On 30 December 2016, China's Supreme People's Court (SPC) issued a notice aimed at strengthening judicial support for the development of pilot free trade zones in China. The notice includes a number of pro-arbitration guidelines that, to some extent, could be deemed an attempt to liberalise and internationalise China's current arbitration regime within range of the pilot free trade zones. In particular, companies incorporated in the Shanghai Free Trade Zone can, in certain circumstances, now agree to arbitrate disputes among themselves outside mainland China. The Opinion may also allow such companies to apply the rules of non-Chinese arbitral institutions, or to hold ad hoc arbitrations (which are otherwise not permitted in mainland China). However, the position here is less clear.

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The SPC notice, entitled "Supreme People's Court Opinion on the Provision of Judicial Safeguards for the Construction of Pilot Free Trade Zones" (FTZ Opinion), sets out guidelines for courts handling cases involving pilot free trade zones, with an emphasis on reform and innovation. In Article 8 FTZ Opinion, the SPC calls for courts to "encourage the use of alternative mechanisms, such as arbitration and mediation, to resolve commercial disputes within the pilot free trade zones", to "support the innovation and development of the arbitration institutions" and to "provide judicial convenience for the variety of commercial disputes resolution within the pilot free trade zone".

Foreign seated arbitration between WFOEs registered in free trade zones

Paragraph 1, Article 9 of the FTZ Opinion states that, if two wholly foreign owned enterprises (WFOE) that are registered within a pilot free trade zone enter into an agreement to submit disputes to arbitration seated outside mainland China, the courts should not hold such arbitration agreement as invalid merely on the ground that the dispute concerned is not foreign-related.

The general rule in China is that only foreign-related disputes can be arbitrated with a seat outside mainland China. Arbitration clauses submitting "non-foreign related" disputes to arbitration outside mainland China will be held invalid. A dispute is deemed foreign-related if (a) at least one of the parties to the dispute is foreign or has its habitual residence outside of China; (b) the subject matter of the dispute is outside China; (c) the occurrence, modification or termination of the civil relationship between the parties takes place outside of China; or there are "any other circumstances that may be deemed foreign-related". Foreign invested enterprises in China, including WFOEs, are companies incorporated and registered in China and thus were not previously considered foreign parties. Unless, therefore, other foreign-related elements exist, disputes between two WFOEs would not be regarded as foreign-related, and could not be submitted to arbitration seated outside of China.

The above position now seems to have changed slightly, at least within the pilot free trade zones, by virtue of paragraph 1, Article 9 of the FTZ Opinion. The implication of paragraph 1, Article 9 seems to be that, if both parties are WFOEs incorporated in a pilot free trade zone, that would be sufficient to make a contract "foreign related" and thus eligible for foreign-seated arbitration. As explained below, this measures seems to be based closely on the rationale of the Shanghai No.1 Intermediate People's Court's in Siemens Int'l Trading (Shanghai) Co., Ltd. v. Shanghai Golden Landmark Co., Ltd. (Golden Landmark case).

The SPC further provides in paragraph 2 of Article 9 that, if a party opposes the recognition or enforcement of an arbitration award rendered in a foreign-seated arbitration merely on the ground that there is no foreign-related element, the courts shall not uphold the objection if (a) at least one of the parties to the arbitration dispute is a foreign invested company registered within a pilot free trade zone; (b) the parties entered into an arbitration agreement submitting disputes to arbitration seated outside mainland China; (c) the opposing party was the claimant who initiated the foreign-seated arbitration in the first place, or the opposing party was the respondent who participated in the foreign-seated arbitration without challenging the validity of the arbitration clause throughout the arbitration. Here, the opposing party's previous submission to or acquiescence with regard to the foreign seated arbitration seems to be a crucial element for the dismissal of an opposition to recognition/enforcement.

As noted, the provisions in paragraphs 1 and 2, Article 9 of the FTZ Opinion seem to be in line with the position taken by the Shanghai No.1 Intermediate People's court in November 2015 in the Golden Landmark case. In that case, the Shanghai court dismissed the respondent's opposition to the enforcement of a SIAC award. Specifically, the Shanghai court referred to the facts that (1) both parties to that dispute were WFOEs registered in the Shanghai Pilot Free Trade Zone and thus their capital, profits and management operations were closely related to their foreign investors; (2) the subject matter of the contract had to be imported from abroad to the Shanghai Pilot Free Trade Zone and go through customs clearance procedures, which was more akin to international sales of goods than domestic sales; and (3) the party opposing enforcement of the arbitral award was the claimant in the arbitration and had been taking the stance that the arbitration agreement was valid throughout the process of the arbitration. While the Shanghai court's decision was just a first-instance decision and did not have binding effect upon other courts (as there is no case law system in China), the FTZ Opinion by the SPC seems to have endorsed the relatively liberal position taken by the Shanghai court in handling arbitration-related cases involving the Shanghai pilot free trade zone.

However, the above-mentioned "liberalisation" by the SPC in relation to foreign-seated arbitrations between WFOEs is not without limits. First, these provisions apply only to WFOEs and FIEs registered within the pilot free trade zones. (At the time of writing, there is only one pilot free trade zone, the Shanghai Pilot Free Trade Zone, established in China, although in 2016 the PRC government approved the plan to establish pilot free trade zones in ten other regions). Second, unless both parties are WFOEs within a pilot free trade zone, evidence of the opposing party's waiver or acquiescence is required for the court to dismiss any opposition to recognition or enforcement on the ground of lack of foreign element.

Permission for ad hoc arbitration in mainland China?

Additionally, the SPC states in paragraph 3, Article 9 of the FTZ Opinion that an arbitration agreement "between two companies registered within the pilot free trade zones, which provides for arbitration in a specified location in mainland China pursuant to specified arbitration rules and by specified arbitrators" may be held valid. If a court is minded to rule such an arbitration agreement as invalid, it should report its intended decision to a higher court for further review. If the higher court holds the same view, it should report its intended decision to the SPC. In effect, only with the SPC's approval could a court rule such an arbitration agreement as invalid.

Although the wording is not very clear, paragraph 3, Article 9 FTZ Opinion could be read as allowing arbitration administered by non-Chinese arbitration institutions in China, if all parties to the arbitration are companies registered within a pilot free trade zone. In the past, the basic position has been that arbitrations seated in mainland China must be administered by domestic arbitration commissions. The first time the SPC tried to relax such limitation was in the Longlide case in March 2013, where it upheld an arbitration agreement that provided for ICC arbitration with a "place of jurisdiction" in Shanghai. In the last two years, a number of international arbitration institutions, including the ICC, HKIAC and SIAC, have opened offices in the Shanghai pilot free trade zone. While these offices do not yet appear to have the capability to accept cases or administer arbitrations in mainland China, the FTZ Opinion might have opened a way for these arbitration institutions to do just that, albeit with many restrictions.

The wording in paragraph 3, Article 9 has also been read by certain commentators as including an arbitration agreement for ad hoc arbitration. If that is correct, this provision indicates that the SPC has, for the first time, allowed the possibility of ad hoc arbitrations seated in mainland China. This would be an encouraging breakthrough. Prior to the FTZ Opinion, it has been clear that ad hoc arbitration is not permitted in mainland China: Article 16 PRC Arbitration Law requires that a valid arbitration clause must specify the designated arbitration commission to administer the arbitration.

Encouraging as paragraph 3, Article 9 might seem to be, its impact in practice remains uncertain. First, the provision applies only to arbitrations between two companies registered within a pilot free trade zone, thus its application in practice would be limited. Second, specific guidelines regarding the conduct of an ad hoc arbitration in China are still missing. Even if it did apply to ad hoc arbitrations seated in mainland China, the high level statement in paragraph 3, Article 9 does not address the more detailed issues such as appointing authorities (e.g. can non-Chinese arbitration institutions be appointing authorities?), applicable arbitration rules (e.g. can the parties adopt CIETAC rules in an ad hoc arbitration without administration by CIETAC?) and enforcement issues concerning ad hoc arbitrations in China.

Conclusion

While its practical impact remains to be seen, the FTZ Opinion nonetheless clearly signals that the SPC is gradually adopting a more relaxed and liberalised approach to arbitration, albeit within the limit of statutory constraints. It seems the SPC, like the PRC government itself, is taking advantage of the "exceptional" and "experimental" nature of the pilot free trade zones to try out some more liberalised approaches to (at least foreign-related) Chinese arbitration. Hopefully, as Chinese arbitration develops further and more in line with international practice, the liberalisation indicated in the FTZ Opinion will be extended beyond the pilot free trade zone in the near future. Needless to say, before any broader liberalisation can take place, this would require endorsement from not only the SPC but also the National People's Congress, by amending the relevant legislation.