Published in Asian-mena Counsel: Dispute Resolution Special Report 2019
By Shenzhen Court of International Arbitration
A substantive appellate mechanism constitutes a beneficial complement to the finality of single-instance arbitration.
The high efficiency brought by the finality of arbitral awards in one-instance procedures is one of the most important considerations when choosing arbitration to settle disputes. Article 9 of the Arbitration Law of the People’s Republic of China (hereinafter referred to as China’s Arbitration Law) provides that: “An arbitral award shall be final. If a party petitions for arbitration to an arbitration commission or institutes an action in a people’s court regarding a dispute for which an arbitral award has been rendered, the arbitration commission or the people’s court shall not accept the case.” This provision on the principle of “finality of arbitral awards in one-instance procedures” (“一裁終局”, hereinafter referred to as the “finality of single-instance arbitration”) guarantees the efficiency and res judicata effect of arbitration as a method of dispute resolution.
However, as China’s international trade and outbound investment become increasingly frequent and sizable, some domestic and foreign market players have started to worry about the finality of single-instance arbitration when they choose arbitration for dispute resolution — that is, once an erroneous award is made, there is no chance to obtain remedies. Based on domestic and overseas legislation, foreign experience and pursuant to its arbitration rules, Shenzhen Court of International Arbitration (SCIA) has responded to these concerns by taking the lead in creating an optional appellate arbitration mechanism within the existing legal framework of China, which constitutes a helpful complement to the regime of finality of single-instance arbitration in China.
I. Exploring the necessity and feasibility of an optional appellate arbitration mechanism
(I) Finality of single-instance arbitration is not an absolute advantage of international commercial arbitration
According to a survey initiated by Queen Mary University of London since 2006, a certain proportion of respondents say that the lack of an appellate mechanism is a flaw of the arbitration system and one of the factors that make them reluctant to choose arbitration. According to its 2018 arbitration survey report, only 16 percent of the respondents considered finality as a valuable feature of international arbitration.
The advantage of the finality of single-instance arbitration lies in simplified and accelerated procedures as well as reduced costs, which is consistent with the pursuit of profit and efficiency in commercial activities. However, Gary Born indicated in his book International Commercial Arbitration that “the non-appealability of an arbitral award excludes appellate review and thus significantly reduces litigation costs and avoids prolonged proceedings; on the other hand, this also means that a wrong award might not be corrected”. Or as JK Thomas said at the Seventh Annual Transnational Commercial Arbitration Workshop in 1996: “Speed and finality can be the advantage of arbitration only when you win a dispute. If arbitrators make a material mistake, speed and finality will not be an advantage anymore.”
The growth of international trade means that disputes often involve a huge amount of money. Understandably, the parties to such cases have a much higher requirement for substantive justice than for efficiency, and have expressed concerns about the potentially significant risk caused by the finality of single-instance arbitration and the lack of appealability, and that errors in arbitral awards will be difficult to be corrected. As in most of developed countries and regions, judicial review of arbitral awards generally involves no substantive issues in China. Therefore, the Chinese judicial review mechanism is unable to address the parties’ concerns about substantive errors in arbitration.
(II) Finality of single-instance arbitration is not an absolute regime or principle in commercial arbitration
A general analysis of the legislation on arbitration in many jurisdictions shows that the finality of single-instance arbitration is not absolute. For instance, Article 58 of the UK Arbitration Act 1996 provides that: “Unless otherwise agreed by the parties, an award made by the tribunal pursuant to an arbitration agreement is final…. This does not affect the right of a person to challenge the award by any available arbitral process of appeal or review or in accordance with the provisions of this Part.” Article 1050 of the Dutch Code of Civil Procedure 1986 provides that: “An appeal from the arbitral award to a second arbitral tribunal is possible only if the parties have agreed thereto.” Similar provisions can also be found in the Hong Kong Arbitration Ordinance and Decree-Law n. 29/96/M of Macau SAR. In Singapore and France, an arbitral award is also appealable in practice. The above arbitration-related legislation and practices indicate that finality of single-instance arbitration is neither an absolute regime or principle of international commercial arbitration nor a basic characteristic or inherent nature of international commercial arbitration procedures.
II. China should draw on foreign experience to establish an optional appellate arbitration mechanism
Arbitration stems from the market and should serve the market and meet the demand of market players. Given that the parties in international commercial arbitration have a real desire to leverage the absolute advantage of arbitration in neutrality and privacy, and avoid risks from finality of single-instance arbitration, China should explore an optional appellate arbitration mechanism into its arbitration system as a useful supplement to the finality of single-instance arbitration.
At present, there are different modes of arbitration appeals in the world. By different entities, arbitration appeals can be categorised into external appeal (to courts) and internal appeal (to arbitration institutions or arbitration tribunals). In view of the facts that only the finality of single-instance arbitration is recognised under China’s Arbitration Law and Chinese courts’ human resources are limited in the face of a large number of cases, it is unrealistic to explore an external appeal mechanism under which appeal petitions are filed to courts. Since the Chinese courts have supported arbitration and arbitrators are usually experts, it is feasible to attempt to establish an internal appeal mechanism.
(I) Key modes of internal appeal in foreign jurisdictions
1. Re-arbitration after annulment
This mode is adopted by the International Centre for Settlement of Investment Disputes. Either party may petition for annulment of an award which is deemed to be under any of the circumstances specified in Article 52 of the Washington Convention. Once such circumstance is found to exist, the award will be annulled and a new arbitral tribunal will be constituted to conduct arbitration.
2. Agreed appellate arbitration
This mode is adopted in the arbitration rules of the American Arbitration Association, Spanish Court of Arbitration and International Institute for Conflict Prevention & Resolution, ie, the parties may agree to file an appeal against an arbitral award to such arbitration institutions.
3. Implied appellate arbitration
This mode is adopted in the arbitration rules of the European Court of Arbitration, International Arbitration Chamber of Paris, Grain and Feed Trade Association, Federation of Oils, Seeds and Fats Associations, Coffee Trade Federation and London Rice Brokers Association, ie, the parties have the implied right to file an appeal against an arbitral award to such arbitration institutions in accordance with their rules.
(II) Innovative practices of SCIA
Based on the above modes and having regards to the current state of judicial review of arbitral awards in China, SCIA has, in accordance with the relevant provisions of the laws of China and the New York Convention, pioneered an internal optional appellate arbitration mechanism in China through its arbitration rules, under which mechanism the parties may, as agreed, submit a case for which an arbitral tribunal has rendered an award to SCIA for re-hearing and rendering of a final award by a new arbitral tribunal, ie, an appellate tribunal. This is a better solution suitable to arbitration practices in China for the following reasons:
1. It does not violate China’s Arbitration Law. The application of the optional appellate arbitration procedure is conditional upon the fact that “it is not prohibited by the laws of the place of arbitration”. In other words, such procedure may not apply unless the arbitral procedure is governed by the laws of the US, the UK, France, Hong Kong or other jurisdictions where an appeal within the arbitration process is permitted or not forbidden. If China’s Arbitration Law is the governing law, such procedure is inapplicable.
2. It expands specific methods for resolution of disputes through arbitration under the existing legal framework, satisfies the actual demand of market players for substantive justice and reflects the high-level flexibility of arbitration.
3. It is designed to respect the principle of “party autonomy”.
4. It does not violate the principle of “finality of arbitral awards”.
The finality of an arbitral award is opposed to the limited scope of judicial review of the arbitral award, ie, the scope of judicial review is limited to jurisdictional, procedural justice and public order issues and does not cover substantive issues. The optional appellate arbitration procedure is a substantive appellate mechanism with respect to the original awards established within the arbitration institution. Such arrangement gives the parties the right and chance to obtain a secondary remedy and does not constitute a breach of or a challenge to the finality of arbitral awards.
III. Application of SCIA’s optional appellate arbitration procedure
(I) Conditions for application of the procedure
1. Such procedure is not prohibited by the laws of the place of arbitration applicable to the case;
2. There is an agreement under which either party may file an appellate arbitration petition; and
3. The case involves an amount in dispute of more than RMB 3 million and is not subject to the expedited procedure.
(II) Requirements for initiation of the procedure
1. There is an arbitration agreement between the parties which contains the right to petition for appellate arbitration;
2. The appellant has petitioned for an appeal within 15 days upon receipt of the original award;
3. The appellant needs to submit a written appeal petition which contains the required information; and
4. The appellate arbitration fees are paid in advance within the required time limit.
(III) SCIA is the body that accepts an appeal petition and decides whether to commence and proceed with the appellate arbitration procedure.
(IV) The appellate arbitral tribunal responsible for appellate arbitration is composed of three arbitrators, including one presiding arbitrator. In order to maximally maintain the neutrality and impartiality of the appellate arbitral tribunal, none of its members will be selected from the original arbitral tribunal.
(V) Upon being rendered by the appellate arbitral tribunal, an appellate arbitral award will be final and binding upon the parties, in lieu of the original award. Thus, the abuse of the parties’ right to appeal can be avoided, and both fairness and efficiency will be taken into account.
In summary, the finality of single-instance arbitration is not an absolute principle or advantage of international commercial arbitration. As an active response to the objective demand of market players, SCIA has, based on foreign experience, creatively designed a substantive appellate mechanism within the arbitration process under the existing legal system and framework, which constitutes a beneficial complement to the finality of single-instance arbitration. In this way, SCIA has blazed a realistic trail in optimising the combination of the advantages of arbitration such as neutrality, impartiality, efficiency and wide recognition and enforcement at international level, broadened the range of specific solutions to settlement of disputes through arbitration, and improved arbitration practices in China.
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