Emergency Arbitration: A Chinese Case Study

by Yi Dai and Joel Evans

The use of emergency arbitration procedures has become increasingly commonplace in international arbitration with parties seeking to obtain a swift, binding decision before a tribunal has been constituted. Emergency arbitration’s popularity stems mainly from the fact that it allows parties who are in difficult commercial situations to seek urgent interim relief when an immediate decision is needed to prevent further loss/maintain the status quo.

Emergency arbitration’s broad appeal and uptake is well documented. Many major arbitral institutions, such as the HKIAC, SIAC, ICC, LCIA, and CIETAC, have all adopted emergency arbitration procedures within their rules.

In China, the use of emergency arbitration procedures has, it must be said, emerged at a slower pace compared to leading arbitral seats in the region. This is likely due to the discrepancy between the typical provisions on emergency arbitration adopted by the major arbitral institutions in China and the provisions of the PRC Arbitration Law and PRC Civil Procedure Law. Specifically, both pieces of legislation require requests for interim measures to be made to Chinese courts, as opposed to an arbitral tribunal directly, which is permitted under emergency arbitration. Nevertheless, emergency arbitration procedures have been able to take place in China by virtue of their inclusion within Chinese arbitral institutions’ rules.

The following case study provides an example of an emergency arbitration proceeding conducted in China.

Factual Background

In the following case study, a non-Chinese party made a request to CIETAC for an Emergency Arbitrators’ (“EA”) decision. This request arose from an international sale of goods dispute where the parties failed to agree on a contractual price revision. The Applicant (the buyer, a foreign entity) sought a decision compelling the Respondent (the seller, a Chinese state-owned enterprise) to release the Original Bills of Lading (“OBL”), which they had refused to transfer. The Applicant sought the OBL to facilitate the discharge of cargo that the Respondent had withheld, allegedly causing potential damage to the cargo, in addition to escalating demurrage fees[1].

It is worth mentioning that prior to the request for an EA’s decision, the Applicant had commenced proceedings in Brazil, seeking injunctive relief to order the discharge of the cargo. However, the vessel owner in question subsequently obtained an anti-suit injunction from the Commercial Court in London, prohibiting the Applicant from taking court action in Brazil to seek discharge of the cargo.

Notwithstanding the above, the buyer made a claim to CIETAC, and the EA rendered their decision within a month of the case’s filing.

Issues

The main issues the EA addressed in their decision included:

1. The Urgency of the Request
2. The Prospect of the Applicant Succeeding on the Merits of the Claim
3. The Impact on Both Parties

Arguments

The Applicant’s Position: In its request for interim relief, the Applicant drew the EA’s attention to the fact that the refusal to hand over the OBL was causing them significant unnecessary harm. According to the Applicant, the Respondent’s refusal to hand over the OBL was causing rapidly rising demurrage fees, in addition to the risk of the undischarged cargo’s deterioration. The Applicant maintained that the Respondent planned on holding the cargo hostage until the disputed fees had been paid. While the disputed fees in question could be settled later, the Applicant contended that the OBL’s immediate release was required to prevent the undue escalation of demurrage fees and the cargo’s possible deterioration.

The Respondent’s Position: In response to the above claims, the Respondent argued that the Applicant caused the escalating demurrage fees by failing to pay the disputed amount and maintained that it was not contractually obliged to release the OBL in the event that the Applicant failed to honor the terms of the contract. The Respondent concluded by stating that it would be in a vulnerable position financially if it transferred the OBL to the Applicant without the disputed amount having been paid.

Findings

Considering the escalating demurrage fees that were accruing because of the Respondent’s refusal to hand over the OBL, the EA decided to find in favor of the Applicant and ordered the OBL’s release. In their reasoning, the EA drew attention to the fact that the Respondent would not have suffered any real harm by transferring the OBL. The EA further concluded that the withholding itself held no real commercial purpose and its impact was unnecessarily disproportionate. In addition, the EA asserted that the Applicant would have suffered irrevocable losses from the potential deterioration of the cargo, on top of demurrage fees that were soon to reach an amount comparable with the disputed fees in question. The EA was therefore required to balance the potential harm suffered by the parties alongside the immediate urgency of the relief.

Takeaways

This case study demonstrates that – contrary to somewhat popular belief – emergency arbitration proceedings can and often do take place in China, and a quick, binding decision can be made to prevent further unnecessary loss.

Furthermore, as many will know, China is currently in the process of amending the PRC Arbitration Law. The recent draft amendments[2] make express provision for the use of emergency arbitration procedures by granting EAs and tribunals the power to order interim measures, if permitted to do so by the applicable arbitration rules. These changes, if adopted by the Standing Committee of the National People’s Congress, would end the monopoly that Chinese courts have, until now, exercised in relation to interim relief.

Footnotes

[1] Demurrage fees are liquidated damages agreed on in a charter-party agreement between the shipowner and charterer for the loss of time associated with a vessel’s continuous stay at the load port and/or discharge port after the agreed laytime is used up.

[2] Mao Xiaofei’s English translation of the proposed Amendments to the PRC Arbitration Law