PRC courts uphold validity of an ICC arbitration in China

Background

As Chinese law is unclear on whether non-Chinese institutions have the right to administer arbitrations in China, parties have avoided agreeing such clauses. However, in a significant decision, a Shanghai court has upheld the validity of a clause providing for China-seated ICC arbitration.

PRC law implies that only Chinese arbitral institutions can administer arbitrations in mainland China. First, a valid arbitration agreement must expressly nominate the parties’ choice of arbitration commission (article 16 of the PRC Arbitration Law) and, second, that arbitration commission should comply with local PRC requirements regarding its establishment, affiliation and regulation (see articles 10–15 of the PRC Arbitration Law). Hence the implication is that foreign arbitral institutions cannot conduct arbitrations in China.

However, there has been no binding judicial pronouncement upon the mandate of international institutions, such as the ICC, operating in China. The PRC courts have ruled on the validity of such clauses, but cases have been determined on narrow grounds, in an inconsistent manner.

In Züblin International GmbH v Wuxi Woke General Engineering Rubber Co Ltd ([2003] Min Si Ta Zi Di 23 Hao.2004), the Supreme People’s Court (SPC) ruled invalid an arbitration clause specifying ICC-administered proceedings seated in Shanghai. The SPC’s grounds for refusal were limited to finding a breach of article 16 of the Arbitration Law, in that no arbitral commission at all (foreign or domestic) had been specified.

Four years later, in Duferco S.A. v Ningbo Art & Craft Import & Export Corp. ([2008] Yong Zhong Jian Zi Di 4 Hao.), the Intermediate People’s Court of Ningbo agreed to enforce an award issued by an ICC tribunal in Beijing. However, this decision, unlike the Züblin decision, was not ratified by the SPC and caused some controversy among practitioners, as despite the PRC seat of the arbitration, the court categorised the resulting award as a non-domestic award for the purposes of the New York Convention.

In light of the uncertain position, arbitration users agreeing to PRC-seated proceedings have usually specified a Chinese entity as the administering institution.

The Longlide case and the decision of the Hefei Court

In October 2010, an Italian-incorporated party, BP Agnati SRL (BP) and a Chinese-incorporated party Anhui Longlide Packaging and Printing Co. Ltd (Longlide) entered into a commercial agreement. The contract contained an arbitration clause providing that ‘any dispute arising from or in connection with this contract shall be submitted to arbitration by the ICC Court of Arbitration according to its arbitration rules, by one or more arbitrators. The place of jurisdiction shall be Shanghai, China. The arbitration shall be conducted in English.’

A dispute arose and BP commenced arbitration proceedings against Longlide. However, Longlide submitted a jurisdictional challenge to the Intermediate People’s Court of Hefei (Hefei Court) on the basis that the arbitration clause breached article 16 of the Arbitration Law.

Longlide contended that the clause did not identify a Chinese arbitration commission within the meaning of the Arbitration Law. Further it was asserted that the nomination of the ICC as administering institution would violate the PRC’s judicial sovereignty.

The Hefei Court acknowledged the provisions of article 10 of the Arbitration Law regarding the establishment and regulation of arbitration commissions by the relevant Chinese government bodies. The Court found that, since the domestic arbitration market has not been opened up to foreign arbitration ‘service providers’, they did not qualify as arbitration commissions for the purposes of article 10. Accordingly, article 16 of the Arbitration Law was not satisfied by an ICC arbitration clause as such a clause would not specify a qualifying arbitration commission.

On the basis of these provisions, and while acknowledging that there was no express prohibition of ICC administration of PRC arbitrations, the Hefei Court noted that it was minded to refuse enforcement.

Under the judicial reporting system, which requires lower courts to refer their decision to refuse the enforcement of foreign and foreign-related awards in the PRC to a higher court to confirm the decision, the Hefei Court then referred the matter to the Anhui High People’s Court (Anhui Court).

Decision of the Anhui Court and the SPC ‘reply’

The Anhui Court was divided on the issue of the validity of the arbitration clause under article 16 of the Arbitration Law. While a minority supported the Hefei Court’s reasoning (i.e. that the domestic arbitration market has not been opened up to foreign arbitration service providers), the majority held the agreement to be valid, stating it considered that the clause contained all of the elements required by article 16. Accordingly the clause was found to be a legitimate designation of an arbitration institution. Upon referral, the SPC sided with the majority view of the Anhui Court, agreeing that the article 16 requirements were satisfied. The challenge was dismissed and the arbitration clause determined to be valid.

Comment

The Longlide decision has no binding force upon other Chinese courts. This will only happen if the SPC issues a binding judicial pronouncement (or ‘interpretation’). Until such time, parties are likely to continue to avoid agreeing PRC-seated proceedings administered by foreign arbitration institutions.

Nevertheless, the decision is important as it marks another cautious step by the SPC to take a more pro-arbitration stance than has previously been seen in China. It reassures many that, in years to come, Chinese courts may allow for the operation of a variety of foreign and domestic arbitration institutions in their jurisdiction, as do the leading arbitration jurisdictions in Asia and worldwide.