Dispute Resolution Reforms in the Shanghai FTZ Underway

Few are aware that current plans for the new Shanghai Free Trade Zone (Shanghai FTZ) include  reforms to China’s dispute resolution systems, both the courts and commercial arbitration. Court reform developments, in particular, are moving rapidly, because the Supreme People’s Court (the Court) has designated the Shanghai courts to be among the first in the country to implement certain judicial reforms (http://rmfyb.chinacourt.org/paper/html/2013-10/26/content_72024.htm?div=-1#).  These reforms are linked to the Supreme People’s Court  2013 Judicial Reform Opinion (discussed in my 30 October blogpost) and  announced on 29 October.

Reforms in dispute resolution were highlighted by Professor Ding Wei, Chairman of Legal Affairs Commission, Shanghai Municipal People’s Congress Standing Committee (http://www.cietac-sh.org/English/ResourcesDetail.aspx?tid=39&aid=571&zt=3) , in a thoughtful speech given at the opening of the China (Shanghai) Pilot Free Trade Zone Court of Arbitration (affiliated with the Shanghai International Arbitration Center) on 22 October.  Professor Ding identified some of the reforms contemplated as well as some of the obstacles to legal reform in the Shanghai FTZ.

This post, which updates my blogpost of 28 October, looks at two important developments affecting dispute resolution in the Shanghai FTZ:

  • the Court designating the Shanghai courts to take the lead in judicial reforms;
  • Professor Ding highlighting to the Shanghai political and legal leadership that the Shanghai FTZ provides an unprecedented opportunity for Shanghai to build itself into an international arbitration center.

A.             The Courts

Professor Ding’s made a statement in his speech that “judicial arrangements (for the FTZ) relate to the organization and authority of matters stipulated by the Organizational Law of the People’s Courts, and local government cannot make changes” makes it clear that substantial court reform in the FTZ is not in the hands of the Shanghai government, but rather the central government.  From its press announcement on 25 October (http://www.chinacourt.org/article/detail/2013/10/id/1113813.shtml), it is clear that the Court sees the opportunity presented by the dynamism of economic developments in Shanghai, including the Shanghai FTZ (although not mentioned).

Although currently there is no Shanghai FTZ court ( Lu Hongbing, vice president of the All China Lawyers Association and founding partner of the Shanghai-based Grandall Law Group,  mentioned in a September article the possibility  that one will be established (http://stock.sohu.com/20130924/n387092295.shtml)), the Court is calling on the Shanghai courts to make reforms that will benefit litigants in the Shanghai FTZ  (as well as the entire Shanghai court system.

The new reforms announced by the Court on 25 October, which build on previous work by  the Shanghai court leadership, include:

  • increasing judicial transparency, including judicial procedure, judicial decisions, and information concerning enforcement;
  • reforming the internal operating rules of the judiciary, so that it operates according to judicial rather than administrative principles;
  • motivating and providing protection to judges to enable them to decide cases fairly;
  •  improving the operating structures of the courts;
  • amending the operating rules for judicial committees;
  • providing a structure for the discussion of cases.

The Shanghai courts have started to take the first steps by issuing regulations to address one of the many issues facing litigants in the Chinese courts, the refusal to take cases (http://www.hshfy.sh.cn/shfy/gweb/xxnr.jsp?pa=aaWQ9MjkyMzQ0JnhoPTEPdcssz)(http://www.chinacourt.org/article/detail/2013/11/id/1116965.shtml).  We can expect many more regulations to come.

The reforms highlighted by the Court will be difficult to implement, particularly the reform of internal operating rules of the judiciary, because the PRC judiciary has operated according to those principles throughout its history (as many others inside and out of the Chinese judiciary and mainland China have pointed out (including this author)). Many of these reforms relate, indirectly, to the relationship of the courts and other government institutions, as well as the nature of Communist Party leadership of the courts.

The Court announced that it has established standards and metrics to evaluate the effectiveness of the announced reforms. On the basis of those reforms, The Court will gradually roll out those reforms throughout the entire country.

The announcement designating the Shanghai courts as one of the court designated to lead the way in judicial reforms indicates  the importance of Shanghai and the Shanghai FTZ.  The Court has put aside the scandal involving a group of senior judges of the Shanghai Higher People’s Court visiting prostitutes (that led the Supreme People’s Court to issue a statement that the judges had tarred the image of the nation’s judges and scarred judicial credibility (http://english.peopledaily.com.cn/90882/8356970.html)).

Designating the Shanghai courts to take the lead in court reform presents a challenge to the Shanghai Higher People’s Court—can they establish a court that will earn the credibility of both domestic and foreign litigants through having competent judges who are able to put into practice ethical standards?

B.             Arbitration

Among the challenges Professor Ding identified in building the Shanghai FTZ into an international arbitration center is challenges to the arbitral institution.  One of those challenges is internationalization.

Challenges to the arbitration institution—possible internationalization?

 In the September interview mentioned above, Lu Hongbing advocated that cooperation between foreign arbitration institutions and Shanghai based ones should be encouraged in the Shanghai FTZ.

Real cooperation involves the following questions (among others!), and a web of legal issues:

  • Should cooperation between foreign and Shanghai based arbitration mean allowing international arbitration institutions to establish offices in the Shanghai FTZ?
  • If that is permitted, should foreign arbitration institutions be permitted to hold arbitrations (seated) in China?
  • Would an arbitral award under those circumstances still be considered to be “international” and enforceable in China under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) or Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region (Arrangement with Hong Kong)

Enabling real cooperation between foreign arbitration institutions and Shanghai based ones will require profound analysis of and well-considered solutions to the complex of issues related to the Arbitration Law and Civil Procedure Law raised by the above questions.

An additional outstanding issue that the Court will need to resolve  is the issue of the validity and enforceability of arbitration clauses of the Shanghai Court of International Arbitration (and its predecessor, the CIETAC/Shanghai).  A draft of a judicial opinion resolving the matter is said to be under consideration by the Supreme People’s Court.  That also needs to be resolved if dispute resolution in the Shanghai FTZ (and all of Shanghai) is to serve the needs of disputing parties.

The Court, Professor Ding Wei (and other Shanghai government legal specialists) and the legal advisers for the People’s Government of Pudong District (lead outside counsel is understood to be the Zhong Lun Law Firm) need to work on designing solutions to untangle  the web of interconnected legal issues affecting the internationalization of arbitration.  Given that multiple central government institutions will need to be involved with any solution, it is likely progress on real cooperation with foreign arbitration institutions can only occur over the long term.

C.             Conclusion

The Shanghai FTZ provides the Chinese government an opportunity to experiment with Chinese dispute resolution reforms, both in the courts and arbitration.  The Court is taking steps in Shanghai to address the difficult legal and political issues that must be considered and resolved to make real progress.  Many are “watching this space”!

[i] My translation: The translation on the website states: the justice arrangement concerning duty allocation among people’s court is an important power under the “PRC People’s Organization Law.” No local organizations are permitted to change it.

[ii] http://www.chinacourt.org/article/detail/2013/09/id/1080615.shtml

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