The fast growth of China’s economy has gotten more and more foreign enterprises to invest in Mainland China. Foreign investors need to establish a local presence Chinese, for example, a representative office, a branch, a subsidiary, or a joint venture so that they can do business in China. As the business ties between China and the rest of the world strengthen, the number of China-related business disputes has been increasing.
Arbitration is one of the most favored international business transaction dispute resolution mechanisms because it is convenient, efficient, and the cross-border enforceability of arbitration awards tends to be higher than court judgments. However, in certain circumstances, even if the parties have agreed to submit their disputes to arbitration, they end up needing to bring their dispute to a court because they disagree on the validity of their agreement’s arbitration clauses. Companies and entrepreneurs that wish to build relationships and do business with Chinese companies or entrepreneurs should pay attention to the validity of their arbitration clauses and agreements. This need to pay attention to arbitration agreements stems from the fact that China’s requirements for what a valid and enforceable arbitration clause or agreement are different than other jurisdictions.
- International Arbitrations, Foreign Related Arbitrations, and Domestic Arbitrations
Chinese law recognizes three types of arbitrations: international arbitration, foreign related arbitration and domestic arbitration.
An “international arbitration,” also known as a “foreign arbitration”, is an arbitration that is governed by a mediator that is based outside of the People’s Republic of China (“PRC”).
A “foreign related arbitration” is an arbitration that involves “foreign elements”, but the mediator for the arbitration is within PRC territory. The “foreign elements” in these kinds of arbitrations entail: (1) one or both parties being citizens of another country, stateless individuals, or foreign entities; (2) the subject matter of the dispute is located outside of China; or (3) the facts establishing, altering, or terminating the parties relationship occurs outside of the PRC.
A “domestic arbitration” is an arbitration that has no foreign related elements, and the arbitration panel is within PRC territory.
One of the questions about arbitrations that remains is whether domestic parties that agree arbitrate outside of the PRC should be considered domestic arbitrations or international arbitrations.
Chinese law does not prohibit parties from choosing a mediation panel outside of Chinese territory, even if the dispute does not have any foreign related elements. However, Chinese law does establish that the international arbitration awards are only enforceable after they are recognized by a people’s court. This people’s court recognition is legally required under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) that the PRC is a party to. The New York Convention does not establish that the court can review the decision the panel reached, instead, it only empowers a court to review the panel’s arbitration procedure to verify that the panel effectively heard both sides of the issue it mediated.
Yet, the PRC Arbitration Law establishes that when a court decides whether it will recognize a domestic arbitration, it may examine the panel’s procedural steps, and the substantive issues it decided.
Therefore, if the parties agree to nominate an arbitration panel outside of the PRC, and their dispute has no foreign elements, a Chinese court is very likely to consider the choice an attempt to evade Chinese law, and it will refuse to recognize the award.
This analysis implies that the arbitration parties may have significant practical barriers to using non-PRC mediator to settle a dispute with no foreign elements.
- Law Governing Arbitration Agreements
The parties’ arbitration clause or agreement largely decides what arbitration panel or arbitrator has jurisdiction over a specific dispute. However, before the validity of an arbitration clause or agreement can be evaluated the law governing the arbitration clause or agreement or clause needs to be determined.
The Interpretation of Issues Relating to Application of the Arbitration Law of People’s Republic of China, promulgated by the Supreme Court of the People’s Republic of China, establishes that there is a procedure for determining the validity of an arbitration clause or agreement in an international or foreign related arbitration (“Interpretation”).governing law should be determined in the following order: First, the law that parties agree should govern the issue; Second, the law governing the domicile where the parties choose to have the arbitration; Finally, the law governing the court that the parties petition for to rule on the validity of their agreed on arbitration clause or agreement. However, the Interpretation does not state what law governs when a domestic arbitration has a arbitration clause or agreement that comes into play. As discussed above, the parties may choose another jurisdiction’s law to govern their arbitration clause or agreement or clause, or they may designate an arbitration panel outside of China to settle their dispute. However, Chinese courts may apply PRC law when they determine the validity the parties’ arbitration clauses or agreements for domestic arbitrations, the court’s right to intervene is intended to help prevent the evasion of Chinese law. It states that an arbitration clause or agreement’s
- The Validity of Arbitration Agreement under Chinese Law
- Written Arbitration Agreements
An arbitration clause or agreement must be in writing. In writing means that the arbitration clause or agreement has been codified in a written contract, a letter, an electronic message, including, telegraph, facsimile, electronic data exchange, and e-mail, or any other form that the PRC Contract Law accepts as being in writing. Chinese law does not recognize a verbal arbitration clause or agreement or clause, and in turn, they are not valid under PRC law.
- Contents of Arbitration Agreements
A valid arbitration clause or agreement must contain:
- Expressed Intention
The parties’ intention settle disputes via arbitration must be clearly and unequivocally stated in a valid arbitration clause or agreement. The parties often agree include a section in their contract that states they will submit any dispute arising out the contract to “either arbitration or court”, or “first to arbitration, then to court”. Such an arbitration clause will be deemed void. However, the arbitration institution that the parties choose needs to be able to take jurisdiction over the dispute. The arbitration panel will be considered to have jurisdiction over a dispute if one party submits the dispute for arbitration, and the other party does not dispute the validity of the arbitration clause before the arbitration’s first oral hearing takes place.
- The Subject Matter of an Arbitration
The arbitration clause or agreement establishes what matters the parties would like to have resolved by an arbitration panel or they may simply provide that “all disputes” shall be submitted to arbitration. In the latter case, “all disputes” means any dispute over the formation, validity, amendment, transfer, performance, default, liability for breach, interpretation, termination of the contract. The people’s courts do not have jurisdiction over disputes arising from a foreign related commercial contract if the cause of action is infringement, and the parties to the contract have a valid arbitration agreement that requires all disputes arising from the contract to be submitted to arbitration.
- The Agreed on Arbitration Institution
The “agreed on arbitration institution” is a very complicated issue, which can confuse the parties and their counsel.
- Ad Hoc Arbitration
The “agreed on arbitration institution” is a necessary component of an arbitration agreement, and when potential disputes may be subject to either domestic or foreign related arbitration an ad hoc arbitration agreement is considered invalid. However, ad hoc arbitration may be acceptable for international arbitration disputes, since the mediators will not be based in the PRC, a Chinese court may recognize the validity of an arbitration agreement provided that the agreement is legally effective under the law that the parties established governs the arbitration agreement, or it is effective under the law of the domicile of the arbitration.
Another question is whether an arbitration agreement or clause that states the parties will apply a specific set of rules, without specifying the place that the arbitration will be held, or the law that will govern an arbitration clause or agreement is currently valid under Chinese law.
The answer to this question is clearly no, an arbitration agreement that has a specific set of rules that must be followed, but does not clearly establish where the arbitration will be held or what law will govern the arbitration is not enforceable under Chinese law. When the parties fail to nominate an arbitration tribunal or institution then the clause or agreement or clause will be considered an ad hoc arbitration agreement, and unless, the parties agreed on arbitration rules expressly provide for applying ad hoc arbitration, then rules that automatically determine what arbitration institution must be used will determine what arbitration panel has authority over the dispute.
For example, an arbitration agreement will be valid if the parties nominate the China International Economic and Trade Arbitration Commission (“CIETAC”) arbitration rules to govern the agreement. This validity stems from that fact that Article 4 paragraph 4 of CIETAC’s rules clearly establishes that “[w]here the parties agree to refer their dispute to arbitration under these [CIETAC] Rules without providing the name of an arbitration institution, they shall be deemed to have agreed to refer the dispute to arbitration by the CIETAC”.
When the parties choose the ICC rules or the UNCITRAL rules the arbitration clause or agreement will be invalid since neither the ICC rules nor UNCITRAL’s rules have a provision similar to Article 4 paragraph 4 of CIETAC’s rules. The Supreme People’s Court has made it clear in its reply to the Jiangsu High People’s Court on Züblin International GmbH vs. Wuxi Woke General Engineering Rubber Co., Ltd. that an arbitration clause that does not establish the law that will govern a dispute or an arbitration panel, but instead, states that the ICC’s rules will be use to resolve a dispute is invalid. In this case, the parties petitioned the Jiangsu High People’s Court to determine the validity of their arbitration agreement. The Supreme People’s Court ruled that the parties’ arbitration clause was void, since Chinese law requires a valid arbitration clause to establish that the law of the domicile of the arbitral seats will govern the agreement and it requires the agreement to name an arbitration institution. Here, the parties did not establish that the law of the domicile of the arbitration seat will govern the agreement, nor what arbitration panel had jurisdiction over a dispute, and the fact that the ICC rules do not have a provision that automatically determines what the applicable rules are.
- Place of Arbitration
China has about 190 arbitration institutions, and almost all of them will accept both domestic and foreign related arbitration cases. Therefore, if the parties only agree on the place of arbitration but do not establish the name of the arbitration institution that they will use, then the arbitration agreement will probably be considered to be invalid, unless, the parties add a supplementary agreement that names an arbitration tribunal or unless, there is only one arbitration institution in the place the parties agree to have the arbitration take place. For example, in Shanghai there are two arbitration institutions, the Shanghai branch office of CIETAC and the Shanghai Arbitration Commission. If a contract between two parties’ arbitration clause or agreement only states that their potential disputes will be arbitrated in Shanghai, the clause or agreement will be considered invalid because the parties do not give the name of the arbitration institution that will mediate their disputes. However, if the parties establish that Qingdao will be the location of their arbitration, the clause or agreement will be valid because Qingdao’s only arbitration institution is the Qingdao Arbitration Commission.
- Inaccurate Name of an Agreed Arbitration Institution
Sometimes, parties agree to submit their dispute to a specific arbitration institution, but they fail to accurately state the name of the institution. In these kinds of circumstances, the general rule is to attempt to determine the validity arbitration clause or agreement by seeing if a specific arbitration institution can be inferred from the name the arbitration clause or agreement uses for the arbitration panel. If an arbitration institution can be determined from the name the clause or agreement used in the clause or agreement, then the arbitration institution inferred will be considered to be the nominated an arbitration institution. If no actual institution can be inferred from the arbitration clause or agreement, then that clause or agreement will probably be deemed as invalid.
In many cases, the parties will choose CIETAC to be their arbitration institution. However, parties will often use CIETAC’s old name, the Foreign Trade Arbitration Commission, or an incorrect name like Beijing Foreign Economic and Trade Arbitration Commission, in their attempt to name CIETAC their arbitration institution in their arbitration clause or agreement. In cases where CIETAC’s old name is used, or it is incorrectly named the validity of an arbitration clause or agreement will not be affected because CIETAC’s name can be inferred from the name that parties use. This acceptance of a flawed arbitration clause or agreement stems from the fact that CIETAC is the only arbitration institution that can be inferred from either of those names, even though, both of those names are inaccurate. However, if the parties agree to use the “Beijing Foreign Arbitration Commission” to settle their disputes, the relevant arbitration clause or agreement will probably be considered invalid, unless, the parties create a supplementary agreement. The clause or agreement would be invalid in this circumstance because the Beijing Arbitration Commission (“BAC”) is an arbitration institution in Beijing, and the name used might refer to BAC instead of CIETAC.
- Nominating Two or More Arbitration Institutions
Sometimes the parties would like to nominate more than one arbitration institution in their arbitration clause or agreement, and having the option to choose which institution it submits each dispute to. However, trying to reserve this option by nominating more than one institution will cause the overall arbitration clause or agreement to be invalid, unless, the parties create a supplementary agreement that chooses a specific arbitration institution to resolve a dispute.
In other situations, a contract’s arbitration clause establishes that if Party A is the claimant, then the dispute will be submitted for Arbitration Institution A to resolve, but if Party B is the claimant, then the dispute will be submitted for Arbitration Institution B to resolve. At present, no Chinese judicial interpretations provide guidance on the validity of this kind of an agreement. However, an overwhelming majority of Chinese judges, arbitrators, and legal scholars believe that an arbitration agreement that establishes that each individual party’s claims will be submitted to separate specific arbitration institutions is an effective way to nominate an arbitration institution. Yet, the question that arises is: when Party A initiates an arbitration with Arbitration Institution A and Party B wishes to file a counterclaim to the Party A initiated arbitration with Arbitration Institution A, which arbitration institution should Party B file its counterclaim at? In other words, Party B, the respondent to the initial claim, has the right to initiate a counterclaim against Party A, the claimant. It appears that many Chinese judges, arbitrators, and legal scholars believe that Arbitration Institution A would be the only institution that has jurisdiction to accept Party B’s counterclaim. I agree with this thought. This approach is the most convenient and efficient way for the parties to resolve a dispute that was initiated by one of the parties as an institution that the parties’ arbitration clause established the disputes will be resolved by. In addition, I also believe that Arbitration Institution B has the right to accept Party B’s counterclaim against Party A if it would like to accept the counterclaim, as long as, there is no law or regulation prohibits Party B from submitting its counterclaim to Arbitration Institution B.
Another hypothetical that creates an interesting situation is where a Chinese company (Party A) and a Hong Kong company (Party B) enter into an arbitration agreement, which establishes that any dispute must be arbitrated in the respondent’s domicile. In these kinds of situations, if a dispute arises and Party A wants to initiate an arbitration, then the arbitration will be considered an ad hoc arbitration conducted in Hong Kong. Hong Kong law allows ad hoc arbitrations, therefore, the arbitration will be is recognized under Hong Kong law. On the other hand, if Party B wishes to initiate an arbitration against Party A, the arbitration panel will be in China and Chinese law will probably consider this arbitration agreement to be invalid because the arbitration agreement does not nominate a specific arbitration institution. Thus, this kind of an arbitration agreement would only entitle Party A to initiate an arbitration.
The Arbitration Law’s requirement of naming an arbitration institution in an arbitration clause or agreement has caused a lot of confusion and uncertainties. Often, parties are told to be sure that they nominate one arbitration institution and accurately name that institution to help avoid their arbitration clause or agreement from being held void.
- Other Requirements
Chinese law establishes that an arbitration clause or agreement or clause is invalid if:
- The matter to be submitted for arbitration is a dispute relates to marriage, adoption, guardianship, maintenance and inheritance, or has an administrative nature.
- The agreement that has the arbitration clause is entered into by an individual that Chinese law establishes does have the capacity to make civil acts, or has a restricted capacity to make civil acts.
- A party enters the arbitration agreement under coercion.
- Challenging the Validity of an Arbitration Agreement
- Jurisdiction over a challenge to the validity of an arbitration agreement
A challenge to the validity of the arbitration clause or agreement can be submitted to the parties’ agreed arbitration institution for it to decide whether the agreement is valid, or it can brought before the people’s courts for a ruling on its validity. If one party submits the agreement to an arbitration institution and the other party petitions a court for a ruling, the court’s actions will have precedence over the arbitration proceeding. Moreover, the arbitration proceeding will be suspended until the court renders its decision. However, if the arbitration institution has already finished deliberating on the validity of arbitration agreement, its decision on the validity of the agreement will stand and neither party has the right to challenge that opinion in court.
In domestic arbitrations, the intermediate people’s court in the domicile of the agreed arbitration institution has jurisdiction over the validity of an arbitration clause or agreement. However, if the parties have not agreed on an arbitration institution, the intermediate people’s court where the arbitration agreement was signed, or the domicile of the respondent will have jurisdiction to decide the validity of the parties’ arbitration agreement.
In a foreign related arbitration or an international arbitration, the intermediate people’s courts in the domicile of the parties’ agreed on arbitration institution, the intermediate people’s court in the place where the arbitration agreement was signed, or the intermediate people’s court in the domicile of either party will have the jurisdiction to decide the validity of the parties’ arbitration agreement. Whichever, intermediate people’s court first accepts the case will have jurisdiction to decide the validity of the parties’ arbitration clause agreement.
- Statute of Limitations for Challenging the Validity of an Arbitration Agreement
If a party would like to challenge the validity of an arbitration clause or agreement it must make the challenge before the arbitration proceeding’s first oral hearing.. For example, in one arbitration case, a party challenged the validity of the parties arbitration agreement after the first oral hearing had started. The other party strongly objected to the party’s late challenge, and requested that the tribunal not to consider the challenge. However, the tribunal decided to accept the party’s challenge to the validity of the agreement after it consulted with the arbitration institution secretariat.
However, PRC law only provides that the people’s courts will not accept a party’s challenge to the validity of an arbitration agreement if it is not raised before the arbitration proceeding’s first oral hearing, but the law does not state that an arbitration institution or tribunal cannot accept a challenge to the validity of an arbitration clause or agreement after the proceeding’s first oral hearing has started. In practice, arbitration institutions often take a cautious approach towards one party challenging an arbitration agreement, this cautiousness stems from the fact that the institution wants to make sure that its arbitration award can be successfully recognized and enforced
- Validity of an Arbitration Agreement and the Enforcement of an Arbitration Institution’s Award
Both PRC law and the New York Convention establish that a valid arbitration clause or agreement is a prerequisite for enforcing an arbitration award. However, the PRC court’s will not support a party’s petition to revoke an arbitration award, if either party fails to challenge the validity of a defective arbitration clause or agreement within the PRC or any other applicable law’s procedure for challenging the validity of an arbitration agreement. The situation is different if either party challenges the validity of the arbitration clause or agreement during the arbitration proceeding. In that case, even if the arbitration institution or a people’s court has rendered an award or a decision, then the party that challenged the arbitration clause or agreement has the right to petition the court to revoke, not recognize, or nor enforce the arbitration award. The party may also petition the court to retry the case.
These rules have a strong impact on what Chinese enterprises’ attitudes are towards arbitration, especially, international arbitration. Before the Interpretation was published, a substantial portion of Chinese enterprises, including some foreign invested enterprises, preferred not to respond to international arbitration claims against them. Instead, these enterprises would commonly wait until a default award was rendered, then they would petition a people’s court to not recognize or enforce the award in the PRC based on fact that the arbitration clause or agreement was not valid. However, since this strategy is no longer effective, more and more Chinese enterprises are now responding to international arbitrations.
- Reporting System
In addition to the rules that have been discussed, the SPC established a special reporting system to protect the parties’ right to submit their disputes to arbitration. The reporting system applies to any case where the validity of a foreign related or an international arbitration’s arbitration clause or agreement is questioned.
Under this reporting system, any intermediate people’s court must report a foreign related or international arbitration case to a competent high people’s court before it issues a ruling on validity of the foreign related or an international arbitration parties’ arbitration agreement. If the high people’s court disagrees with the ruling the intermediate people’s court was going to make, the intermediate people’s court must follow the high people’s court’s decision, and it must issue a ruling that is inline with the high people’s court’s order. However, if the high people’s court agrees with the intermediate people’s court decision, the high people’s court must report its decision to the SPC for it to make the final judgement. After the Supreme Court considers whether the arbitration clause or agreement valid, the intermediate people’s court can issue an official ruling on the arbitration clause or agreement that is inline with the SPC’s decision.
When the SPC established this reporting system it effectively removed the local courts power to invalidate an arbitration agreement. This system also helps eliminate the influence that “local protectionism” has in enforcing arbitration agreements.
Moreover, Chinese law has established some special mechanisms to help determine the validity of an arbitration agreement. The Chinese laws and regulations, which are legal basis of this mechanism to determine validity, have been refined since the Interpretation was promulgated and implemented. These improved rules establish stricter requirements for parties to create of legal and valid arbitration clauses or agreements.
For these reasons, it is recommended that when parties, particularly foreign entrepreneurs or entities that are not familiar with Chinese law, would like to create a legal and valid arbitration agreement under Chinese law they should use standard clauses that arbitration institutions have created, and then customize them for Chinese law. It is also suggested that foreign parties consult with a PRC arbitration lawyer before amending the standard clauses, this consultation will help insure that the arbitration clause or agreement is not invalidated or the foreign parties do not lose their standing to demand arbitration.