For almost a decade, the validity of arbitration clauses that subject a Sino-foreign contract dispute to arbitration before a foreign arbitration institution, but with a seat in China,[1] has been controversial. Many practitioners and commentators believe, for a variety of reasons, that such clauses are invalid under Chinese law. A recently published decision of the Supreme People’s Court of China (“SPC”), however, casts doubt on this view.

The Longlide case and the courts’ discussions

As revealed by the latest issue of the Guide on the Trial of Foreign-related Commercial and Maritime Disputes (an official publication of the SPC), on 25 March 2013 the SPC concluded, in a reply to a reporting local court,[2] that an arbitration clause providing for ICC arbitration and stipulating that the “place of jurisdiction shall be Shanghai, China”, was valid.

The clause in question came from a three-party sales contract entered into between Chinese Anhui Longlide Wrapping and Printing Co., Ltd. (“Longlide”), Italian BP Agnati S.R.L and a Chinese third party in October 2010. It provided that “any dispute arising from or in connection with this contract shall be submitted to arbitration by the International Chamber of Commerce (‘ICC’) Court of Arbitration [sic] according to its arbitration rules, by one or more arbitrators. The place of jurisdiction shall be Shanghai, China. The arbitration shall be conducted in English.”

Longlide subsequently applied to the Hefei Municipality Intermediate People’s Court in Anhui Province (“Hefei Intermediate Court”) to annul the clause. It argued that: (i) ICC Court of International Arbitration is not an institution that is established under the PRC Arbitration Law; (ii) ICC’s administration of arbitration in China would infringe China’s public interest and may also impair China’s judicial sovereignty; and (iii) even if an award were to be made by a tribunal under the ICC Rules in China according to such clause, the award should be deemed a “domestic award” under the PRC Arbitration Law and therefore not enforceable under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Hefei Intermediate Court, in its opinion, admitted that the current PRC Arbitration Law does not address the issue of whether a foreign arbitration institution such as the ICC Court of International Arbitration can “engage in arbitration activities within the territory of China”. It then opined that arbitration is a professional service that must be permitted by the relevant Chinese government bodies. It concluded that, since the Chinese government has not opened the arbitration market to foreign arbitration institutions, such institutions cannot administer cases in China.

When that court opinion was submitted to the Anhui High People’s Court (“Anhui High Court”) for approval pursuant to the reporting system[3], the Anhui High Court divided. The majority believed the clause to be valid, on grounds that it contained all of the elements required by Article 16 of PRC Arbitration Law for a valid arbitration clause, namely (i) an express intention to arbitrate, (ii) the matters to be submitted to arbitration and (iii) a designated arbitration institution. The minority opinion denied the validity of the arbitration clause, arguing among other things that “foreign arbitration institutions cannot conduct arbitration in China” as the government has not opened the market to the outside world. This latter line of reasoning echoed that of the lower court.

The SPC, in its reply to the Anhui High Court, adopted the majority view of the Anhui High Court. It stated first that the expression of “place of jurisdiction shall be Shanghai, China” should be interpreted as meaning that the seat of the arbitration would be Shanghai, China. It then found that since the parties did not specify the governing law of the arbitration clause, under Article 16 of the 2006 SPC Interpretation of the PRC Arbitration Law, the law of the seat (i.e. PRC law) should apply.   Next, in keeping with the Anhui High Court’s majority view, the SPC considered Article 16 of the PRC Arbitration Law to check whether all required elements of a valid arbitration clause were contained in the clause.   After finding that all such elements were present in the disputed clause, the SPC concluded that such clause “should be deemed valid”.

Why is the Longlide case significant?

The SPC’s decision is the next step in a decade-long debate among Chinese practitioners and scholars about the validity of clauses that refer disputes to arbitration in mainland China under the rules of a non-Chinese arbitral institution.

In July 2004, in the landmark Züblin case, the SPC annulled an arbitration clause that said “Arbitration: ICC Rules, Shanghai shall apply”.[4] Many since then have cited this SPC decision as proof that the ICC Court of International Arbitration, as well as other foreign arbitration institutions, are not allowed to administer arbitrations in China. However, a more careful reading of this 2004 decision shows that the SPC did not directly address the issue of whether a foreign arbitration institution could administer cases in China. Rather, the annulment was the result of lack of specific designation of an arbitration institution in the arbitration clause, contrary to the requirements of Article 16 PRC Arbitration Law. In response, the ICC published a China-specific model arbitration clause to avoid annulment by the SPC on the same ground in future.[5]

In 2008, when the Ningbo Intermediate People’s Court in the Duferco case recognized and enforced an ICC award made in Beijing, but did so pursuant to the New York Convention[6], the debate over the validity of the “foreign arbitration institution plus China seat” clause became heated again.  However, since enforcement was supported by the local court, the ruling did not reach the SPC for approval[7] and the position of the SPC on this issue remained unknown to the public.

It is against the above background that the Longlide case was decided.

Should we draft arbitration clauses differently after Longlide?

Does Longlide mean that parties to a Sino-foreign agreement now can safely provide for arbitration administered by a non-Chinese arbitration institution with its seat in China? For the time being, our answer would be “probably not”.

Unlike SPC Interpretations, which are a source of law, SPC decisions in individual cases are of persuasive value only. While lower courts are very likely to follow the SPC, the SPC itself may take a different position in subsequent cases. Also, there remains considerable uncertainty as to how awards rendered under such clauses would be treated at the enforcement stage in China, given prior splits in lower court treatment of this question. It should also be noted that the reasoning of the Longlide case is specific to “foreign-related” arbitration clauses, rather than purely “domestic” ones.  

Conclusion

While the Longlide case has helped clarify a long-standing question as to the validity of an arbitration clause that names a foreign institution but calls for a China seat, it does not ultimately answer the – perhaps more significant – question as to whether China would recognize and enforce an award so made. Consequently, to secure the enforceability of the award, we recommend that such clauses continue to be avoided.