With China’s bond market opening wider to the outside world， a broader variety of investors are allowed to enter the domestic bond market for a wider range of investment activities． Foreign investments are increasingly facilitated． While foreign investors have a growing exposure to corporate credit bonds in China， cross-border bond disputes will also show an upward trend．
The jurisdiction in a litigation case is in principle limited to the territory of a state． Compared with litigation， arbitration has a significant advantage in addressing cross-border disputes． First， the neutrality and credibility of dispute resolution is enhanced． For cross-border bond disputes involving foreign investors， the judicial authority of any country may face doubts about its neutrality in dispute resolution． In contrast， arbitration is a private-sector dispute resolution mechanism． Under the extensive influence of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards2， the judicial authorities uphold the principle of judicial restraint． Judicial authorities will not interfere with the arbitral decisions on substantive matters unless a country’s public policy is violated or for other major reasons， where they usually refuse to recognize and enforce arbitral awards on the grounds of specific procedural matters， thus ensuring the independence of arbitration． Second， China will gain a bigger say in dispute resolution． At present， many Chinese arbitral bodies， such as China International Economic and Trade Arbitration Commission （CIETAC） have rich experience in resolving cross-border disputes． Strengthening policy support for the securities arbitration mechanism and aligning arbitration rules with generally accepted international practices can effectively attract relevant parties to Chinese arbitral bodies for resolution of foreign-related bond disputes． In particular， CIETAC and the Hong Kong International Arbitration Center （HKIAC） enjoy a high level of internationalization and broad recognition across the Asia-Pacific region and even the larger world． Thus they can be taken as a point of breakthrough to expand the jurisdiction of cross-border dispute arbitration． Domestic bond issuers can also strive to use the PRC laws as the governing laws for dispute resolution， promote the application of PRC laws to cross-border disputes and enhance China’s voice in cross-border dispute resolution．
Possible Difficulties in Bond Dispute Arbitration
The consensual nature of arbitration not only gives the parties the right to choose， but also determines the limited jurisdiction of the arbitral tribunal． How to include various parties to bond disputes into the arbitration agreement is the precondition to promoting the application of arbitration． At the same time， the arbitral tribunal has no power of judicial investigation backed by the public power of the state， facing difficulties in the determination of bond torts．
i． The consensual nature of arbitration is difficult to accommodate the variety of parties to bond disputes
The jurisdiction of an arbitral tribunal originates from the consensus between the parties． Usually the parties need to set an arbitration clause in the underlying contract or enter into a separate arbitration agreement． The arbitral tribunal shall only be competent to deal with matters for which the parties to the arbitration agreement have agreed to submit for arbitration． The bond dispute resolution involves a wide range of stakeholders and various responsible entities． The key to central and efficient dispute resolution is to put multiple parties under arbitration jurisdiction． However， the arbitration of bond disputes may face the following obstacles in practice： If an arbitration clause has been included in the underlying contract before the dispute occurs， due to the relativity and decentralization of arbitration agreements， how to realize the joint hearing of many investors’ arbitration cases， and whether the arbitration clause of the underlying contract covers tort disputes？ If there is no arbitration clause available at the time of dispute， how to reach an arbitration agreement when the parties are in confrontational emotions？ If not all the responsible entities （e.g． intermediaries） in a tort dispute are parties to the arbitration agreement， how to realize the full remedies for investors’ rights and interests？
It is difficult for the trustee to perform the collective exercise of rights in arbitration． According to Article 92 of the Securities Law， “where bond issuers fail to pay bond principal and interest on schedule， the bond trustee may， as entrusted by all or part of the bondholders， initiate or participate in the trustee’s name in civil lawsuits or liquidation procedures on behalf of the bondholders”． According to Article 5 of the Minutes of National Symposium on Court Trial of Bond Disputes， “If， when an issuer is unable to repay the principal and interest of bonds as agreed or there is a default as stipulated in the bond offering documents， the bond trustee files or participates in a civil lawsuit in his own name on behalf of bondholders according to the authorization in the bond offering documents， the trusteeship agreement， or the resolution of the meeting of bondholders， or applies for bankruptcy reorganization or liquidation of the bond issuer， the people’s court shall accept it according to law．” The bond trustee system was designed to solve the problem of too many bondholders exercising rights． Theoretically， however， the trustee system can hardly fit into the institutional framework for agencies， representatives and trusts． The only possible explanatory perspective is the statutory litigation undertaking． However， the litigation undertaking of the trustee is conditional upon authorization from the bondholders， thus avoiding directly depriving the bondholders of their litigation rights （Wang Yang， 2021）． As for arbitration， the law does not stipulate that the trustee may initiate arbitration on behalf of the bondholders． The trustee lacks the theoretical foundation like statutory litigation undertaking． Moreover， due to the consensual nature of arbitration， the trustee is not a party to the arbitration agreement． The issuer may raise a jurisdictional objection on this ground． Meanwhile， the trustee’s power to institute a suit on behalf is limited to bond default cases． The law does not authorize the trustee to file a tort action on behalf． Therefore， it is difficult for the trustee to assist numerous investors in collectively exercising rights in arbitration．
ii． Bond tort disputes are arbitrable but with difficulties in investigation and evidence collection
The scope of arbitrable disputes in a country relates essentially to the transfer of jurisdiction from judiciary authorities， which involves public policy considerations of the country． According to Articles 2 and 3 of China’s Arbitration Law， contractual disputes and other disputes over property rights and interests between citizens， legal persons and other organizations that are equal subjects are arbitrable， but disputes over marriage， adoption， guardianship， support， inheritance and administrative disputes that should be dealt with by administrative authorities in accordance with the law are not arbitrable． The bond tort disputes in nature are disputes over property rights arising from such torts as misrepresentation and fraudulent issuance， and therefore are arbitrable． From the perspective of arbitrability theory， the key to what kind of authorizations a country gives to arbitration for public policy considerations is whether arbitration can fully compensate for the interests of investors and maintain the order of capital market （Wang Keyu， 2015）．
At present， in the pilot securities arbitration， the arbitral tribunal’s power to determine torts is reserved， and administrative and judicial pre-procedures3 are set up． The reason does not lie in the arbitrability of bond tort disputes， but the fact that cancelling pre-procedures will lead to many problems with respect to evidence production， tort determination and regulatory coordination． Taking misrepresentation as an example， it may involve such issues as the investor’s evidence production， the criteria for “materiality” of misrepresentation， the determination of causality and the coordination between civil compensation and administrative supervision （Ding Yuxiang， 2021）．
Arbitration usually follows the principle that “the claimant bears burden of proof”， and grants the arbitral tribunal the power to investigate and collect evidence on its own． The burden of proof and determination of liability in bond tort disputes are complicated． In practice， the administrative penalty decision and criminal judgment documents are important evidence for the parties to prove the illegality of the tort-feasor’s acts， and are also the direct basis for identifying the “materiality” of misrepresentation and other acts． If there are no such pre-procedures， the parties will be passive in adducing evidence to prove the essential facts． According to Article 43 of the Arbitration Law， “the arbitral tribunal may， as it considers necessary， collect evidence on its own．” However， arbitration is a dispute resolution mechanism based on the parties’ consensus． The arbitral tribunal does not have the judicial investigation power backed by the public power of the state． Whether the arbitral tribunal can collect evidence successfully depends on the cooperation from the entities and individuals that retain the evidence． In practice， evidence collection personnel often encounter “cold shoulders”， and therefore they usually hold a negative attitude towards proactive collection of evidence （Wang Haixia， 2017）． Therefore， even if the arbitral tribunal is confirmed to have jurisdiction over the bond tort cases， it still faces difficulties in investigation and evidence collection．
The Path to Promote the Bond Dispute Arbitration Mechanism and Improvement Suggestions
Taking the opportunity of pilot securities arbitration and relying on the characteristics of the arbitration system and the practical value of arbitration in resolving bond disputes， the author believes that it is advisable to develop an arbitration model focused on sectoral arbitration， reach the parties’ arbitration consensus through various channels and improve the rules for the arbitral tribunal in respect of investigation， evidence collection and mediation procedures．
i． Developing a mainstream sectoral arbitration model to gather cases with the advantage of rules
At present， the pilot securities arbitration proceeds under the sectoral arbitration mechanism． Self-regulatory organizations （SROs） such as stock exchanges and arbitration commissions cooperate in building a securities arbitration center and increase SROs’ support for arbitration． Sectoral arbitration has significant advantages in addressing cross-border disputes． First， the arbitration of bond disputes will be incorporated into the unified supervision system of the securities market． Sectoral arbitration can combine dispute resolution with self-regulation to better align arbitral awards with the bond regulatory objectives （Wang Keyu， 2015）． Meanwhile， apart from settling disputes fairly in accordance with the law， dispute resolution can also provide an important basis for improving the legal system and regulatory policies． Second， sectoral arbitration facilitates the standardization of arbitral discretion． Compared with the existing arbitral bodies scattered around， having the disputes centrally resolved through an arbitral body specializing in securities industry disputes can effectively improve the consistency of arbitral awards on the same or similar issues （Wang Keyu， 2015）． Third， the articles of association of SRO members are a good carrier of the arbitration clause． The members’ articles of association define the contractual rights and obligations among the members， which can incorporate the arbitration clause in advance for direct invocation upon occurrence of disputes involving members．
Even so， the author believes that sectoral arbitration can be promoted as the preferred arbitration mode for bond disputes， rather than designated as the only mode． Arbitration is characterized by autonomy． Although sectoral arbitration has many advantages in promoting unified supervision and facilitating investigation and evidence collection， if the sectoral arbitration promoted by SROs or even competent authorities is set as the only pathway， it will blur the boundary between arbitration and justice， thus undermining the institutional value of diverge dispute resolution mechanisms． As far as the arbitration mechanism itself is concerned， the competitive advantage of the rules is sufficient to gather cases． Mandatory implementation is unnecessary and unjustified． Either sectoral arbitration centers or local arbitration commissions can take in disputes over trading contracts and defaults involving only civil property-related interests． The bond tort disputes， however， not only harm the property rights and interests of investors， but also disrupt the normal order of the bond market． To ensure the consistency between the determination of civil compensation and the supervision by the state’s public authority， the sectoral arbitration center can seek to improve its arbitration rules， including strengthening the procedural alignment with judicial authorities in terms of investigation， evidence collection and award enforcement， so as to establish an advantage of rules that helps bring tort disputes to the sectoral arbitration center．
ii． Reaching arbitration consensus through multiple channels， achieving central handling of bond disputes
The most straightforward way for various parties to a bond dispute to reach an arbitration consensus is including an arbitration clause in advance in the prospectus． The prospectus is an important document for the disclosure of bond issuance information， providing a basis for investors to subscribe for bonds and defining the rights and obligations of the issuer and the investors． However， the prospectus itself is an invitation to offer． Upon subscription by the investors and acceptance by the issuer， the contents contained in the prospectus， including the dispute resolution clause， become the contract text （Cao Mingzhe， 2018）， thus reaching an arbitration consensus among various parties． Moreover， the arbitration agreements between different investors and various responsible parties all use the standard text provided in the prospectus．
In accordance with the requirements for preparing the corporate credit bond prospectus， the issuer should specify the dispute resolution clause． In the prospectus， however， the events of default are usually listed before the dispute resolution clause， so the dispute resolution clause is generally construed as a clause specifically set for default disputes． For the arbitration clause to effectively cover the tort disputes， on the one hand， it is necessary to specify in the prospectus that the default disputes and tort disputes related to this issue are arbitrable． On the other hand， the parties responsible for the tort disputes may include the controlling shareholder， de-facto controller， lead underwriter and securities service provider in addition to the issuer． If there is no valid arbitration agreement， the arbitral tribunal has no power to hold them liable． Such entities may undertake in the prospectus that the arbitration clause in the prospectus shall also apply if this issuance harms the interests of investors． If the arbitration clause is not preset in the prospectus， investors can also negotiate with the responsible parties to reach an arbitration agreement after the dispute occurs． The private nature of arbitration is an important factor to attract responsible parties to arbitration．
Under the sectoral arbitration mechanism， it is advisable to specify arbitration as an option for investors in the articles of association for SRO members． With reference to Rules 600（A） and 600 of the New York Stock Exchange， in the case of disputes involving SRO members， the disputes between SRO members should be submitted for sectoral arbitration． In the case of disputes between a SRO member and an investor， the investor may opt to submit the dispute for sectoral arbitration or not． If the investor chooses arbitration， the SRO member shall cooperate． This model is to pre-load SRO member’s articles of association with the members’ intention to submit disputes for arbitration， with the flexibility that the investor’s application for arbitration is deemed to be an arbitration agreement reached between the SRO member and the investor， rather than by entering into a written arbitration agreement like before．
In terms of arbitration procedures， investors in the same issue of bond may apply for arbitration together， or after multiple investors submit their applications for arbitration separately， the arbitration commission may decide to merge them into a single case for arbitration， thus realizing central handling of cases6． Considering the large number of investors distributed across a broad range of geographical areas， representatives may be elected from investors to exercise the rights collectively， and the online hearing mode may be adopted7．
iii． Multi-party support for investigation and evidence collection in arbitration， efficient enforcement of civil compensation
In order to resolve civil disputes efficiently by arbitration， some mechanisms are needed to make up for the shortage of evidence produced by the parties and deficiencies in investigation and evidence collection by the arbitral tribunal． At present， China has explicitly cancelled the pre-procedures for administrative penalty or the criminal proceedings in the civil action on securities torts in many documents8． As mentioned above， the arbitral tribunal should have the right to determine the amount of loss compensation for misrepresentation and fraudulent issuance of bonds． To cancel the pre-arbitration procedures， the key is how to address in the difficulties in evidence production and collection． First， the court should provide support for the investigation and evidence collection by the arbitral tribunal and lawyers． If the arbitral tribunal considers it necessary to collect relevant evidence on its own， it may apply to the court for assistance． In line with this， the Arbitration Law of the People’s Republic of China （Revised） （Exposure Draft） issued in 2021 reserves the arbitral tribunal’s power to investigate and collect evidence on its own， but adds a provision that “the people’s court may be requested to assist if necessary”． In addition， at the request of the parties involved in the arbitration proceedings， the court may issue a lawyer’s investigation order， and the lawyer shall visit and present the investigation order to the exchange and the bond depository and clearing institution to collect relevant evidence， so as to relieve the burden of proof on investors （Ding Yuxiang， 2021）． Second， the SRO shall provide the arbitral tribunal with support for investigation and evidence collection． As the first-line regulator closest to the market， the SRO can assist the arbitral body in the investigation and evidence collection for bond disputes， and can also provide professional support for proper dispute resolution based on its experience in market supervision． Third， professional agencies assist in the loss determination． Article 24 of the Provisions of the Supreme People’s Court on Several Issues Concerning Representative Action in Securities Disputes provides that “the people’s court may， upon the application of the parties， entrust a professional agency approved by both parties or randomly selected to verify the amount of investment losses and the loss deduction ratio caused by risk factors other than securities torts． Where the parties does not make an application but it is necessary for trial of the case， the people’s court may， by way of random selection， entrust a professional agency to verify the relevant matters．” The arbitral body can also involve a professional agency in loss determination， especially the SRO’s sectoral arbitration center， and seek professional advice from SRO experts．
In ensuring the priority of civil liability， consideration may be given to establishing a system of suspended entry into treasury coffers and fiscal reversal． Even if the administrative and judicial pre-procedures are cancelled， because the arbitration procedure is independent from the administrative and judicial procedures， there may still be administrative penalty or criminal judgment already enforced， or effective and pending enforcement， when the arbitration award is determined． In such cases， a mechanism should be introduced for fiscal reversal or suspension of coffer entry of administrative penalties or criminal fines （Chen Jie， 2017） to ensure the effective enforcement of civil compensation．
iv． Improving the procedural coordination of mediation and arbitration
Mediation is known as “the treasure of the East”， upholding the philosophy of “valuing peace” in dispute resolution． Mediation can be used as an independent dispute resolution procedure or as part of an arbitration procedure． Promoting the application of mediation in the arbitration procedure can substantially cut the time needed for resolving the bond dispute and reach a solution to the satisfaction of the parties as far as possible．
In terms of mediator selection， it is advisable to go beyond China’s traditional practice of direct mediation by members of the arbitral tribunal and appoint the SRO mediation center or trusted securities experts as mediators． This approach prevents the compromise or bargaining of the parties in mediation from adversely affecting the arbitration procedure that continues when mediation fails and eliminate the concerns of the parties regarding the application of mediation． As for the coordination between arbitration and mediation procedures， we can learn from the Singapore’s practice of “arbitration-mediation-arbitration”， that is， suspending the arbitration procedure when the parties turn to mediation， and terminating the arbitration procedure if the mediation is successful or resuming the arbitration procedure if the mediation fails or the dispute is not fully resolved9． To ensure the effective implementation of the mediation agreement， after the mediation agreement is reached， the arbitral tribunal should issue a mediation statement or make an award based on the agreement reached．
Notes：
1． See Article 220 of the Securities Law for details： “where anyone violates the provisions of this Law and is liable for paying civil compensation， fines and penalties， and turning in illegal gains， if his assets are insufficient to make such payments， priority shall be given to making civil compensation．”
2． In 1958， the United Nations Conference on International Commercial Arbitration deliberated and adopted the Convention， which entered into force on June 7， 1959．
3． The Drafting Note on the Opinions on Conducting the Pilot Program on Arbitration in the Securities and Futures Industry in Accordance with the Law states that “due to the insufficient authority of the arbitral body to confirm illegal acts， administrative and judicial pre-procedures have been established for the arbitration of disputes over securities and futures civil compensation”．
4． Please refer to Article 5 of the Provisions of the Supreme People’s Court on Several Issues Concerning Representative Action in Securities Disputes and Article 85 of the Minutes of the National Courts‘ Civil and Commercial Trial Work Conference．
5． Please refer to Article 6 of the Pilot Arbitration Opinions．
6． The arbitration rules of Shenzhen Court of International Arbitration， Beijing Arbitration Commission and other institutions all contain provisions on combined application and arbitration for more than one contract．
7． For example， Shenzhen Court of International Arbitration has specially formulated the Online Arbitration Rules， and the latest rules of the Beijing Arbitration Commission explicitly adds online hearing to hearing methods．
8． For example， the Minutes of National Symposium on Court Trial of Bond Disputes makes it clear that the people’s court shall not support the request for case dismissal or rejection made by the person who commits fraudulent issuance or misrepresentation on the ground that the fraudulent issuance or misrepresentation alleged by the bond holder or investor has not been imposed any administrative penalty by the relevant authority or confirmed by an effective criminal judgment document． The Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law proposed to “improve the civil compensation system” and “cancel the pre-litigation procedures for civil compensation”．
9． Refer to website
http://simc.com.sg/v2/wp-content/uploads/2019/03/SIAC-SIMC-AMA-Protocol.pdf
References
[1] Cao Mingzhe． The Nature of Bond Prospectus and Its Judicial Effects [J]． Bonds， 2018（11）： 53-57．
[2] Chen Jie． The Implementation Mechanism for the Principle of Priority of Securities-related Civil Compensation Liability [J]． Securities Market Herald， 2017（6）： 58， 60-62．
[3] Ding Yuxiang． Divergence Effects of Cancellation of Securities Misrepresentation Pre-procedures and Their Handling [J]． Law and Economy， 2021（5）： 31-46．
[4] He Haifeng， Chen Haoxin． Discussion on the Application of New Provisions on Misrepresentation in Disputes Over Bond Misrepresentation [J]． Bonds， 2022（3）： 24-27．
[5] Wang Haixia． A Study on Issues Regarding the Arbitral Tribunal’s Power to Investigate and Collect Evidence [EB/OL]． （2017-12-07） [2022-01-10]． https：//www.sohu.com/a/209112112_100017582．
[6] Wang Keyu． Analysis on the Path of Establishing and Improving China’s Securities Tort Arbitration Mechanism - From the Perspective of the Development of U.S． Securities Arbitration Mechanism [J]． Legal Forum， 2015（2）： 109-114．
[7] Wang Yang． The Dilemma of Bond Trustee’s Position in Lawsuit and the Solution under the New Securities Law - From the Perspective of the Case of Taihehui v． Zhongfu [J]． Securities Law Review， 2020（2）．
[8] China International Economic and Trade Arbitration Commission． Annual Report on International Commercial Arbitration in China （2020-2021） [M]． Beijing： Law Press， 2021： 5-6， 96．
This article was first published on Bond Monthly （May． 2022）． Please indicate the source clearly when citing this article． The English version is for reference only， and the original Chinese version shall prevail in case of any inconsistency．
◇ Author from： CCDC Postdoctoral Research Center
◇ Editors in charge： Wei Hairui， Yin Ying
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