Breaking the Taboo: Why Restrict Arbitral Institutions?
Aditya Singh Chauhan[i]
There seems to be a noticeable lack of discourse on the merits of the restrictions in various jurisdictions on the establishment and operation of arbitral institutions. These restrictions may be in the form of licencing and registration requirements for the establishment of arbitral institutions (particularly foreign institutions) and ‘quality control’ requirements for their operation. There is not much data on how effective (if at all) these restrictions would prove to be for ‘quality control’ and there may be good reason to second-guess the intention behind such provisions. If they exist to ensure quality, what better way to ensure quality than competition? That aside, the prospect of ‘too many cooks’ does not seem particularly harmful. Further, states must ensure that neutrality and independence of arbitral institutions ‘is maintained and seen to be maintained’, which may be compromised when they are over-regulated by a chamber of commerce, council established for this purpose, or other departments under the government. This article focuses on a few jurisdictions (viz., China, India and Russia) to highlight the said restrictions from a comparative perspective. It then concludes with some pointers to ensure that the restrictions (if any) are reasonable and not excessive, while also encouraging further research and discourse on this issue.
II. Instances of restrictions on arbitral institutions and their implications
A. People’s Republic of China
On July 30, 2021, the Chinese Ministry of Justice published the Draft Amendment to the Arbitration Law of the People’s Republic of China (‘PRC’) (‘Draft Amendment’) to solicit public opinion. It inter alia seeks to abolish the dual system of domestic and foreign-related arbitral institutions, and further regulate foreign institutions. At present, Article 10 of PRC’s Arbitration Law requires the relevant departments and chambers of commerce to ‘organize’ the ‘arbitration commissions’ in a ‘unified manner’, establishment whereof is registered with the relevant the administrative department of justice. Article 16(3) requires an arbitration agreement to contain ‘a designated arbitration commission’ in order for it to be valid. Since Chapter II does not explicitly provide for a registration process for foreign institutions, there is uncertainty as to whether they can administer an arbitration seated in PRC. In Anhui Longlide Packing & Printing Co., Ltd. v. BP Agnati SRL, PRC’s Supreme People’s Court upheld the validity of an arbitration agreement, which provided Shanghai as the seat and International Chamber of Commerce (ICC) rules to administer the arbitration. But this decision contradicts some of its previous decisions where similar arbitration agreements were held to be invalid. Further, it circumvents any discussion on whether foreign institutions can be ‘arbitral commissions’ under Article 10.
The Draft Amendment, under Article 12, provides for a registration process for foreign institutions, which will be registered by the relevant judicial administrative department and reported to the judicial administrative department of the State Council. This would no doubt resolve the uncertainty discussed earlier, which matters also because the international clients require a fair amount of predictability on such issues. It must also be noted that there will be measures for registration and management in place, formulated by the State Council, and the arbitral institutions will be renewed regularly. The eligibility requirements for arbitrators are also not done away with; instead, additional grounds for ineligibility, such as when a person has ‘received criminal penalties’, are suggested in Article 18. Lastly, the arbitral institutions will be members of the China Arbitration Association, which will also formulate its articles of association and supervise its violations. This indicates that the government intends to regulate arbitral institutions and keep a check on the growth of this mechanism of dispute resolution, but at the same time realizes its importance to the international business community.
In fact, further regulations on foreign institutions were very much expected. PRC gradually opened its market to foreign institutions by first allowing them to open representative offices and then establish business organization in certain Free Trade Zones, starting with the Lin-Gang Special Area of China (Shanghai) Pilot FTZ in late-2019. The administrative measures issued for this purpose include provisions stating that the ‘Shanghai Municipal Bureau of Justice shall be responsible for supervising and administering their foreign-related arbitration activities’ and ‘[a] Business Ofﬁce and its principal, staff, and arbitrators […] shall not harm China’s national and social public interests when they conduct foreign-related arbitration activities’. Such administrative measures provide a significant amount of power for supervision of the business offices to the relevant Municipal Bureau of Justice. This may include the duty to maintain the list of a panel of arbitrators of the Overseas Arbitration Institution for the record and the power to de-register a business office. This level of regulation, monitoring and control, however, is unlikely to have any relation with quality control, and may even deter both arbitral institutions and businesses.
The 2019 Amendment to the India’s Arbitration Act inserted sections 43A–43M (still to be notified), which provide for the establishment of the Arbitration Council of India (‘ACI’). Ironically, its objective is to make arbitration more competitive. The Srikrishna Committee Report (‘Report’), after collating responses to questionnaires, noted problems faced by stakeholders as regards the infrastructure, facilities and services offered by arbitral institutions. It therefore recommended establishment of a body at the national level to grade arbitral institutions based on infrastructure, personnel and performance. The argument seemed cogent and focused purely on quality control by incentivizing institutions to perform well in a competitive market for arbitral institutions. Notably, the Report stated that regulating the arbitral institutions may prove ‘antithetical to the foundation of party autonomy’. It emphasised on the role of the national body being limited to setting the minimum standards only and not regulating arbitral institutions.
While the recommendations are followed to a good extent, the ACI doesn’t seem to be as autonomous and self-sufficient as originally envisioned. The said provisions hand over a significant amount of control over the ACI to the Central Government. Section 43C provides for the appointment of its Chairperson and Members, and fixing of salaries, allowances and other terms and conditions, which are effectively controlled by the Central Government. Section 43D(2) provides the functions of the ACI, which inter alia include framing policies governing the grading of arbitral institutions, reviewing the grading of arbitral institutions and arbitrators, establishing and maintaining an electronic depository of arbitral awards, and ‘such other functions as may be decided by the Central Government’. While arbitration can develop well with adequate government support, autonomy and self-sufficiency is a must for a body that will inter alia grade and review arbitral institutions. More importantly, the scope of functions of the ACI has been kept open and left in the hands of the Central Government. The impact of the regulations that are to be framed (and whether they would amount to over-regulation) is yet to be seen.
C. Russian Federation
In Russia, Article 2(9) of the Federal Law on the Arbitration (Arbitral Proceedings)describes ‘permanent arbitral institutions’ as a ‘sub-division of a non-profit organization’, the implication being, they cannot be an independent legal entity. Article 44 provides that the right to function as a permanent arbitral institution has to be conferred by an act of the authorized federal executive body, based on a reasoned recommendation of the Council for the Development of Arbitration under the Ministry of Justice (‘CDA’). For foreign institutions, the CDA will consider its ‘widely recognized international reputation’ and ‘presence in the territory of the Russian Federation’. In other words, it will have to meet the statutory conditions and receive a license from the Government to be conferred the ‘permanent arbitral institution’ status. The functions of the CDA in this regard include, inter alia, recommending to the Ministry of Justice whether to issue an order to a foreign institution to cease operating as a permanent arbitration institution. The awards rendered by arbitral tribunals in the territory of Russia and administered by foreign institutions not conferred the ‘permanent arbitral institution’ status are regarded as arbitral awards rendered by an ad hoc arbitral tribunal. This is relevant in terms of the restrictions for ad hoc tribunals, which includes the exclusion of the right to consider any corporate disputes in Russia. The current list of ‘permanent arbitral institutions’ includes only a handful of arbitral institutions, with the ICC and Singapore International Arbitration Centre (SIAC) being the recent additions. Thus, the arbitral institutions in Russia, particularly the foreign arbitral institutions, are heavily regulated. This reduces competition, thereby negatively impacting the quality of arbitral institutions in the country.
Regulation of arbitral institutions are more common than one would imagine. Sometimes the restrictions on establishment or operation of arbitral institutions may not be provided in arbitration laws of various states, but in other laws, sub-laws or regulations (many of which may not be available in English). For example, Belarus allowed the entry of arbitral institutions by adopting the Law on Domestic Arbitration Courts and other relevant sub-laws that regulate the procedure for their establishment and operation. Further, many states (particularly the developing ones) that are looking to be recognised as arbitration-friendly, find having such measures in place very appealing. For example, the Verkhovna Rada of Ukraine is considering two bills, viz. Draft Law on Amendments to Certain Laws of Ukraine on Improving the Procedure for Establishment and Activity of Arbitration Courts dated April 29, 2020 and Draft Law on Amendments to Certain Legislative Acts of Ukraine on Improving Arbitration Activity dated April 8, 2021. The first bill proposes a registration process and imposes stricter requirements for setting up domestic arbitral institutions in order to remedy the lack of trust that currently exists. The second bill proposes a framework for establishing international arbitral institutions, which, unlike for domestic institutions, does not require any prior recommendation by a body.
III. Concluding remarks
A question also arises as to whether the introduction of such provisions will affect their ‘Model Law status’? The answer is: No, it will not. Needless to say, this is beyond the ambit of the Model Law. However, as is also observed by Prof. Skvortsov, merely having a Model Law-based national legislation is grossly insufficient to become arbitration-friendly. The states need to not only loosen up control, but also reject any preference towards certain arbitral institutions (for e.g., Article 38 of Ukraine’s Law on Foreign Economic Activity, which creates such a preference). Further, there is no actual need to set-up a centralized body to regulate or monitor arbitral institutions, and not many instances of their contribution to improving the arbitration climate. An exception, perhaps, is the Arbitration Chamber of Kazakhstan, established under Chapter 2 of the Law of the Republic of Kazakhstan on Arbitration, which is based on the principle of self-regulation and a neutral arbitration model, set-up to unite permanent arbitral institutions and arbitrators.
It is argued that arbitral institutions should not be over-regulated, as it would adversely affect competition and, thus, quality. It would also, in some cases, affect the perception of independence and neutrality of the arbitral institutions. Again, this assertion is not to suggest that there should be absolutely no mechanism in place to register arbitral institutions, but merely that there should not be any micro-management. Any registration requirements that may exist should be minimal and also liberal, and licensing requirements should not be imposed at all. In particular, no restrictions should be imposed on the operation of arbitral institutions (especially in the case of foreign arbitral institutions). If at all the states choose to regulate arbitral institutions, it must be ensured that their neutrality and independence is not compromised; that there is no scope of subjectivity or wide discretion in provisions imposing such restrictions; that such regulations are made publicly available in advance; that the objective sought to be achieved is clear, well-deliberated upon and not coloured; that such regulations set the same standards for all arbitral institutions; and that foreign institutions are not discriminated against. There also must be a clear answer to the question: Do we seek to control quality or the arbitral institutions?
Lastly, the lack of discourse on this topic could either be due to political sensitivity and fear of repercussions, or lack of relevance to the international arbitration community. But for the former, it is unlikely that the stakeholders would be subject to international sanctions for discourse on the efficacy of such restrictions on the quality of arbitral institutions. And for the latter, I would argue that mapping the impact of regulating arbitral institutions and determining whether or not it proves counterproductive would be beneficial for many states contemplating such measures, and for the ones that already have them in place, for revaluation.
Aditya Singh Chauhan is a final year student pursuing B.A., LL.B. (Business Law Honors) at National Law University, Jodhpur. He is the Editor-in-Chief of the Indian Journal of Arbitration Law and the Convenor of the Centre for Advanced Research and Training in Arbitration Law. Email: firstname.lastname@example.org.