Chinese arbitrators might take the social and political effect into account when making decisions on final awards.”

In a rare admission from a lawyer practicing inside of China, Lin signals the possible and even probable likelihood that “social and political” factors may affect the arbitrators' final decisions.

Arbitration, particularly in labor cases, may also be plagued in China by bad faith negotiating styles on the part of the Chinese complainant; threats to report non-compliance, real or invented, with Chinese laws on the part of company owners; and even theft of company seals, without which the company cannot operate in China, as Dezan Shira and Associates reported.

I have recently witnessed all of these behaviors, and have seen how little the Chinese arbitration process has helped the foreign owner of the company in adjudicating damages done to them. Indeed, we were told that certain political pressures had come to bear upon the arbitrator's decision, preventing her from independently judging the merits of the cases before her.

In Conclusion

Real progress has been made by China in internationalizing its legal system, and the development of large and respected arbitration courts is an important part of that process. For example, one of China's heavyweight arbitration commissions, China International Economic and Trade Arbitration Commission (CIETAC), is reported to have registered 4,086 new arbitration cases in 2022. The total amount in dispute among those cases was 126.9 billion yuan, or approximately $8.64 billion. Both figures are record highs.

With over 85 percent of those cases being domestic, it is clear that Chinese are relying substantially on legally binding arbitration tools to settle financial disagreements and disputes.  Accustomed to their system, however, Chinese will automatically factor in a political component to their case, knowing that forces beyond their – and the arbitration court's – power may influence final decisions.

The international community is less likely to accept a politically influenced court. Probably no legal system in the world is completely free of political imperatives. But China, which is actively working to develop its arbitration courts into internationally accepted and sought institutions, would do well to ensure the independence of those courts, particularly in light of the fact that most foreign companies don’t feel that they get a fair shake in China in the first place.