Ad hoc arbitration agreements offer contracting parties considerable latitude in deciding the appropriate dispute resolution procedure themselves and avoid the difficulties of the one-size fits all model sometimes associated with institutional arbitration. They also dispense with the sometimes considerable administrative and other costs levied by arbitral institutions.

One of the distinguishing features of arbitrations with their seat in the People’s Republic of China (PRC) is that they must be conducted under the auspices of a PRC-recognised arbitral institution. There are in excess of 200 such institutions in the PRC, with perhaps the most well known outside the PRC being the China International and Trade Arbitration Commission, better known as CIETAC.

This means that where an arbitration is seated in the PRC, it cannot be on an ad hoc basis. The obvious downside of this is that parties cannot benefit from the two key advantages traditionally associated with ad hoc arbitration, namely flexibility in terms of procedure and overall cost-effectiveness.

A recent decision of the Ningbo Intermediate Court is therefore to be welcomed since it does appear to confirm that hybrid arbitration clauses are permitted under PRC law, allowing for some element of flexibility in PRC arbitrations.

The case concerned a jurisdictional challenge by a Chinese petrochemical company, Zhejiang Yisheng, in a dispute with a Luxembourg company, Invista, over the licensing of certain proprietary technology.

Invista had previously commenced arbitration proceedings against Zhejiang Yisheng pursuant to the terms of a licensing agreement which it is understood provided for arbitration under the auspices of CIETAC, but in accordance with the UNCITRAL arbitration rules. Clauses of this type are often referred to as hybrid arbitration clauses.

Under both the 2005 and 2012 CIETAC arbitration rules, where the parties have agreed to refer their disputes to CIETAC arbitration, but have also agreed on the application of other arbitration rules, the parties’ agreement prevails unless their agreement is incapable of being performed or is in conflict with a mandatory provision of PRC law. The 2012 rules also clarify that where the parties have agreed on the application of other arbitration rules, CIETAC will perform the relevant administrative duties.

Notwithstanding these provisions, Zhejiang Yisheng are understood to have argued, in effect, that the arbitration agreement amounted to an ad hoc arbitration agreement and was thus invalid. Initially, the Ningbo Court is understood to have upheld the challenge and concluded that the arbitration agreement was invalid. However, the decision was referred up to the Zhejiang Court and thereafter to the PRC Supreme Court under the PRC report and review system.

Following its review, the Supreme Court required the Ningbo Court to rule in Invista’s favour, albeit without making any wider decision on the validity of hybrid arbitration clauses generally.

Although there are no official figures, anecdotal evidence indicates that CIETAC has administered (and continues to administer) arbitrations in accordance with hybrid arbitration clauses.

In light of the decision of the PRC Supreme Court and the practice of CIETAC, it does seem that parties arbitrating in the PRC do have the option of choosing a hybrid arbitration clause so as to gain some flexibility – to choose under which rules to arbitrate their disputes – with CIETAC performing administrative duties.

However, whilst this allows for an element of flexibility, it does not assist in relation to the issue of the costs associated with institutional arbitration. In order to take advantage of the potential benefits of ad hoc arbitration in terms of costs, the best option remains to subject disputes to arbitration in a jurisdiction where ad hoc arbitration is permissible.

When contracting with PRC counterparties, a good compromise can be to subject disputes to arbitration in Hong Kong, which permits ad hoc arbitration and benefits from the advantages of the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the mainland and the Hong Kong Special Administrative Region, thus facilitating the enforcement of Hong Kong arbitration awards in the PRC.