Under the People’s Republic of China’s (PRC or China) Interpretation on Several Issues Concerning the Law on the Application of Laws to Foreign-Related Civil Relations (2012 Interpretation), there is a distinction between domestic and foreign-related arbitration disputes. The 2012 Interpretation sets out the “domestic” rule, under which domestic disputes must be arbitrated in the PRC while foreign-related disputes may be arbitrated either within or outside the PRC. Disputes falling under this domestic rule typically involve Foreign Invested Enterprises (FIEs) incorporated in China and wholly foreign-owned enterprises (WFOEs), both considered as PRC domestic entities. The range of criteria to determine whether a dispute is foreign-related or not is wide and decisions are made on a case by case basis.
Cases in the PRC have demonstrated the courts’ pro-arbitration attitude towards foreign arbitral institutions administering disputes in China. This was exemplified in Longlide Packaging Co. Ltd v BP Agnati S.R.L. in 2013, where the Supreme People’s Court upheld the validity of a China-seated International Commerce Centre (ICC) arbitration clause and allowed foreign-related disputes to have a seat in PRC.
Onshore and Offshore Arbitration Trends in China
In Siemens International Trading (Shanghai) Co., Ltd vs. Shanghai Golden Landmark Co., Ltd (2013) Hu Yi Zhong Min Ren (Wai Zhong) Zi No. 2 (Golden Landmark case), the Chinese Court held that the dispute was foreign-related although it involved two WFOEs incorporated in the Shanghai Free Trade Zone (Shanghai FTZ) that entered a sale of goods contract governed by PRC law and to be performed in China. The validity of the arbitration clause contained therein, which stated that the arbitration was to be conducted in Singapore, was challenged but the Court held that the dispute was foreign-related due to “other circumstances” being:
- Although the parties were incorporated as WFOEs in the Shanghai FTZ, their purpose was aimed at facilitating foreign investment trade;
- There was sufficient connection to foreign investors who provided the source of capital, ultimately held ownership interests and made business-decisions; and
- The sale of goods contract was similar to that of an international one, whereby goods were being imported into the Shanghai FTZ, stored in bond and passed through PRC customs procedures.
The approach taken in the Golden Landmark case was the first instance where the PRC Courts were keen to recognize a wider spectrum of elements contributing to the foreign element of a dispute and enforce a foreign award despite both parties being PRC domestic entities. However, it remains unclear what “other circumstances” are to be accounted for and what their respective weight is to be as in Beijing Chaolaixinsheng Sports and Leisure Co., Ltd v Beijing Suowangzhixin Investment Consulting Co., Ltd (2013) Er Zhong Min Te Zi No. 10670, the PRC Courts refused to enforce a foreign award because it regarded the dispute between a South Korean owned FIE registered in Beijing and another China incorporated company as purely domestic based on the ground that both parties are domestic entities, the subject matter of the contract is in the PRC and the contract was concluded and performed in the PRC.
Major Asian Arbitral Institutions Open Representative Offices in the Shanghai FTZ
In line with the PRC Courts’ shift towards a pro-arbitration stance and the State Council’s announcement in April 2015 that it would “support the introduction of internationally renowned commercial dispute resolution institutions,” three of Asia’s most popular arbitral institutions, namely the Hong Kong International Arbitration Centre, the Singapore International Arbitration Centre and the International Chamber of Commerce, have set up representative offices in the Shanghai FTZ to promote international arbitration. Their plans notably include best practice sharing and professional training to judges located in rural areas, where Courts typically have less sophisticated understanding and experience in dealing with foreign-related disputes and the overall arbitral process.
Since 2012, there has been a sharp increase in arbitration work due to the surge of Chinese outbound investments, particularly in overseas construction project-related work and technology. As PRC companies tend to favor local arbitral institutions (e.g. the Chinese International Economic and Trade Arbitration Commission, the Shanghai International Arbitration Center and the Shenzhen Court of International Arbitration), the formal presence of these three foreign arbitral centers in the FTZ will both help build closer relationships with the local institutions and strengthen the ties with PRC-qualified lawyers and law firms.