The International Arbitration Review: China
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 which 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.
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.
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.
Judicial interpretations of judicial reviews of arbitration cases released in 2018 extended the report and review system for domestic arbitrations to strengthen the supervision of domestic arbitrations and improve consistency, and clarified many detailed aspects of the report and review system by, inter alia, allowing limited party participation to improve the system's transparency and legitimacy.
A judicial interpretation on the enforcement of arbitral awards, also released in 2018, provided a comprehensive and more detailed
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 reviews 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 aims 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. Judgments and rulings rendered by the CICC are final and binding on the parties with legal effect, and they are not appealable.
vii Local arbitration institutions
More than 250 arbitration institutions have 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 and the Shenzhen Court of International Arbitration. CIETAC was set up in 1956; its headquarters are in Beijing, and it has sub-commissions in some regional economic centres both at home and abroad.
viii Trends in arbitration
According to the Ministry of Justice, from the promulgation of the Arbitration Law in 1994 to the end of March 2019, arbitration institutions across the country have handled more than 2.6 million civil and commercial cases involving more than 70 countries and regions. Domestic arbitration institutions' ability to provide high-quality and efficient arbitration legal services for commercial entities is constantly improving. For example, statistics show that 3,333 arbitration cases were handled in 2019 by CIETAC, an increase of 12.53 per cent over 2018, while the total disputed amount subject to arbitration reached 122.04345 billion yuan, an increase of 20.13 per cent over 2018. Other statistics show that 6,732 arbitration cases were handled in 2019 by BAC, an increase of 38.18 per cent over 2018, while the total disputed amount subject to arbitration reached 94.804 billion yuan, an increase of 20.74 per cent over 2018.
The year in review
i Developments affecting international arbitration
Judicial assistance for interim relief in arbitration proceedings between Mainland China and Hong Kong
On 2 April 2019, the SPC and the Department of Justice of the government of Hong Kong 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). On 26 September 2019, the SPC also released a Notice by the Supreme People's Court of Implementing 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, which confirms that the Arrangement became effective on 1 October 2019.
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 to 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.
According to information about the practice of processing applications under the Arrangement released by the Hong Kong International Arbitration Centre (HKIAC), HKIAC has received 13 applications under the Arrangement that were made to nine different mainland courts since 1 October 2019, of which at least five were granted by the courts in the mainland, and the total value of these applications reached approximately 1.7 billion yuan. It is expected that the Arrangement will continue to play an important role in arbitrations involving parties from Hong Kong and mainland China in the future.
BAC releases its International Investment Arbitration Rules and amends its Arbitration Rules
In July 2019, BAC released its International Investment Arbitration Rules 2019 (Investment Rules 2019) and its amended Arbitration Rules (New Rules).
The Investment Rules 2019, which took effect on 1 October 2019, make BAC the second arbitration institution to release specific arbitration rules for investment arbitration in China. The Investment Rules 2019 aim not only to provide a set of practical rules for investment arbitration, but also to introduce a number of innovative aspects to existing investment arbitration rules and practices. For instance, the Investment Rules 2019 contain an optional procedure for appealing against arbitral awards, and require that arbitrators should be sufficiently available to handle disputes as well as being persons of high moral character with recognised competence in the law.
The highly rated New Rules, which came into effect on 1 September 2019, reform BAC's arbitration fee schedule significantly. They increase the amount in dispute applicable under an ordinary procedure to 5 million yuan and above, and implement a new schedule of fees that clearly divides arbitration fees into arbitrator fees and administration fees. They also raise the minimum applicable fees and impose a cap on the maximum fees.
Shanghai supports overseas arbitration institutions setting up offices in the pilot free trade zone
On 21 October 2019, the Shanghai Judicial Bureau issued its Administrative Measures for Business Ofﬁces Established by Overseas Arbitration Institutions in Lin-Gang Special Area of China (Shanghai) Pilot Free Trade Zone (Administrative Measures), which specify conditions, registration procedures, business scope, management measures and legal liability for offices being set up by overseas arbitration institutions. Overseas arbitration institutions' offices set up under the Administrative Measures are allowed to undertake arbitration activities including accepting and hearing cases, managing arbitration proceedings and rendering arbitral awards. The Administrative Measures came into effect on 1 January 2020.
ii Arbitration developments in local courts
SPC rejects arbitration for administrative contract disputes
There has been a long debate about whether public–private partnership (PPP) contracts are arbitrable or not. Many believe that they are arbitrable because of the commercial dimensions in such contracts, while local governments are eager to keep such cases at the courts. Without clear guidance from the SPC, courts and arbitration organisations had been very divided.
In December 2019, the SPC issued a judicial interpretation on the handling of administrative contract disputes in which arbitration is excluded for settling administrative contract disputes, and any arbitration agreements in such contracts are void, save as otherwise provided under a piece of legislation or administrative ordinance, or under an international treaty. Administrative contracts encompass a large spectrum of public–private contracts, including without limitation concession contracts, compensation agreements for expropriation and PPP contracts.
To date, there is no legislation or administrative ordinance laying the groundwork for the arbitration of PPP contracts. Some foreign investors might be fortunate enough to have the blessing of an investment treaty, but the majority of the private investors in public services are domestic players. Understandably, the new rule have upset investors and the arbitration community.
SPC declares antitrust disputes non-arbitrable
Prior to 2019, there were several cases in the lower courts regarding whether antitrust disputes are arbitrable, and the lower courts remain divided. The issue was presented to the SPC in 2019.
Hohhot Huili Material Co, Ltd (Huili) alleged that Shell (China) Limited (Shell China) had entered into a horizontal monopolistic agreement and sued for damage arising from the allegedly monopolistic acts. Shell China argued that the Court did not have jurisdiction to adjudicate the matter because Shell China and Huili agreed to settle disputes by arbitration in the contract. The case was first heard by the Hohhot Intermediate People's Court, and was then appealed to the SPC by Shell.
The SPC held that antitrust disputes are non-arbitrable, and thus should be subject to the court's jurisdiction, based on two arguments:
- First, the SPC held that the legislation did not authorise antitrust disputes to be arbitrated. According to Article 1 of the Anti-Monopoly Law, the purpose of legislation is to maintain fair competition in the market and protect consumer interests and public interests in society. Articles 10, 38 and 50 of the Anti-Monopoly Law stipulate expressly that monopoly-related cases are to be resolved by administrative sanctions or by civil litigation. These articles make no reference to arbitration.
- Secondly, an antitrust dispute involves public interests, and thus is out of the orbit of the arbitration system purported to settle private disputes between parties of equal status. Article 2 of the Arbitration Law permits parties to a dispute related to contractual rights or other property rights to submit a dispute to arbitration in accordance with an arbitration agreement. However, this case was an anti-monopoly dispute rather than a contractual dispute. Although Shell China and Huili agreed to resolve disputes by arbitration, the anti-monopoly dispute fell within the sphere of public law. The determination of whether certain conducts are monopolistic is a matter that goes beyond the rights and obligations of contractual parties, and anti-monopolistic disputes are not within the scope of arbitrable disputes as defined in the Arbitration Law.
Therefore, the Court held that Shell China could not rely on the arbitration clause in the contract at hand to exclude a court's jurisdiction to adjudicate the dispute.
Whether correct or not, the case is likely to stand as the position of the Chinese courts on the issue for years to come.
SPC upholds an arbitration agreement while denying the formation of a commercial agreement
Luck Treat Limited (Luck Treat) intended to transfer its shares in Newpower Enterprises Inc to Zhong Yuan Cheng Commercial Investment Holdings Co, Ltd (ZYC). After intensive negotiations, the parties finished the drafts of the equity transfer contract and debt settlement agreement. Both drafts included an arbitration clause. The transaction was cancelled, and the parties did not sign the contracts. ZYC applied for arbitration, and Luck Treat filed a lawsuit with the courts to confirm that there was no arbitration clause between the parties as there was no contract.
The SPC, while declaring that the contract had not been formed, concluded that there was an arbitration agreement. The Court dismissed the application of the claimant, and the issue will be resolved in arbitration.
The SPC first declared that a court should entertain disputes over the existence of arbitration agreements, even though the arbitration law only establishes judicial review for 'disputes over the validity of arbitration agreements'. Whether an arbitration agreement exists directly affects the dispute resolution method in the same way that validity does: it is equally classified as a preliminary issue. Therefore, a request to confirm the non-existence of an arbitration agreement is an objection to the validity of an arbitration agreement in a broad sense, and thus the court shall accept the case according to Paragraph 1 of Article 20 of the Arbitration Law.
The SPC then moved on to declare that the separability doctrine applies to the formal validity of arbitration agreements as well as to the substantive validity. In accordance with Paragraph 1 of Article 19 of the Arbitration Law, the separability of arbitration agreement is a general rule and shall cover the issue of whether an arbitration agreement exists or not. As ZYC had accepted Luck Treat's offer regarding the arbitration clause in May 2017, the parties have reached an arbitration agreement under the Contract Law. Although the parties did not sign the contracts so that the contracts had not been formed, under Paragraph 2 of Article 10 of the 2006 judicial interpretation on the Arbitration Law, the validity of the arbitration clause shall not be affected even if commercial contracts are not formed.
SPC dismisses attempted circumvention of an arbitration agreement by adding irrelevant parties as co-defendants
Fujifilm Holdings Corporation (Fujifilm), Asia Optical Co Ltd (Asia Optical) and Dongguan Sintai Optical Co, Ltd (Sintai) signed eight commissioned development contracts in which the parties agreed that any disputes in connection therewith shall be submitted for arbitration if the negotiations fail. Asia Optical was sought by a third party and paid a patent royalty. Therefore, Asia Optical and Sintai applied for arbitration in Japan against Fujifilm, and the parties signed the confirmation and agreed to abide by the arbitral awards on the dispute in connection with the contracts. Asia Optical and Sintai lost the arbitration, and then brought a lawsuit against Fujifilm and its Chinese subsidiaries, non-parties to the contracts, for unjust enrichment related to the commissioned processing activities. Fujifilm raised an objection to the jurisdiction of the court, noting that Asia Optical and Sintai did not provide any evidence on the implication of these subsidiaries in the dispute.
The SPC found that the dispute was covered by the arbitration agreement, and precluded by the res judicata effect of the arbitral award rendered in Japan. The subject matter of the lawsuit was basically the same dispute presented to arbitration, and was related to or arose out of the commissioned development contracts. Therefore, the dispute fell within the scope of the arbitration clause and should be submitted for arbitration, and Asia Optical and Sintai further confirmed their agreement to arbitration in the proceeding.
The SPC did not stop there. The SPC found that Asia Optical and Sintai had failed to present a prima facie case against the Chinese subsidiaries of Fujifilm, as the legal foundation for suing them was completely baseless under Chinese law, and as independent legal entities they are not qualified defendants in the case. The SPC held that the appellants listed the subsidiaries as co-defendants only for the purpose of circumventing the arbitration clause.
Local courts in China release guidance for judicial review of arbitration
In July 2019, Jiangxi Higher People's Court released its Guidance for Judicial Review of Arbitration, specifying, among other things, the jurisdiction, procedure, timeline and review standards for judicial review of arbitration in Jiangxi Province.
On 10 December 2019, Beijing No. 4 Intermediate People's Court held a press conference to brief its judicial review of arbitration practice in the past five years, and released its Guidance for Judicial Review of Arbitration (Beijing Guidance). The Beijing Guidance is aimed at regulating the court's power of judicial review of arbitration so as to promote the credibility of arbitration and provide a high-quality judicial safeguard for the development of arbitration practices.
iii Investor–state disputes
The new Foreign Investment Law, which took effect on 1 January 2020, made no reference to arbitration for the settlement investor–state disputes.
In 2019, 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,2 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.
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 greatly enhancing the efficiency, consistency and legitimacy of arbitration in China; the new enforcement rules and the arrangement with Hong Kong are strengthening the execution of both domestic and international awards, and reduce uncertainty; and the establishment of the international commercial courts is also supporting the use of arbitration in China, and the cases seen in 2019 showcased a strong pro-arbitration stance from the highest court.
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.
That said, excluding the use of arbitration for antitrust disputes and administrative contract disputes is regrettable when the country is entering the deep-water zone of its reform and opening up phase, and also highly concerning, as it signals the reluctance to loosen state control over economic activities.