The Supreme People’s Court (“SPC”) recently published Circular Fa Fa [2016] No. 34 with its Opinions on Providing Judicial Support for Developing Pilot Free Trade Zones (“PTFZs”) (“the Opinions”). 

The Opinions mention several areas that should be improved at court level to support the development of PFTZs, including labor protection, consumer rights protection, intellectual property rights protection, financial leasing and ecommerce.

One of the most relevant topics refers to liberalizing, to some extent, disputes to be submitted to foreign arbitration institutions and ad-hoc arbitration in the PFTZs. 

According to the Opinions: 

1. Two wholly foreign-owned enterprises (“WFOEs”) registered in the PFTZs can agree to submit their disputes to foreign-seated arbitration, and the sole argument that these disputes lack foreign-related factors cannot invalidate their arbitration agreement. 

Our Legal Flash of March 2016[1] reported that Shanghai’s Intermediate People’s Court recognized and enforced a foreign arbitration award in an arbitration related to a contract dispute between two WFOEs registered in the Shanghai PFTZ, which was conducted by the Singapore International Arbitration Centre as the foreign arbitration institution. Recognition was based on (i) the contract being carried out in the Shanghai PFTZ and (ii) having two WFOEs as contracting parties as circumstances relevant enough to understand that there was a foreign-related factor. However, unlike this legal interpretation, the Opinions directly confirm that two WFOEs registered in PFTZs can agree to submit their disputes to a foreign-seated arbitration without further limitation. 

2. An arbitration agreement between two PFTZ-registered enterprises, made in an adhoc arbitration in a specific location in the People’s Republic of China (“China,” excluding Taiwan and the special administrative regions of Hong Kong and Macau), under specific arbitration rules by specific arbitrators, can be recognized as valid. 

SPC officials admitted in a statement to the press that ad-hoc arbitrations are common for resolving commercial disputes and, although the Chinese Arbitration Law does not stipulate this type of arbitration, Chinese courts can recognize and enforce foreign adhoc arbitrations complying with the laws under the New York Convention. Under the Opinions, the arbitration agreement will be recognized if it was the parties’ intention to bring their disputes to an ad-hoc arbitration. However, the court can also decide that an arbitration agreement in an ad-hoc arbitration is invalid, in which case the court will report to the higher level court for examination and, if that court has the same opinion, the case will be reported level by level to the SPC for its final decision. 

The Opinions only give the SPC’s guidance on the different topics, so further implementing details are needed to confirm the extent of the liberalization and whether this policy may be extended outside the PFTZs in the future. 

Date of issue: December 30, 2016. Effective date: December 30, 2016