Under Chinese law, arbitrations between mainland parties and foreign-related arbitrations are governed by different legal provisions. As a result, when concerning the validity of arbitration agreements, different rules apply to the mainland ones and foreign-related ones.
I. The Validity of Arbitration Agreements between Mainland Parties
1. The General Principle
A valid arbitration agreement shall be in written format (including a contract, letter, or electronic text) and include the following elements (article 16 of the Arbitration Law of PRC, hereinafter Arbitration Law):
- the expression of an application for arbitration;
- the designated arbitration commission (i.e. arbitration institution).
2. Validity of the Arbitration Agreement that has No Designated Arbitration Commission
Under Chinese law, in principle, ad hoc arbitration is not allowed between mainland parties, thus parties have to designate an arbitration institution in the arbitration agreement. Without the designation, it very likely that the arbitration agreement will be rendered as invalid, however, there are some exceptions:
- Where the name of the arbitration commission provided in the arbitration agreement is inaccurate but is nevertheless identifiable. (Article 3 of the Interpretation of the Supreme People's Court on Certain Issues relating to Application of the Arbitration Law of China, hereinafter Interpretation of the Arbitration Law)
- Where an arbitration agreement only provides the applicable arbitration rules, it shall be deemed that no arbitration commission is designated, unless the parties have concluded a supplementary agreement, or an arbitration commission can be determined pursuant to the arbitration rules provided. (Article 4 of the Interpretation of the Arbitration Law)
- Where an arbitration agreement chooses two or more arbitration commissions, the parties may negotiate to pick up one of them; whereas the parties are unable to agree on the choice, the arbitration agreement shall be deemed invalid. (Article 5 of the Interpretation of the Arbitration Law)
- Where an arbitration is agreed to be administered by an arbitration commission at a certain locality and there is only one arbitration commission exists at that locality, that arbitration commission shall be deemed to be chosen by the parties. Where there are two or more arbitration commissions at that locality, the parties may negotiate to select one of them, whereas fail to do so will render the arbitration agreement invalid. (Article 6 of the Interpretation of the Arbitration Law)
3. Validity of the Optional Arbitration Clause:
Where the parties agree that a dispute may be submitted to arbitration or litigation, the arbitration agreement shall be invalid, unless one party fails to object before the first hearing after the other party has submitted the dispute to arbitration. (Article 7 of the Interpretation of the Arbitration Law)
4. Institutional Arbitration as Principle with Restriction on Ad Hoc Arbitration
In principle, Chinese law does not recognize ad hoc arbitration but only institutional arbitration in mainland China.
However, Article 9 of the Opinions of the Supreme People's Court on Providing Judicial Safeguard for the Development of Free Trade Zones (carried out on December 30, 2016), under limited conditions, permits ad hoc arbitration between enterprises registered in Free Trade Zones. If enterprises registered in Free Trade Zones agree with each other to arbitrate the relevant disputes by designated personnel at a designated location in Mainland China (not necessarily in Free Trade Zones) according to designated arbitration rules, such arbitration agreement can be held valid by the People’s Court.
5. The Principle that Disputes without Foreign-related Factors cannot be Submitted to Foreign-seated Arbitration and the Exception
Under Chinese law, parties can only submit disputes with foreign-related factors for foreign-seated arbitration. (Article 128 of Contract Law, Article 271 of Civil Procedure Law, etc.) In principle, disputes without foreign-related factors cannot be submitted to foreign-seated arbitration. (See Supreme Court (2012) Civil Tribunal 4 No.2: the Judicial Reply for the Validity of the Arbitration Agreement between Jiangsu Space Wanyuan Wind Power Equipment Manufacturing Co, LTD vs LM Wind Power (Tianjin) A/S.)
However, article 9 of the Opinions of the Supreme People's Court on Providing Judicial Safeguard for the Development of Free Trade Zones provides for an exception. Wholly foreign-owned enterprises registered in Free Trades Zones can agree to submit commercial disputes for foreign-seated arbitration.
II. The validity of the Arbitration Agreements in Foreign-related Cases
Under Chinese law, for purely domestic arbitrations, Chinese law shall be always applying, both to the substantive contract and to the arbitration agreement. However, for foreign-related arbitration, as per Article 18 of the Law of the People's Republic of China on Choice of Law for Foreign-related Civil Relationships, the parties may choose the laws applicable to the arbitration agreements.
Article 1 of the Interpretation of the Supreme People's Court on Several Issues Relating to Application of the Law of China on Application of Laws to Foreign-related Civil Relations (I) defines foreign-related factors and state that under any of the following circumstances, the People's Court may determine a civil relation as a foreign-related civil relation:
- Where a party concerned or both parties concerned is/are (a) foreign citizen(s), (a) foreign legal person(s) or any other organization, or (a) stateless person(s);
- Where the habitual residence of a party concerned or both parties concerned is located outside the territory of China;
- Where the subject matter is located outside the territory of China;
- Where the legal facts that trigger, change or terminate the civil relation take place outside the territory of China; or
- Any other circumstances that can be determined as foreign-related civil relations.
For cases involving element of Hong Kong, Macau, and Taiwan, in accordance with article 19 of the same legislation, these cases shall be treated as the foreign-related civil relation.
Therefore, whenever one of the above elements exists, the parties can freely to agree the governing law applies to their arbitration agreement, absent of which, “the laws in which the arbitration institution is located or the seat of arbitration shall apply” (Article 18 of the Law of the People's Republic of China on Choice of Law for Foreign-related Civil Relationships).
To this extent, Article 14 of the Provisions on Certain Issues Related to the Conduct of Judicial Review of Arbitration Cases further clarifies that where, absent of the parties’ choice of the governing law, the law of the place of the arbitration institution or the law of the seat of arbitration will bring up different results in respect of the validity of the arbitration agreement, the People’s Court shall apply the law that renders the arbitration agreement valid and confirm the validity of the arbitration agreement.
Nevertheless, it should also be noted that Article 14 of the Interpretations of the Supreme People's Court on Several Issues Concerning Application of the Law of the People's Republic of China on Choice of Law for Foreign-related Civil Relationships (I) stipulates that “where the parties concerned do not choose any law applicable to their foreign-related arbitration agreement, nor do agree on an arbitration institute or the seat of arbitration, or their agreement thereon is unclear, the People's Court may determine the validity of the arbitration agreement by applying the laws of the People' s Republic of China”.
As a result, if there is no clear agreement among the parties re the seat or the institution of the arbitration, then a PRC court will apply the foregoing mentioned article and rule that Chinese law relating to the validity of domestic arbitration clauses shall apply (i.e. all the analysis under Part I of this article shall apply).