On 30 December 2016, the Supreme People's Court of the People’s Republic of China ("SPC") issued the ("the Opinion") which entered into effect on the same day. The Opinion has attracted wide public attentions as it introduces some new elements to arbitration in China. However, it is geographically restricted to the Free Trade Zones ("FTZs"). Below we summarise the main contents of the Opinion and how it will affect the enterprises and their business in the FTZs.
I. Foreign Arbitration Permitted between WFOEs in FTZ
One of the Opinion’s highlights is the eventual breakthrough to the principle of "no foreign-related factor, no arbitration abroad".
• Previous law
Before the issuance of the Opinion, the principle of "no foreign-related factor, no arbitration abroad" had been anchored. According to Article 128 of the PRC Contract Law and Article 271 of the PRC Civil Procedure Law, foreign-related disputes may be submitted to a foreign arbitration institution for arbitration; domestic disputed can only be arbitrated by PRC arbitration institutions. In the judicial practice, arbitration clauses without foreign-related factor in which a foreign-seated arbitration was agreed by the parties have almost exclusively been regarded as invalid by the court.
As to the definition of foreign-related matters, Article 1 of the Interpretation of the SPC on Several Issues Concerning Application of the Law of the Chinese Choice of Law for Foreign-Related Civil Relationships (I) provides that a civil relationship which falls in one of the following situations may be considered as foreign-related civil relationship: one or both of the parties are foreign citizens, legal persons or other organizations or stateless persons; the habitual residence of one or both of the parties is outside Chinese territory; the subject matter is located outside Chinese territory; the legal facts causing the civil relationship’s coming into being, changing or dissolving takes place outside Chinese territory; other situations which may be regarded as foreign-related.
As a result, for wholly foreign owned enterprises ("WFOE") which are Chinese legal persons, disputes between them were considered as not foreign-related and could only be submitted to a Chinese arbitration institution for arbitration under the previous law.
• Innovation in the Opinion
According to the Opinion, if the WFOEs registered in the FTZs agree to submit commercial disputes between them to a foreign-seated arbitration institution for arbitration, the relevant clauses related to arbitration shall not be deemed as invalid only based on the ground that the dispute is not foreign-related. This means, the involvement of foreign-related factors is not a prerequisite for foreign-seated arbitration any more. As long as there is a dispute between WFOEs in the FTZs, it can be submitted for arbitration abroad. This is a breakthrough to the previous principle of "no foreign-related factor, no arbitration abroad".
However, it is worth noticing that this only applies where the parties of the dispute satisfy the following conditions: first of all, both of the parties must be registered in the FTZs. This means a dispute between a WFOE in an FTZ and another company registered in the remaining territory of the PRC is still not eligible for foreign arbitration; furthermore, both parties must be 100% owned by foreign shareholders, i.e. it does not apply to Chinese-foreign Joint Ventures, even if they are registered in the FTZ.
II. Ad hoc Arbitration Permitted
One of the main characters of ad hoc arbitration is that no regular fixed arbitration institution is involved. Ad hoc arbitration is preferred by some parties in international arbitration as they believe it offers higher efficiency, lower costs and better reflection of the parties’ intentions.
• Previous law
To date ad hoc arbitration has not been permitted in the PRC. According to the PRC Arbitration Law, an arbitration agreement is to be regarded as invalid if it lacks the provision of a definite arbitration institution.
• Innovation in the Opinion
Now the Opinion permits ad hoc arbitration by providing that if enterprises in the FTZs agree to settle relative disputes at certain place within China, according to certain arbitration rules and by certain persons ("Three Criteria"), the arbitration agreement may be deemed as valid. On the one hand, this is a significant breakthrough to the current arbitration system. On the other hand, the Opinion still holds a reserved attitude on the following:
Firstly, it only applies to enterprises in the FTZs.
Secondly, "Three Criteria" as abovementioned must be satisfied, inter alia the certain place must be somewhere in the mainland China.
Thirdly, with regard to the effectiveness of such an ad hoc arbitration agreement, the court "may" but not "shall" acknowledge its validity. Nevertheless it can be understood that in principle such an agreement is valid, for the Opinion also provides that if a court regards such an arbitration agreement invalid, it shall be subject to a strict procedure of review, i.e. it shall be reviewed by two superior instances of court and the SPC has the right to make the final decision on the validity.
III. Other Significant Aspects of the Opinion
In terms of litigation, the local courts in the FTZs may establish specialised courts or tribunals to try FTZ-related cases, in order to ensure the correctness of trial. Aiming at solving the difficulty of service in cases where the parties are registered in the FTZs and operate outside the FTZs, the Opinion provides certain rules for service of legal documents. Also, the Opinion defines the ascertainment of foreign law in litigation.
The Opinion contains certain provisions guiding judges in litigation e-commerce cases, and thus providing the framework for the increasingly popular cross-border e-commerce in the FTZs.
The Opinion provides some rules on how to correctly identify the nature of a contract between consumers and cross-border e-commerce enterprise.
- If in a contract it is agreed that the consumers shall bear the customs duties and risk of loss, damage and deterioration during mailing, it can be regarded that a contractual relationship on entrustment (in Chinese: 委托关系) rather than a purchase and sales contract is established between the consumer and the cross-border e-commerce enterprise.
- In contrast, where an e-commerce enterprise imports goods as a wholesaler and sells them in batches, if a consumer claims that a purchase and sales contract exists between him/her and the e-commerce enterprise, the court shall support the claim.
Arbitration clauses in e-commerce consumer contracts are expressly accepted by the Opinion. If an e-commerce enterprise includes in the contract provided by it to consumers an arbitration clause, special reminding should be made; if the consumers do not object, it shall be considered that they have reached a valid arbitration agreement. In line with a previous interpretation of the SPC issued in 2009, it is to be understood that the enterprise should remind the customers with a special indication by means of words, symbols or a font sufficient to draw the attention of the customers.
Currently, the Opinion only covers the FTZs. Existing FTZs are in Shanghai, Tianjin, Guangdong, and Fujian. FTZs in Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, and Shanxi are about to be opened. Given the usual practice of the Chinese government on similar regulatory issues, the innovations will be possibly extended from the FTZs to the entire territory of China in the future. For the time being, it is expected that the Opinion will have a significant impact on the internationalisation of the dispute resolution system as well as the sustainable development of international trade in the FTZs. It offers much more dispute resolution options for WFOEs established in the FTZs. They should consider the Opinion when drafting arbitration clauses for new contracts or amending their existing ones. E-commerce enterprises should check and update their existing contracts and standard clauses to ensure compliance with the Opinion.