IA Fundamentals｜Main Types of International Arbitration

Editor's Note: As enterprises are increasingly engaged in international trade and investment, international arbitration is recognized as the preferred option in the face of cross-border disputes. However, international arbitration, which differs from domestic arbitration with complex procedures, often put parties unfamiliar with its rules in an inherent disadvantage. King & Wood Mallesons’ international arbitration teams are located in Beijing, Shanghai, Shenzhen, Hong Kong Special Administrative Region of China, Sydney, Melbourne, Perth, London, Madrid, Brussels, Dubai, Tokyo, Sydney, New York and Silicon Valley. KWM International Arbitration Fundamentals is co-hosted by King & Wood Mallesons’ China and Australia international arbitration teams. The purpose of the program is to share knowledge and experience on international arbitration, including international commercial arbitration and investment arbitration, from the perspective of expert lawyers. Hopefully it will benefit parties engaged in international arbitration. Please comment with any suggestions or ideas.

---

International  Arbitration can be divided into Commercial Arbitration and Investment Arbitration, from the perspective of the nature of arbitration disputes. Further, disputes can be divided into Institutional arbitration and ‘ad hoc’ arbitration, from the perspective of the organization of arbitration procedures.

This second article in the "Arbitration Fundamentals" series will introduce different types of International Arbitration from these two perspectives, and briefly explain the differences between them.

International Commercial Arbitration and International Investment Arbitration

(I) Definition of International Commercial Arbitration and International Investment Arbitration

International Commercial Arbitration is a mechanism for settling disputes between commercial subjects in international economic and trade transactions. The disputes mainly include traditional commercial disputes, such as disputes in relation to commercial contract, foreign economy, trade, transportation contract, and maritime business.

International Investment Arbitration is designed to resolve disputes between the host State and its foreign investors, generally in respect of tax, foreign exchange regulation, environmental protection requirements, labor protection, expropriation, requisition and other regulatory acts.

(II) Historical background of international investment arbitration mechanism

Compared with the well-known International Commercial Arbitration, International Investment Arbitration has a shorter history and has been less frequently applied in resolving disputes. It is a less familiar field for participants in foreign trade and economic activities. Understanding the historical background of International Investment Arbitration will illuminate the differences between International Investment Arbitration and International Commercial Arbitration, specifically regarding their rules system.

International Investment Arbitration was established in the 1960’s. Prior, foreign investors who had been unfairly treated by the host State could only bring a lawsuit in the host State or make a request to their own government to assist settling the dispute via diplomatic channels. Neither approach was ideal for foreign investors. The former, brought the risk of protectionism of the host State government. The latter meant that the Investor could not represent their own suit, relying on indirect relief supplied by their government. At the same time, the host State also hopes to attract more foreign investment by developing more reasonable and efficient dispute resolution methods.

In 1966, the Convention on the Settlement of Investment Disputes between States and Nationals of Other Countries (the "Washington Convention") came into effect. Based on the common needs of the host State and foreign investors, the Washington Convention established the International Centre for Settlement of Investment Disputes (the “ICSID”) as a platform for State parties to voluntarily settle international investment disputes through mediation or arbitration and provided a set of procedural norms. There are now 163 State signatories to the Washington Convention, and ICSID arbitration has become the mainstream mechanism for settling international investment arbitration disputes. China signed the Washington Convention on 9 February 1990, and ratified it on 7 January 1993.   

Since the 1980’s, with more and more international investment agreements adopting International Investment Arbitration as a dispute resolution method, the number of cases resorting to International Investment Arbitration has increased year by year. So far, China has signed bilateral investment agreements with more than 100 countries. Along with its economic growth, China is gradually shifting from an attractive destination of foreign investment to a source country of investment. It is predicted that in the new, re-signed and supplementary investment agreements concluded between China and foreign countries, especially “Belt and Road” countries, greater attention will be paid to the protection of investors' rights in the future.

(III) Main differences between International Commercial Arbitration and International Investment Arbitration

International Commercial Arbitration and International Investment Arbitration are significantly different in terms of the nature of the arbitration dispute, participants, sources of arbitration agreements, transparency requirements and enforcement mechanisms of arbitral awards.

Difference of nature of dispute and participants

International Commercial Arbitration is designed to resolve traditional cross-border commercial disputes, and its participants are private subjects with equal contractual status. International Investment Arbitration, however, deals with disputes between the host State and foreign investors which arise from changing national policies and government actions. One of the participants of International Investment Arbitration is a sovereign country and the other an investor, therefore the status of participants is unequal.

Differences in sources of arbitration agreements

Commercial arbitration agreements can only originate from contractual agreements between the contractual parties. However, investment arbitration agreements originate from bilateral investment treaties or free trade agreements between the source State and the host State. Investors cannot decide how to settle investment disputes on their own, instead are required to comply with the provisions of international treaties or agreements between the two states.

Differences between Governing laws of arbitration

The governing law for commercial arbitration is the domestic law of a state selected by the parties or determined in accordance with conflict of laws rules. The governing laws for investment arbitration include the domestic law of the host State, the investment agreement signed between the host State and the investor's home state, and international law (including customary international law). Given that the content of international law is usually hard to precisely identify and there is no system of binding precedent in international law, there is usually a significant amount of debate in investment disputes regarding the relevant international law standards to be applied in each case.

Differences in transparency requirements

In many States there is a presumption in favour of confidentiality in respect of commercial arbitration (and frequently commercial parties choose arbitration to maintain confidentiality) but, due to the public interest surrounding Investor-State disputes, Investor-State disputes are frequently public. In this regard, the existence of most investment arbitrations is made public, the awards and procedural decisions of the tribunals are published and, in some cases, the hearings are even live-streamed to the public.

Differences in independence and enforcement

Based on the New York Convention, commercial arbitration agreements and awards are subject to review by domestic courts, and may deliver an award in the place of arbitration in accordance with the law of the seat of arbitration. A state's courts may refuse to recognize and enforce foreign international commercial arbitration awards in accordance with its domestic law. The effectiveness of investment arbitration is based on international agreements, and it is not bound by the domestic laws and court procedures of the place of arbitration. As such, investment arbitration has strong independence. Investment arbitration awards are also not subject to review by the domestic law of the seat of arbitration. Unless the ICSID provisional appellate body rescinds an award, the State parties to the Washington Convention should recognize and enforce the ICSID award based on their obligations under international law.

Given the smaller number of international investment arbitration cases compared with that of international commercial arbitration and the particularities mentioned above, in this series articles, “international arbitration” refers exclusively to international commercial arbitration, unless otherwise specified. “IA Fundamentals” will introduce specific content on international investment arbitration in detail later.

Institutional Arbitration and Ad Hoc Arbitration

(I) Introduction to institutional arbitration and ad hoc arbitration

1. Institutional arbitration

Institutional arbitration refers to the arbitration proceeding conducted by a special permanent arbitration institution in accordance with its own arbitration rules. The arbitration institution is mainly responsible for appointing arbitrators, determining arbitration fees, handling applications for withdrawal of arbitrators, designating the venue of the hearing, and promoting the arbitration process. However, the arbitration institution itself does not render a ruling on disputes between the parties.

Internationally, the most influential arbitration institutions include the International Chamber of Commerce International Court of Arbitration (“ICC”), American Arbitration Association (“AAA”), London Court of International Arbitration (“LCIA”), Arbitration Institute of the Stockholm Chamber of Commerce ("SCC"), Singapore International Arbitration Centre (“SIAC”), and the Hong Kong International Arbitration Centre ("HKIAC").

In China, the permanent arbitration institutions with jurisdiction over foreign-related arbitration cases include the China International Economic and Trade Arbitration Commission (“CIETAC”), China Maritime Arbitration Commission (“CMAR”), Beijing Arbitration Commission (Beijing International Arbitration Centre) (“BIAC”), Shanghai International Economic and Trade Arbitration Commission (Shanghai International Arbitration Centre)  (“SHIAC”), and Shenzhen Court of International Arbitration (Shenzhen Arbitration Commission ) (“SCIA”),etc. In recent years, internationally renowned arbitration institutions such as HKIAC, SIAC and ICC have successively registered and established Shanghai representative offices in the Shanghai Free Trade Zone.

The Supreme People's Court of China has recognized the validity[1]of arbitration procedures administered by foreign arbitration institutions in China. Some local courts have also recognized the arbitral awards made by foreign arbitration institutions in China as “non-domestic awards[2]”, which thereby shall be recognized and enforced in accordance with paragraph 1 of Article 1 of the New York Convention. These judicial practices have cleared some legal obstacles for foreign arbitration institutions to engage in international commercial arbitration activities in China. With the official entry of foreign arbitration institutions into the Shanghai Free Trade Zone, the development of foreign-related arbitration in China will flourish.

2. Ad hoc arbitration

Ad hoc arbitration refers to the arbitration proceeding conducted by the parties in accordance with the procedural rules agreed upon by themselves. The parties to ad hoc arbitration may also agree to conduct arbitration in accordance with an existing arbitration rule or do so by adding more detailed procedural rules based on an existing arbitration rule according to their own needs. For example, the parties may agree to apply the Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL Arbitration Rules”) in the arbitration and agree on more detailed procedural rules based on this rule. In the ad hoc arbitration, there is no arbitration organization to administer the arbitration procedure. Generally speaking, the arbitration rules issued by arbitration institutions do not apply to ad hoc arbitration. The ad hoc arbitration has a longer history than institutional arbitration. In most countries and regions, the ad hoc arbitration is deemed effective provided the rules adopted by the parties conform to the requirements of the New York Convention and/or the law of the seat of arbitration regarding due process, that is - the parties are treated equally and each party is allowed to present its case ,is met.

As ad hoc arbitration requires the parties themselves to be responsible for organizing and managing the progress of the arbitration procedure, ad hoc arbitration is commonly applied in industries with the tradition of resorting to arbitration for dispute resolution, such as bulk commodity trading and maritime business.

(II) How to choose between institutional arbitration and ad hoc arbitration?

Institutional arbitration and ad hoc arbitration have their respective advantages and disadvantages. Parties to international arbitration may make their choice based on actual situations. Further, Chinese law recognizes the validity of ad hoc arbitration agreements only under exceptional circumstances. As such, parties to international arbitration should carefully consider foreign-related ad hoc arbitration within the territory of China.

1. Institutional arbitration – advantages and disadvantages

Firstly, the choice of institutional arbitration means the incorporation of well-established procedural rules into the arbitration agreement. This is the most distinctive advantage of institutional arbitration. Arbitration rules issued by permanent arbitral institutions have been tested and proven to work well in practice. They also have been amended from time to time according to new developments in the law and practice. Thus, they can provide a framework ensuring successful arbitral proceedings.

Secondly, professionals at arbitral institutions are responsible for work such as forming arbitral tribunals, collecting arbitration fees, and promoting arbitral proceedings according to schedules. If the disputes involve highly specialized issues, the arbitral institutions may, upon request of the parties, appoint arbitrators with relevant expertise for the parties, thus reducing the transactional burden of the parties in the arbitral proceedings.

In addition, arbitral institutions will often review the awards before announcing them to the parties to ensure quality. The arbitral institutions will not interfere with the decision of the tribunal, but will ensure that the awards have dealt with all the issues in dispute and have considered interest and expenses in the award amount (even the most experienced arbitrators may sometimes forget this point!).

Finally, the rules of institutional arbitration prescribe procedures to deal with the application for withdrawal of the arbitrators, thus avoiding procedural delays caused by court intervention in arbitration proceedings.

The most conspicuous disadvantage of institutional arbitration is its high cost. In addition to the remuneration paid to arbitrators, parties also need to pay administrative fees to arbitral institutions.

In addition, institutional arbitration needs to be conducted pursuant to established arbitration rules. The procedural time limits specified in the rules are tight, and often parties apply for extension of time in the arbitral proceedings. Thus, arbitrations often cannot be completed within relevant time limits and may be even more time-consuming than litigation in some cases.

If the tribunal issues a tight schedule for arbitration proceedings, another issue may arise – the claimant may have sufficient time to prepare relevant materials before filing an application, and can generally submit the required documents in time. However, the respondent may not have sufficient time to prepare, and the time limit may become a unilateral pressure, resulting in unfairness, and a requirement for the respondent to apply to the tribunal for an extension of time.

2. Ad hoc arbitration – advantages and disadvantages

Compared with institutional arbitration, the biggest advantage of ad hoc arbitration is that it gives parties and tribunals greater procedural options. If all parties genuinely wish to solve the disputes, ad hoc arbitration can be “tailored” to specific disputes, providing more flexibility and efficiency in the proceedings.

However, the effectiveness of ad hoc arbitration depends on whether parties cooperate with each other, and whether the legal system of the seat of arbitration has effective supervision over the proceedings. If the parties fail to reach a consensus on the rules of the proceedings, and the laws of the seat of arbitration do not provide for applicable procedures for ad hoc arbitration, or guarantee the proceedings of ad hoc arbitration, the ad hoc arbitration agreement will lose its de facto binding force.

(III) Ad hoc arbitration under Chinese law

For Chinese parties to international arbitration, in principle the arbitration laws of China do not recognize the validity of ad hoc arbitration, which limits the choice of parties to conduct ad hoc arbitration within the territory of China.

Paragraph 2, Article 16 of the Arbitration Law of the People’s Republic of China (the “Arbitration Law”) provides that parties shall specify the selected arbitration commission in their arbitration agreement. Pursuant to Article 18, if there is no agreement or unclear agreement on the arbitration commission, and the parties fail to reach a supplementary agreement, the arbitration agreement shall be invalid. As such, in principle, Chinese law recognizes the choice of institutional arbitration as the premise for a valid arbitration agreement.

However, China has recently loosened its prohibition on recognizing the validity of ad hoc arbitration agreement. Pursuant to Paragraph 3, Article 9 of the Opinions of the Supreme People’s Court on Providing Judicial Guarantee for the Building of Pilot Free Trade Zones (Fa Fa [2016] No.34) (the “Opinion”), arbitration agreements executed between enterprises registered in free trade zones can be deemed valid if certain conditions are met (that is, agreement to arbitrate certain disputes in specific places in Chinese mainland, in accordance with specific arbitration rules and by specific personnel). The Opinions does not specify whether “arbitration under specific conditions” includes ad hoc arbitration. 

However, as it does not require the agreement on any specific arbitral institution, scholars and practitioners generally believe that “arbitration under specific conditions” refers to “ad hoc arbitration in Free Trade Zone”. This provision establishes an exception to the principle of institutional arbitration in China’s Arbitration Law and relevant judicial interpretations. Therefore, under the current legal system in China, foreign-related ad hoc arbitration agreements are valid only if all parties are enterprises registered in a Free Trade Zone and all “specific conditions” are met. As for the specific content of “specific conditions”, it is still to be specified by laws, regulations and judicial interpretation.

It is noticeable that the validity of ad hoc arbitration agreements under Chinese law and the enforceability of ad hoc arbitration award within China are two independent legal issues. Although Chinese law does not recognize the validity of ad hoc arbitration in principle, as China is a contacting party to the New York Convention, the extraterritorial ad hoc arbitration award can be recognized and enforced in China. This is conditional on the applicable law determining the validity of ad hoc arbitration agreement (unless otherwise agreed by the parties, it is generally the law of the place of arbitration) recognizes the ad hoc arbitration. Therefore, for parties who wish to choose ad hoc arbitration, they can agree with their counterparties on extraterritorial ad hoc arbitration. In this way, they have no need to worry whether the arbitration award will not be recognized or enforced in China.

(IV) Hybrid arbitration: a new arbitration mode combining the advantages of institutional arbitration and ad hoc arbitration

In recent years, a “hybrid arbitration” mode, which is in the intersection of institutional arbitration and ad hoc arbitration, has become popular in international arbitration practice.

Specifically, the parties to “hybrid arbitration” often choose the existing UNCITRAL Arbitration Rules in their arbitration agreements, and select another arbitral institution to appoint arbitrators. The selected arbitral institution is only responsible for matters related to the selection of arbitrators / formation of the arbitration tribunal. All other procedural matters are managed by the sole arbitrator / arbitration tribunal.

Such “hybrid arbitration” not only has effective arbitration rules as a procedural guarantee, but also minimizes the administrative fees of arbitral institutions. It combines the advantages of traditional institutional arbitration and ad hoc arbitration, and there are no legal obstacles in China. Based on a strict reading of the law, the Arbitration Law only requires the selection of arbitral institutions, but does not require arbitral institutions to undertake all responsibilities for case management. The appointment of arbitrators by the selected arbitral institutions meets the statutory requirements of “selecting arbitration committees”.

Currently, HKIAC, SIAC and SCIA have issued relevant procedural guidelines or operation manuals for “hybrid arbitration”, which can provide various flexible management services according to the choice of the parties. For parties who wish to conduct foreign-related arbitration within the territory of China, “hybrid arbitration” is a good choice.

Footnotes

[1] Reply of the Supreme People's Court to the Request for Instructions on Application for Confirming the Validity of an Arbitration Agreement in the Case of Anhui Long Li De Packaging and Printing Co., Ltd. v. BP Agnati S. R. L. , [2013] Min Si Ta Zi No. 13.

[2]DUFERCOS.A’s application for recognition and enforcement of ICC arbitration award No. 14006/MS/JB/JEM, Ningbo Intermediate People’s Court [2008] Yong Zhong Jian Zi No. 4.

Major references:

1. List of Bilateral Investment Treaties executed by China with Foreign Parties, Ministry of Commence of the People’s Republic of China, http://tfs.mofcom.gov.cn/article/Nocategory/201111/20111107819474.shtml, December 12, 2016

2. Database of ICSID Member States, ICSID, https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx, last access: June 18, 2020.

3. Database of Bilateral Investment Treaties, ICSID, https://icsid.worldbank.org/en/Pages/resources/Bilateral-Investment-Treaties-Database.aspx, last access: June 18, 2020.

4. Gary B. Born, International Commercial Arbitration, Second Edition, Kluwer Law International, 2014.

5. Nigel Blackaby and Constantine Partasides QC with Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration, Sixth Edition, Oxford University Press, 2015.

6. David ST. John Sutton, Judith Gill QC, and Matthew Gearing QC, Russell on Arbitration, Twenty-Fourth Edition, Sweet & Maxwell, 2015.

related links:

Authors

Shining Guo

过仕宁

Partner

Dispute Resolution

[e-mail]

Ms. Shining Guo specializes in dispute resolution, especially in cross-border commercial dispute resolution.Ms. Guo is proficient at assisting Chinese and foreign clients with complex commercial disputes, and she has handled many influential arbitration cases before major international arbitral institutions, which includes the HKIAC, ICC, SIAC, FOSFA, CIETAC, as well as ad hoc arbitrations in Hong Kong and London, in respect of joint venture shareholders’ disputes, financial derivative disputes, product liability disputes, sale of goods disputes, bill of lading, charterparty and shipbuilding contract disputes. She also represents clients in recognition and enforcement of foreign arbitral awards in China. Additionally, Ms. Guo has participated in several litigation cases before the UK and the US courts.

Edwina Kwan

Partner

Sydney Office

[e-mail]

Edwina is a partner in our Sydney dispute resolution practice, specialising in China related cross-border disputes. She represents clients in all forms of dispute resolution including international arbitrations, mediations, intellectual property disputes and commercial litigation. Edwina has extensive expertise covering commercial strategy & negotiations and risk mitigation and advises clients on trade, shareholder, joint venture and IP disputes in the retail, e‑commerce, private equity, telecommunications, construction, energy & resources and international trade sectors. Edwina has been recognised by Who’s Who Legal: Arbitration as a Future Leader in 2019, 2018 and 2017.

Domenico Cucinotta

Senior Associate

Sydney Office

Benedict Porter

Solicitor

Sydney Office

Mengtao Mao 

毛孟涛

Associate 

Dispute Resolution 

Thanks to Jin Xiaojia for her contribution to this article.