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Arbitration of China aviation disputes

18 Nov 2020

Putting Covid-19 to one side, the growth of the aviation sector in China in recent years has been remarkable. Despite the pandemic, a cursory glance at the Flightradar24 website confirms that the Chinese domestic market has been one of the quickest to recover.

In 2017, 549 million Chinese passengers travelled by air. This was a year-on-year increase of 7.1%, and over 7.1 million tons of air cargo was carried. The figures for 2019 rose to 660 million passengers and 7.5 million tonnes of cargo respectively.

A new mega-airport (Daxing International (PKX)) has recently been opened to the south of Beijing. It has taken 5 years to build and boasts 8 runways, 268 aircraft parking bays and a whopping 700,000 square metre terminal complex. The airport is designed to handle an initial 120 million passengers a year, but this can be increased to over 200 million with future expansion.

Impressive stuff.

Litigating aviation disputes in Mainland China

Historically in Mainland China an aviation dispute between say a mechanical repair and overhaul provider and an airline would be fought out in a local Intermediate People’s Court. The underlying contract may stipulate that English law is the governing law.

The use of a local court often proves to be a drawn-out and expensive way of resolving the dispute, and both parties are required to instruct local counsel. If the dispute is of a technical nature, then local expert witnesses may also be needed. There could be volumes of documents and evidence to be translated from English into Chinese so that the judge can read it and have an understanding of the issues in dispute.

Mainland Chinese litigation is very different from the common law concept - the law is codified, the judge is inquisitorial, cross-examination and disclosure limited or non-existent, experts are more likely to be appointed by the court and not by the parties. This, and perceived bias, is why foreign parties may not want to litigate in Mainland China.

Alternative dispute resolution in aviation disputes

The established benefits of arbitration are that the process is flexible and caters well for any industry that operates internationally, and across borders. Litigation is always a confrontational process, fought in public that risks damaging the type of long-standing relationships with customers that are typical of the aviation industry.

Parties need to differentiate between mediation (or early neutral evaluation) and arbitration. The latter can be as confrontational as litigation – just more confidential. Arbitration is generally a confidential process, so the existence of a dispute and the outcome of any arbitration can (often but not always) be kept out of the public domain. The perception with arbitration is that it offers a neutral forum which gives the parties a better chance of having a fair hearing and closure on the dispute.

Arbitration is generally considered to be a preferred method for resolving disputes involving Mainland Chinese parties.

Shanghai International Aviation Court of Arbitration

As the aviation market has expanded in Mainland China, the number of aviation-related disputes has also increased. On the back of this, a need has arisen for resolving these disputes locally, yet in a way which is time and cost-effective for all concerned.

On the 28th August 2014 the Shanghai International Aviation Court of Arbitration (SHIACA) came into being following a cooperation agreement between the China Air Transport Association, International Air Transport Association and the Shanghai International Arbitration Centre. This is world’s first arbitration centre dedicated to handling aviation disputes. Its aim is to be the go-to forum for aviation disputes in the APAC region, with a bespoke set of industry-focused procedures unique to this institution. Previously, part of the problem with arbitrating aviation disputes in Mainland China was that ad hoc (i.e. non institutional) arbitration is not enforceable there – whereas ad hoc arbitration is the most common form of arbitration in the aviation industry worldwide.  The SHIACA employs a blend of domestic and international arbitration rules to cater for foreign users and which assist with the recognition and enforcement of its awards.

SHIACA vs. Hong Kong arbitration?

Hong Kong is an special administrative region of China, a common law jurisdiction with a well-regarded judiciary.  It is a leading venue for international arbitration in Asia.  International aviation industry players may consider it as an alternative to arbitrating against Mainland Chinese parties on the Mainland.  Given its proximity and ties to the Mainland, Mainland Chinese parties may consider it an acceptable compromise venue. There are several reasons for this, mainly due to the enforceability with certain exceptions of Hong Kong awards (both ad hoc and institutional) in Mainland China, but also because interim relief in Mainland China is available for Hong Kong seated arbitrations. In your arbitration agreement, consider here opting for ad hoc or institutional (under the auspices of the Hong Kong International Arbitration Centre or the International Chamber of Commerce – Asia Office) in Hong Kong.

Practice points

  • When drafting an aviation contract have in mind the nature of the relationship and the type of counterparty. There are various forums for dispute resolution in China now, and court litigation is no longer the only option. Mainland China (or Hong Kong) can be specified as the arbitral seat within the arbitration clause.
  • Traditionally, lessors have been attracted by the familiarity and predictability of English courts, as well as the flexibility of an option to arbitrate or litigate.
  • An arbitration clause should never be an after-thought in an aviation contract, and parties should negotiate these provisions with the idea that a serious dispute could occur at some point down the line.
  • Arbitration can be a flexible process – use this to your aviation client’s advantage when trying to solve the dispute.
  • In the SHIACA and in Hong Kong you can select your arbitrator(s) – you can never choose your judge in court! The arbitrator may have spent most of their working career in the aviation industry and would have a grip of the core issues and be well-placed to preside over any dispute.

This alert is for information only and is not legal advice.