i Sources of arbitration law
In China, sources of arbitration law include legislation, judicial interpretations, official replies of the Supreme People's Court (SPC) and guiding cases.
The Arbitration Law, which has been in effect since 1995 and was revised in 2017, is the primary legislation for arbitration. The Civil Procedure Law also covers certain aspects, particularly related to interim measures and enforcement.
Judicial interpretations promulgated by the SPC, such as the Interpretation of the SPC on Certain Issues Concerning the Implementation of the Arbitration Law of the People's Republic of China (2006), and the Provisions of the SPC on Several Issues Concerning Trial of Cases Involving Judicial Review of Arbitration (2018), also play important roles.
In addition, official replies of the SPC and guiding cases may provide rules on certain specific issues.
The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) was ratified by China in 1996 and transformed into domestic law by a judicial interpretation in 1997.
ii Distinction between foreign-related arbitration and domestic arbitration
For arbitrations seated in mainland China, based on whether an arbitration contains a foreign element (including Hong Kong, Macao and Taiwan, which are separate jurisdictions within the People's Republic of China (PRC)), arbitrations are separated into foreign-related arbitration and domestic arbitration. The differences between the two are reflected in aspects of the arbitration agreements, the arbitration proceedings and the enforcement of awards.
iii Arbitration agreement
If parties wish to submit their dispute to arbitration, an arbitration agreement in writing is needed. It could be an arbitration clause stipulated in a contract, take the form of a special agreement for arbitration, or be concluded through letters and exchanges of electronic messages (including telegraphs, teletexts, facsimiles, digital data exchanges and emails).
There are three basic elements: a valid arbitration agreement shall explicitly include a manifestation of the parties' intent to submit their disputes to arbitration, the matter subject to arbitration and the specific arbitration institution selected by the parties.
The matter stipulated in the arbitration agreement shall be arbitrable. Disputes over marriage, adoption, guardianship, child maintenance and inheritance, and administrative disputes falling within the jurisdiction of relevant administrative organs cannot be submitted for arbitration.
Validity of arbitration agreements
If parties have reached an arbitration agreement, courts would not accept a lawsuit unless the arbitration agreement is null and void.
Common situations where an arbitration agreement is deemed to be invalid under China's Arbitration Law include:
- parties failing to agree upon the arbitration matter or the arbitration institution, or where the relevant provisions are not clear and the parties fail to reach a supplementary agreement;
- parties stipulating that they may either arbitrate or litigate if there is any dispute; and
- domestic parties submitting to a foreign arbitration institution for arbitration over issues without a foreign element.
Particularly, with respect to stipulating the arbitration institution, the Arbitration Law Interpretation provides that:
- if the name of the arbitration institution is inaccurate, but a specific arbitration institution can still be ascertained, it is deemed that the arbitration institution has been chosen;
- if only the arbitration rules are stipulated, it is deemed that the arbitration institution is not agreed upon, unless parties reached a supplementary agreement or a specific arbitration institution can be ascertained according to the selected arbitration rules; and
- if more than two arbitration institutions are stipulated, the parties may select any one upon agreement, but if no agreement can be reached, the arbitration agreement is invalid.
Judicial review on the validity of arbitration agreements
If a party challenges the validity of an arbitration agreement, it may apply either to the arbitration institution for a decision or to a court for a ruling. If one party requests a decision from the arbitration institution, but the other party applies to a court for a ruling, the court shall render the decision.
In the case of applications for determining the validity of an arbitration agreement, the intermediate court, or the specialised court at the place where the arbitration institution stipulated in the arbitration agreement is located, the arbitration agreement is executed, or the applicant or the respondent is domiciled, shall have jurisdiction.
Conflict of law rules in foreign-related cases
In foreign-related cases, courts shall first determine what law should be applied to determine the validity of an arbitration agreement. For foreign-related arbitrations, the law agreed upon by the parties shall be applied to examine the validity of an arbitration agreement; where no consensus has been reached upon the applicable law but the seat of arbitration has been stipulated, the law of the seat shall be applied; where neither the applicable law nor the seat have been agreed upon, or the seat is unclear, the law of the place of the court shall apply (i.e., PRC law). In regard to domestic arbitrations, PRC law applies.
The report and review system
In cases of judicial review of foreign-related arbitrations, if upon review an intermediate court plans to hold that an arbitration agreement is invalid, the court shall report to the corresponding high court for review. Where the high court plans to approve the holding, it shall report to the SPC for further review and approval. The final ruling shall be rendered based on the review opinions given by the SPC, usually in an official reply.
In 2018, the report and review system was extended to domestic arbitrations. In a domestic arbitration, such proposed ruling shall be submitted to the high court in its jurisdiction, and the final ruling shall be made based on the opinion of the high people's court.
iv Arbitration proceedings
Because the Arbitration Law requires that arbitration agreements shall include the selected arbitration institution, ad hoc arbitration is theoretically prohibited in China. Nevertheless, at the end of 2016, the SPC issued a guideline providing that enterprises registered in free trade zones may agree to submit disputes to specific persons under specific arbitration rules at a specific place in mainland China, thus opening the door for ad hoc arbitration. However, due to legal uncertainty, practitioners do not recommend this approach, and so far no case of this kind has been reported.
Parties may apply either to the arbitration institution or the competent court for a decision on the jurisdiction of an arbitration tribunal. If one of the parties challenges the jurisdiction before the arbitration tribunal while the other party challenges before the court, the court shall make the determination. In any event, the challenge shall be made prior to the first hearing of the arbitration tribunal. If a party challenges before the court after the first hearing, the application may not be accepted by the court.
Parties may apply for evidence preservation, property preservation or behaviour preservation (prohibitory injunction) before and during the arbitration proceeding. For preservations before initiating arbitration, parties may directly apply to the court at the locality of the evidence or the property, or of the domicile of the party against which the application is made. For preservations after initiating arbitration, the application shall be made to the arbitration institution, which then shall forward the application to a competent court. Applications for preservation in domestic arbitrations shall generally be submitted to the basic courts, while the same in foreign-related arbitration shall be submitted to the intermediate courts.
v Arbitration awards
Setting-aside or non-enforcement of onshore awards
If a party to an arbitral award objects to the award, it may challenge the award by applying to the competent court for the setting aside of the arbitration award on very narrow and largely procedural grounds.
If the winning party applies to a court for enforcement, the losing party may request non-enforcement.
Parties to an award may apply for setting aside or non-enforcement if:
- there is no arbitration agreement;
- the matter decided in the award exceeds the scope of the arbitration agreement or is beyond the authority of the arbitration institution;
- the constitution of the tribunal or the arbitration procedure violates the law;
- an arbitrator has demanded or accepted bribes, committed malpractice for personal benefits or perverted the law in rendering the award; or
- the award is against public interests.
If the award is a domestic award, parties may also apply for setting aside or non-enforcement if the evidence that the award relied upon is falsified, or the opposing party concealed evidence that is sufficient to affect the impartiality of the award.
If the arbitration was conducted by the parties in a malicious collusion, a third party may also request the non-enforcement of the arbitral award.
Foreign arbitration awards
As the PRC has ratified the New York Convention, courts will determine whether to recognise or enforce foreign arbitral awards under the grounds set out in the New York Convention. Applications for the recognition and enforcement of foreign awards shall be made to the intermediate court of the domicile of the party subject to enforcement or of the locality of its property.
Special arrangements of inter-regional judicial assistance between mainland China and Hong Kong, Macao and Taiwan govern the enforcement of arbitration awards from these regions, the provisions of which basically mirror those covering Convention awards.
The report and review system
Setting aside or non-enforcement of arbitral awards rendered in mainland China, and non-recognition or non-enforcement of arbitral awards rendered outside, are subject to the report and review system as well. Cases related to domestic arbitral awards shall be reported to the high courts for review and final approval; cases related to foreign-related arbitral awards or foreign awards shall be first reported to the high people's court then to the SPC for review and final approval.
vi People's courts
China has a four-level court system consisting of, from the highest to the lowest:
- the SPC;
- the high people's courts;
- the intermediate people's courts and some specialised courts (such as maritime courts and intellectual property courts); and
- the basic people's courts.
Cases of judicial review of arbitrations are adjudicated by intermediate (at prefecture level) and higher level people's courts.
To try international commercial cases fairly and timely in accordance with the law, the SPC established the China International Commercial Court (CICC). It is aiming to form a one-stop dispute resolution platform with a choice of mediation, arbitration and litigation available for parties. Cases before the CICC would be heard by a collegial panel consisting of three or more judges, and the judgments and rulings rendered by the CICC are final and binding on the parties with legal effect, and are not appealable.
vii Local arbitration institutions
By the end of 2018, 255 arbitration institutions had been established nationwide. The major ones handling international arbitrations include the China International Economic and Trade Arbitration Commission (CIETAC), the Beijing Arbitration Centre (BAC), the Shanghai International Arbitration Centre (SHIAC) and the Shenzhen Court of International Arbitration (SCIA). CIETAC was set up in 1956 with it headquarters in Beijing and sub-commissions in some regional economic centres at home and abroad.
viii Trends in arbitration
According to the Ministry of Justice, since the promulgation of the Arbitration Law in 1994, arbitration institutions across the country have handled more than 2.6 million civil and commercial cases involving more than 70 countries and regions. Statistics show that more than 540,000 arbitration cases were handled in 2018, an increase of 127 per cent over 2017; and the total disputed amount subject to arbitration almost reached 700 billion yuan, an increase of 30 per cent over 2017. As the Minister of Justice stated at the National Arbitration Conference in March 2019, more endeavours will be made to improve the multi-level arbitration system that adapts to the development of internationalisation to establish a global and regional brand of arbitration in China. We look forward to new developments.
ii THE YEAR IN REVIEW
i Developments affecting international arbitration
Streamlining of the judicial review of arbitrations and the enforcement of arbitral awards
The SPC issued two judicial interpretations on the judicial review of arbitrations in late 2017, which became effective on 1 January 2018, and one judicial interpretation on the enforcement of arbitral awards in early 2018, which became effective on 1 March 2018. These judicial interpretations made significant improvements to the existing regime for both domestic and cross-border arbitration in mainland China.
The judicial interpretations on judicial reviews of arbitration cases extended the existing report and review system to domestic arbitrations in order to strengthen the supervision of domestic arbitrations and improve consistency, and clarified many detailed aspects of the report and review system, including allowing limited party participation to improve transparency and legitimacy.
The judicial review on the enforcement of arbitral awards provided a comprehensive set of rules on the execution of arbitral awards, including detailed rules for the ascertainment of the circumstances for non-enforcement. Importantly, it provides judicial recourse to victims of sham arbitrations, in response to public outcry against the abuse of the arbitration system.
Disapproval of arbitration in advance by the SPC
The SPC also issued the Official Reply of the Supreme People's Court on Issues Concerning the Application of Law for the Case-filing and Enforcement for Awards or Conciliation Statements under 'Arbitration in Advance' on 5 June 2018, closing the long-lasting debate over the arbitration in advance mechanism2 in China.
The arbitration in advance mechanism was first introduced by the Zhanjiang Arbitration Commission in 2016, specifically for resolving disputes arising out of online loan agreements. Under such mechanism, an arbitral tribunal will render an award, when no dispute occurs between the parties, based on the contents of the contract or the settlement agreement between the parties. The purpose of this mechanism was to force parties to perform their obligations under a contract.
There were significant debates on this mechanism, because it was considered to have violated some fundamental principles under the Arbitration Law. The Official Reply made it clear that applications to enforce an arbitral award or conciliation statement rendered before a dispute occurs shall be dismissed, and if such applications have already been accepted, they shall be overruled.
The establishment of international commercial courts to oversee certain arbitration-related cases
The SPC issued a set of court rules revolving around the establishment and operation of international commercial courts in 2018.
On 27 June 2018, the SPC issued the Provisions of the Supreme People's Court on Several Issues Concerning the Establishment of International Commercial Courts, pursuant to which the SPC will establish international commercial courts that will accept and hear cases, including certain applications for preservation in arbitrations, and applications to set aside or enforce international commercial arbitral awards. The first and second international commercial court were established on 29 June 2018 in the cities of Shenzhen and Xi'an respectively.
On 13 November 2018, the General Office of the SPC published the Notice of the Supreme People's Court on Inclusion of the First Group of International Commercial Arbitration and Mediation Institutions in the 'One-Stop' Diversified International Commercial Dispute Resolution Mechanism, and it was determined that seven arbitration and mediation institutions, including CIETAC, BAC, SHIAC and SCIA, were listed as the first group of institutions in the one-stop diversified international commercial dispute resolution mechanism. For arbitration cases accepted by the arbitration institutions listed in such mechanism, the parties may apply for preservation of evidence, assets or behaviours to the international commercial courts. After an arbitral award is rendered, the parties may also apply to the international commercial courts for the setting aside or enforcing of the arbitral award.
The SPC issued the Procedural Rules of the International Commercial Courts of the Supreme People's Court (For Trial Implementation) on 21 November 2018 under which certain applications for preservation in arbitrations, and applications for the setting-aside or enforcement of international commercial arbitral awards, shall be accepted and heard by the international commercial courts. By the end of 2018, the two international commercial courts had accepted a number of foreign-related commercial arbitration judicial review cases.
On 24 August 2018, the SPC also announced a list of members of the Expert Committee of the international commercial courts.3 On 30 November 2018, the SPC issued the Working Rules of the Expert Committee, in accordance with which members of the Committee may, when entrusted by the international commercial court, assume duties including presiding over mediations of international commercial cases and providing advisory opinions on legal issues involved in cases heard by the international commercial courts.
Judicial assistance in interim relief for arbitration proceedings between mainland China and Hong Kong
On 2 April 2019, the SPC and the Department of Justice of Hong Kong's government executed the arrangement concerning mutual assistance in court-ordered interim measures in aid of arbitral proceedings by the courts of the mainland and of the Hong Kong special administrative region (arrangement).
The arrangement is the seventh bilateral judicial assistance arrangement, and also the first arrangement in respect of interim measures for arbitration proceedings between mainland China and Hong Kong. In accordance with the arrangement, courts in mainland China may, upon application of the parties of Hong Kong-seated institutional arbitration proceedings, order interim relief including asset, evidence and behaviour preservation. Similarly, parties to arbitration proceedings administered by domestic arbitration institutions may also apply to the Hong Kong Higher Court for interim relief.
The effective date of the arrangement will be announced after the issuance of a judicial interpretation by the SPC and the completion of relevant procedures in the Hong Kong.
Appellate arbitration under the new SCIA Arbitration Rules
On 9 January 2018, SCIA announced its merger with the Shenzhen Arbitration Commission, another Shenzhen-based arbitration institution. This was the first merger between arbitration commissions in China, and was expected to bring significant influence to the reform and innovation of China's arbitration system.
New SCIA announced its new Arbitration Rules on 23 December 2018, which came into force from 21 February 2019.
One of the highlights of the new Arbitration Rules is the optional appellate arbitration procedure, which is the first exploration of the appellate arbitration procedure in China. In accordance with Article 68 of the Arbitration Rules, the application of the appellate procedure shall be subject to three pre-conditions: the parties have agreed on submitting to SCIA for appellate arbitration in respect of an award rendered by a arbitral tribunal; such procedure is not prohibited by the laws of the seat of arbitration; and such procedure is not applicable to the expedited arbitration procedure.
SCIA also formulated its Guidelines for Optional Appellate Arbitration, which set out detailed procedures of the optional appellate arbitration procedure.
First emergency arbitrator proceeding in China before BAC
In late 2017, BAC accepted its first case applying emergency arbitrator proceedings in mainland China. The claimant in this case obtained an enforcement order rendered by the High Court of Hong Kong in respect of the emergency arbitrator's decision rendered in the arbitral proceedings administered by BAC, which partially granted the interim measures requested by the claimant.
ii Arbitration developments in local courts
Arbitration clause choosing the Singapore International Economic and Trade Arbitration Commission held valid by applying Singapore law
The case involved concerned an arbitration clause reached by Tata International Metals (Asia) Ltd and Chinalight Tri-Union International Trade Company Ltd, which stipulated that disputes should be submitted to the Singapore International Economic and Trade Arbitration Commission, with no seat designated. The parties disputed the validity of the arbitration clause before Beijing No. 4 Intermediate People's Court.
The Court confirmed the validity of the arbitration agreement, reasoning as follows:
- the name of the designated arbitration institution does not line up with the name of any existent arbitration institutions in Singapore;
- however, as in the sales contracts the parties had explicitly expressed their intention to have the arbitration before the Singapore International Economic and Trade Arbitration Commission, the Court could ascertain the real intention of the parties in light of the text of the arbitration clause;
- given the reference to Singapore, the Court thereby presumed that the parties agreed to conduct their arbitration under the Singaporean legal framework;
- therefore, the applicable law governing the validity of the arbitration agreement should be Singaporean law;
- based on the expert evidence, the arbitration agreement was valid under the applicable Singaporean law; and
- the issues pertaining to how to conduct the arbitration as well as how to interpret and determine the choice of the arbitral institution fell outside the Court's scope of judicial review at this stage.
Court of Arbitration for Sport award recognised and enforced under the New York Convention
On 3 December 2012, Dalian A'erbin Football Club Co, Ltd (which later changed its name to Dalian Yi Fang Football Club Co, Ltd (Yi Fang)) executed a legal service agreement with Juan Perez and Alfonso Vargas (collectively the claimants). The claimants applied for arbitration to the Court of Arbitration for Sport (CAS), and an award was rendered by a sole arbitrator in 2015. In 2017, the claimants applied before Dalian Intermediate Court for the recognition and enforcement of the CAS award.
Yi Fang argued that CAS lacked jurisdiction, the arbitration clause was invalid and Yi Fang did not have a proper opportunity to present its case due to having failed to receive valid notification from CAS. The Court found that whether an arbitration institution lacks jurisdiction is not one of the circumstances under Subparagraph (1), Paragraph 1, Article 5 of the New York Convention, and that CAS had already made valid service to Yi Fang in accordance with the applicable arbitration rules.
On 1 August 2018, Dalian Intermediate Court rendered the (2017) Liao 02 Min Chu No. 583 Ruling, recognising and enforcing the award rendered by CAS. This was the first CAS award successfully recognised and enforced by a PRC court in accordance with the New York Convention. This ruling is considered to be of significant value against the background of the 2022 Asian Games and Olympic Winter Games, which are to be held in China.
HKIAC award denied recognition and enforcement by a Beijing court for exceeding mandate
On 16 April 2018, Beijing No. 4 Intermediate Court rendered a ruling to refuse the enforcement of an HKIAC award. This was the first ruling of said Court denying recognition and enforcement of an HKIAC award.
The Court found that, while there were 21 respondents under the award and the award ordered all of the respondents to perform repurchase obligations, the claimant only raised the relevant claims against seven entities. Therefore, the award exceeded the claimant's submission to arbitration, and because the part exceeding the scope of submission is inseparable from the other parts, the entire award should be denied recognition and enforcement.
iii Investor–state disputes
In 2018, there were no new investor–state cases against the PRC registered at the International Centre for Settlement of Investment Disputes or new awards issued in cases involving the PRC as a party. Currently there is only one publicly reported pending investor–state case against the state, Hela Schwarz v. China,4 initiated by the investor under the China–Germany bilateral investment treaty in relation to an investment in Jinan by the food and spice manufacturer.
Since China still embraces the doctrine of absolute sovereign immunity, there is no investor–state case against other states registered at the local courts.
iii OUTLOOK AND CONCLUSIONS
The PRC courts are making great efforts to address a number of perceived problems in China's arbitration regime in order to meet the high expectations of users. The streamlining of the report and review system, a key feature of the arbitration regime, is to greatly enhance the efficiency, consistency and legitimacy of arbitration in China; the new enforcement rules are expected to strengthen the execution of awards and reduce uncertainty; and the establishment of the international commercial courts is more likely to enhance than undermine the use of arbitration in China.
Importantly, the Standing Committee of the National People's Congress has added the amendment of the Arbitration Law into its legislative plan. The arbitration community in China is optimistic that the reform of the country's arbitration law and practice are on the right track.
1 Hu Ke and Fang Ye are partners at Jingtian & Gongcheng.
2 Also known as the simultaneous arbitration or synchronised mediation-confirmation arbitration.
3 The members of the first group of the expert committee are Zhang Yuejiao, Huang Jin, Wang Liming, Shen Sibao, Lu Song, Shan Wenhua, Wan Meng, Liu Jingdong, Shi Jingxia, Wang Guiguo, Philip Yang, Rimsky Yuen, Fuldien Li, Jingzhou Tao, Albert Jan van den berg, Anna P Mantakou, Anselmo Reyes, David Unterhalter, Donald Francis Donovan, Emmanuel Gaillard, Gabrielle Kaufmann-Kohler, Gary Born, George A Bermann, Hi-Taek Shin, James Spigelman, Nayla Comair-Obeid, Neil Kaplan, Peter Malanczuk, Susan Finder, William Blair and Vladimir I Kurilov.
4 Hela Schwarz v. China (ICSID case No. ARB/17/19.