This article was first published in the China Business Law Journal, October 2016, Volume 7 / Issue 9.

The Deputy Head of the Supreme People’s Court (SPC) Fourth Civil Division, Liu Jingdong, recently revealed that the SPC is considering applying the reporting system for the enforcement of international arbitration awards to domestic arbitration awards. If implemented, this move will unify the standards for judicial review of domestic awards and help reduce incorrect lower court decisions on enforcement of arbitral awards.

This development is in line with China’s recent trends and will enhance its reputation as an arbitration-friendly jurisdiction (to avoid any doubt, a reference to China in this article means Mainland China). However, despite improvements made in the past decade, certain aspects of the legal framework for arbitration in China still lag behind international standards.

Positive developments

Increased willingness to give effect to arbitration clauses. The Arbitration Law and Chinese court practices have long been criticised for imposing unnecessarily rigid requirements on the validity of an arbitration agreement (or arbitration clause). For example, the arbitration agreement has to specify an arbitration institution – as a result, ad hoc arbitration is not recognized in China. But in recent years, the SPC is moving closer to international practices by broadening the interpretation of what constitutes a valid arbitration agreement in order to give effect to an arbitration agreement.

In a 2014 decision, the Ningbo Intermediate People’s Court upheld an arbitration clause which provides that “the arbitration shall take place at CIETAC [China International Economic and Trade Arbitration Commission] and be settled according to the UNCITRAL arbitration rules”. The Ningbo court initially held that the arbitration clause is invalid as it failed to specify the arbitration institution. The SPC was, however, of a different view. Although the phrase “take place at” is not clear as to the parties’ intention, in order to give effect to the arbitration clause, the SPC interpreted the clause to mean that the parties have specified CIETAC as the arbitration institution.

Broadening the interpretation of “foreign element”. In China, only a foreign-related dispute can be referred to foreign arbitration. The SPC has decided on several occasions that a wholly foreign owned enterprise (WFOE) is a domestic entity. Therefore, if both parties to a dispute are WFOEs, the dispute is not considered to have a foreign element. A breakthrough development was made possible by a decision of the Shanghai No.1 Intermediate People’s Court in November, 2015.

In this case, the court held the dispute as foreign-related. One of the factors taken into account by the court is that both parties to the dispute are WFOEs with registered offices in the Shanghai Free Trade Zone. By stating that the source of capital, ultimate beneficiary interests and decision-making powers of the two parties were all connected to foreign investors, the court distinguished the two parties from purely domestic companies and considered them to be foreign-related.

Adopting a restrictive interpretation on the scope and applicability of public policy. Recent court decisions show that Chinese courts tend to be reluctant to apply the public policy exception when enforcing foreign awards. At the end of 2014, the Fuzhou Intermediate People’s Court enforced two Hong Kong International Arbitration Centre (HKIAC) awards relating to a variable interest entity (VIE) structure. It held that enforcement of awards that merely order monetary compensations but not specific performance of the disputed agreements is consistent with basic legal principles and public interests.

It further held that violating the regulations promulgated by the State Council and Ministry of Commerce does not necessarily constitute violation of China’s social public interest. In another case in 2014, Beijing Chaolaixinsheng Sports and Leisure v Beijing Suowangzhixin Investment Consulting, which involved an arbitration clause that submitted a purely domestic dispute to a foreign arbitration institution, the Beijing No.2 Intermediate People’s Court was inclined to refuse enforcing the award on grounds including violation of public policy. The SPC, however, stated that refusing enforcement on the public policy ground under article V(2)(b) of the New York Convention was inappropriate and should be corrected, but without further elaboration as to the reason for not applying public policy.

Improving market access to foreign arbitration institutions. One unsettled issue concerning Chinese arbitration is whether parties to an arbitration agreement can choose a foreign arbitration institution with the seat of arbitration in China. It was argued that a foreign arbitration institution is not registered with the Bureau of Justice in China, and thus is not a qualified “arbitration commission” as stated under the Arbitration Law.

But in 2014, the SPC published two decisions upholding arbitration agreements that subjected relevant disputes to International Chamber of Commerce (ICC) arbitration to be administered in Shanghai and Beijing, respectively. Following publication of these two decisions, the HKIAC, ICC and Singapore International Arbitration Centre (SIAC) all opened representative offices in Shanghai Free Trade Zone in November 2015, February 2016, and March 2016, respectively.

Key areas for improvement

Nationality of arbitral awards. While an arbitration agreement choosing a foreign arbitration institution to administer the arbitration in China is considered valid, the SPC did not address the issue of whether the resulting award is enforceable or not. According to the Civil Procedure Law, the nationality of an arbitral award is determined by the location of the head office of the arbitration institution. An award made by a foreign institution is classified as a foreign award and therefore, should be enforced pursuant to the New York Convention.

However, according to the reciprocity reservation made by China when acceding to the New York Convention, Chinese courts will recognize and enforce only those arbitral awards that are made in the territory of another contracting state. In other words, the New York Convention may not be applicable when seeking to enforce a foreign award rendered in China. Therefore, there remains uncertainty as to the nationality of an award rendered by a foreign institution in China and how such award will be enforced in China.

Granting interim measures in aid of foreign arbitration. A Chinese court has the power to grant interim measures to support arbitration conducted in China. However, PRC law does not confer jurisdiction on Chinese courts to grant interim measures in aid of a foreign arbitration, i.e. arbitration seated in a foreign jurisdiction. Chinese courts also do not recognize and enforce interim measures issued by a foreign court. In order to promote China’s reputation as an arbitration friendly jurisdiction, domestic legislation should be reformed by extending the court’s power and jurisdiction in granting interim measures to assist a foreign arbitration proceeding.