“Any dispute arising out of or in connection with the contract or over its validity shall be submitted for arbitration to the International Chamber of Commerce. The place of arbitration shall be Shanghai, China. All arbitration proceedings shall be conducted in English language”.

The above sentences have been widely used in arbitration agreements under China-related contracts although the validity of such agreement is uncertain. Many foreign enterprises in China insist on including the said arbitration agreement in their contract with the Chinese partners for two major reasons: a) They want to engage an international arbitration institution which, as they think, will hold a more objective and unbiased position; and 2) To be geographically convenient, they wish to carry out the arbitration procedures in China.

  1. Determining the validity of an arbitration award made by a foreign arbitration institution within the territory of China has caused heated debate for quite a long time. The PRC law does not explicitly address this issue. In practice, courts in China are holding two different opinions:
    1. One opinion holds that such arbitration awards shall be invalid and denied enforcement under the PRC law. According to the PRC Arbitration Law, an arbitration institution can only conduct arbitration proceedings in China after filing for registration with the competent Chinese authorities. Therefore, a foreign arbitration institution, including the International Chamber of Commerce (“ICC”) cannot conduct arbitration within the territory of China.
    2. The other opinion holds that such arbitration award shall be valid and enforced. On 22 April 2009, Ningbo Intermediate People’s Court in Zhejiang Province enforced an arbitration award given by ICC with the arbitration seated in Beijing. However, since the court denied the respondent’s objection to the award merely from a procedural perspective in the aforesaid case, the Ningbo case could not provide general guidance for other cases and did not help open the door for foreign arbitration institutions to expand their presence in China.
  2. The Supreme People’s Court (“SPC”) remained unclear on the validity of the aforesaid kind of arbitration awards until the SPC Reply on Declaration of Validity of Arbitration Clause in Anhui Longlide Packaging Co., Ltd. v. BP Agnati S.R.L. was recently published on 25 March 2013. Applicant Longlide Packaging is a Chinese company. In 2010, Longlide Packaging entered into a Sales Contract with respondent BP Agnati S.R.L., a company domiciled in Italy. The arbitration clause states that any dispute arising from or in connection with this contract shall be submitted to arbitration by ICC. The place of jurisdiction shall be Shanghai, China.
    The SPC explains that, under the PRC Arbitration Law, the arbitration agreement made by and between the two parties shall contain three basic elements: a) an expression of intention to apply for arbitration; b) subject matters for arbitration; c) a designated arbitration commission. Therefore, the SPC rules that the arbitration agreement is valid.
  3. Unfortunately, aside from declaring the validity of the arbitration agreement, the SPC Reply failed to address how to classify such an award for enforcement in China, once it is issued under the said arbitration agreement.
    To date, the legal basis for enforcing an arbitration award in the PRC remains unclear. Since China acceded to the New York Convention in 1987, an arbitration award issued by a foreign arbitration institution has been given recognition and enforcement in China. However, foreign arbitration awards are only those made in another contracting state of the New York Convention. On the contrary, an arbitration award issued by a foreign arbitration institution in China is considered as a “non-domestic award”. Due to a reservation declared by China, only foreign awards but no other “non-domestic” awards are acknowledged and enforced in China under the New York Convention. The SPC confirmed this understanding in its Notice on the Implementation of China’s Accession to the Convention on the Recognition and Enforcement of Foreign Arbitration awards issued on 10 April 1987 (“Notice 1987”).
    Though the SPC declared in principle the validity of an arbitration award made by a foreign arbitration institution seated in China, the question on how to enforce the award is not addressed. Either China must revoke its reservation to the New York Convention, the SPC must lift its own restrictions set out in the Notice 1987, such arbitration award shall be considered as domestic award and enforceable under the PRC Arbitration Law, or new solutions need to be introduced into the current legal regime. Until the above questions are answered, the worst scenario for a foreign party in ICC arbitration proceedings in China would be to risk enforcement abroad if it loses, but not to gain enforcement in China if it wins.

At the moment, considering the said uncertainty of enforcement and to play on a safe side, foreign enterprises may prefer not to adopt an arbitration agreement allowing a foreign arbitration body to carry out arbitration in China. But subject to further clarification by SPC or Chinese legislators, the SPC Reply could signal the first step for international arbitration organizations to provide their service in China. It would be a big boost for foreign arbitration institutions to expand their local presence in China. We will keep you updated in this regard.

Finally, in this case it was a dispute between a foreign company and a domestic party. Another interesting question would be whether a dispute between two domestic parties, e.g. foreign-invested enterprises in China, can also be administered by a foreign arbitration in China in the future. Currently there is no indication for this trend but only time knows if this may change on a long run.