The PRC Supreme People’s Court (SPC) has recently released two new judicial interpretations on arbitration (the New Rules).1 They are the most important SPC judicial interpretations on arbitration issued since 2006, addressing gaps in the now more than 20-year old PRC Arbitration Law.2
The New Rules focus on issues frequently encountered by the PRC courts in the judicial review of arbitration cases, and fill a number of significant gaps in the outdated Arbitration Law and related laws.
The key changes include:
- Applying the “reporting procedure” – which previously only applied to foreign and foreign-related arbitrations – to purely domestic arbitrations;
- Opening the door to party participation in the “reporting procedure”;
- Clarifying the choice of an applicable law to uphold the validity of an arbitration agreement; and
- Clarifying various procedural issues – such as which local court has jurisdiction, what materials the parties should submit in a judicial review, and whether the court’s decisions are appealable.
Extending the “reporting procedure” to domestic arbitrations
A well-known feature of the PRC’s arbitration regime is its “reporting procedure”, which has applied since 1995 to the enforcement of foreign arbitration awards (ie, awards made by tribunals seated outside the PRC) and foreign-related arbitration awards (ie, awards made by tribunals seated in the PRC, but involving a foreign element),3 as well as to applications to challenge the validity of arbitration agreements and to set aside foreign-related awards made in the PRC.
In general, under the “reporting procedure”, lower courts cannot refuse to recognise and enforce an award without first referring its decision to the higher people’s court (ie, the provincial level court), followed by the SPC, for approval. Consequently, the SPC has been the only court that is empowered to refuse to recognise and enforce a foreign or foreign-related arbitration award. The “reporting procedure” is intended to emphasise the PRC’s pro-enforcement bias, and to safeguard awards from being wrongly refused enforcement by less experienced lower courts.
The New Rules now extend this “reporting procedure” to all domestic arbitrations – including any decision to invalidate an arbitration agreement, to set aside an award or to refuse to enforce an arbitral award. All such decisions must first be approved by a higher people’s court, before it is effective.
However, unlike the “reporting procedure” which applies to foreign or foreign-related awards, in the case of domestic arbitrations, there is an important limitation: The higher people’s court does not need to report to the SPC for approval, except in the following two scenarios – if the case involves parties from different provinces; or, if the ground for refusing enforcement or setting aside of the award is “infringement of public interest”.
As a result, while the new regime provides greater safeguards than before, domestic awards still enjoy less protection than foreign-related and foreign awards, since it is not essential that the SPC’s approval is obtained in all cases. In practice, this limitation is likely to be of greater concern to foreign parties who have used a PRC entity to enter into the contract containing the arbitration agreement, and that entity is incorporated in the same province as the counterparty to the contract.
Greater transparency in the “reporting procedure” – up to a point
A common criticism of the “reporting procedure” is that it is an internal process within the people’s court – the parties are not always kept informed of the progress, and they do not have the opportunity to make submissions to the higher courts. The New Rules provide that if the higher court finds that the relevant facts are not clear, it “can question” the parties or require the lower court to conduct further fact finding. The parties may therefore have an opportunity to participate in the reporting procedure by way of answering the court’s enquiries on the facts.
It remains to be seen whether this change in the procedure is significant. In particular, the New Rules do not grant parties the unfettered right to participate in the “reporting procedure”, and to make full submissions on the facts and the law – even though they clearly have an interest in the final outcome.
Applicable law of an arbitration agreement
The New Rules clarify that if the parties intend to choose a particular law to govern the validity of a foreign-related arbitration agreement, they should do so expressly. An agreement on the law governing the underlying contract will not necessarily mean that the same law will be applied to decide the validity of the arbitration agreement itself.
If the parties do not choose the applicable law of a foreign-related arbitration agreement, the court will apply either the law at the place of the arbitration institution, or the law at the seat of the arbitration. If the choice of law leads to different results, the court will apply the law which results in a valid arbitration agreement.
The drawing of a distinction between the law governing the arbitration agreement, and the law governing the underlying contract, is consistent with the approach taken in a number of other jurisdictions. In addition, the pro-arbitration stance of the New Rules is clear, given that the court will apply the law which upholds the validity of the arbitration agreement.
In addition to the three points set out above, the New Rules also contain more than 20 articles addressing a variety of other matters. Many of these articles are less significant, but they include the following:
- If a party applies to recognise a foreign arbitration award in the PRC, and there is a related litigation or arbitration in the PRC, the intermediate people’s court in the city where the related litigation or arbitration is taking place shall, in principle, have jurisdiction, in situations where neither the residence nor the assets of the award debtor are in mainland China;
- The New Rules set out the required documents and information the parties should submit when applying to recognise and enforce a foreign award, providing helpful clarity in this area.
- The New Rules clarify that court decisions in cases involving judicial review of arbitration are generally not appealable, with a few exceptions4. This underscores the pro-arbitration bias under the New Rules.
Other recent efforts to improve the arbitration regime
The New Rules are part of the SPC’s recent efforts to improve the arbitration regime. On 22 May 2017, the SPC released a Notice on Some Issues Concerning the Centralised Handing of Judicial Review of Arbitration. As a result, the courts at all levels are now required to designate specialised divisions5 to handle the judicial review of arbitration cases. This measure is likely to build up a core group of judges who are more familiar with arbitration matters, thereby ensuring greater consistency in the judgments rendered.
In addition, on the very same day that the SPC released the New Rules, the SPC in principle also passed another judicial interpretation concerning the enforcement of arbitral awards. The text of this new judicial interpretation has not yet been made public.
Significance to international corporations
Although there may be debate as to whether the SPC could have gone further, it is clear that the New Rules are a step in the correct direction, and indicate an arbitration-friendly approach by the PRC courts.
The amendments are of particular significance to foreign companies who contract through their PRC subsidiaries in situations where their contracts have no foreign element and they have no option but to agree to PRC arbitration. Here, the partial extension of the “reporting procedure” to cover domestic arbitrations is helpful, because of the safeguards it introduces in three situations: where (i) the counterparty tries to circumvent the arbitration agreement, or (ii) to set aside an award in their favour or (iii) to resist enforcement of an award against assets located in the PRC.