CHINA

Haifeng Li and Hailin Cui

A. LEGISLATION AND RULES

A.1      Legislation

Lingang Area of the Shanghai Pilot Free Trade Zone opens up to foreign arbitration institution

On 8 November 2019, the Shanghai Bureau of Justice released the Administrative Measures for Business Offices Established by Overseas Arbitration Institutions in the Lin-gang Special Area (Lin-gang FTZ) of the Shanghai Pilot Free Trade Zone (Administrative Measures), which came into force on 1 January 2020. The Administrative Measures sets out specific rules governing the operation of foreign arbitration institutions in the Lin-gang FTZ, including the criteria, application and registration procedures, scope of business, management, and legal liabilities of the operating offices.

Previously, the scope of business of the representative offices set up by foreign arbitration institutions in China was limited to answering inquiries, providing training, attending and organizing conferences and engaging in promotional activities. However, following the implementation of the Administrative Measures, foreign arbitration institutions can also administer foreign-related arbitrations in the Lin-gang FTZ through an operating office.

Specifically, the Administrative Measures provide that any non-profit arbitration institution legally established in foreign countries, (Hong Kong, Macau or Taiwan), as well as arbitration institutions established by international organizations that China has joined, can apply to establish an operating office in the Lin-gang FTZ if it meets the following criteria:

  • It has been duly established and has existed for more than five years,
  • It has substantial arbitration operations overseas and enjoys a good international reputation,
  • The principal of the institution has not committed any criminal offense.

Supreme People’s Court supports the Belt & Road Initiative and Lin’gang Free Trade Zone

On 27 December 2019, the Supreme People’s Court of China (SPC) published two policy documents, namely the Opinion on Providing Services and Safeguards for the Belt & Road Initiative (“BRI Opinion”) and Opinion on Providing Services and Safeguards for Construction of the Lin’gang Area of the Shanghai Pilot Free Trade Zone (“Lin’gang FTZ Opinion”). These two policy documents have no force of law but are rather proclamations of a supporting attitude.

Specifically, the BRI Opinion expressly supports the introduction of foreign arbitration institutions into China, the collaboration between Hong Kong arbitration institutions such as HKIAC and domestic arbitration commissions, the establishment of joint arbitration mechanisms between domestic and BRI participating countries’ arbitration institutions, and allowing foreign arbitration institutions to set up branches in Lin’gang FTZ. The Lin’gang FTZ Opinion reaffirms the policy laid out in the BRI Opinion by allowing, among other measures, foreign arbitration institutions, to administer arbitration of international commercial, maritime and investment disputes in China.

Once implemented, many of the policies provided under the BRI Opinion and Lin’gang FTZ Opinion will afford both domestic and foreign businesses with more options within a more neutrally perceived arbitration forum.

Arbitrability of Administrative Agreements

On 27 November 2019, the SPC released the Provisions on Several Issues regarding the Adjudication of Administrative Agreements (“SPC Provisions”). An “Administrative Agreement” is defined as any agreement which provides for rights and obligations in the sense of administrative law entered into between a public authority on one hand, and citizen, legal entities, or other organizations on the other, for the purpose of achieving an administrative purpose or a public service function. The SPC Provisions list the following as examples of an Administrative Agreement: concession agreements, land and real estate appropriation and compensation agreements, agreements granting the right to use natural resources, lease or sale agreements regarding government-invested security housing, and public-private partnership agreements that meet the definition of an Administrative Agreement. The SPC Provisions expressly provide that any arbitration clause agreed in the administrative agreement should be held as invalid unless otherwise provided by laws, regulations or international treaties to which China is a party.

Landmark Development Allows Interim Relief Protection in China for Hong Kong Arbitrations

Previously, parties to an arbitration proceeding seated outside of mainland China were not able to secure interim measures from a PRC court as the court was only authorized to grant interim measures to an arbitration seated in China. This position has changed. On 2 April 2019, the Hong Kong SAR Government and China’s Supreme People’s Court entered into 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”). This is a landmark arrangement that will allow for the first time, parties to arbitrations seated outside of Mainland China to obtain interim relief protection from PRC courts. The Arrangement has come into effect as of 1 October 2019. The Arrangement will apply to Hong Kong seated arbitrations that are administered by certain arbitral institutions or permanent offices of international intergovernmental organizations of which China is a member (including HKIAC).

The Arrangement mentions three types of interim measures available in mainland China, namely preservation of (i) property (e.g., freezing orders), (ii) evidence (e.g., not to destroy a document) and (iii) conduct (e.g., not to use a trademark). However, it remains to be seen whether in practice that PRC courts will grant evidence preserving measures and conduct as the PRC Arbitration Law appears to provide only for property preservation.

A party to a pending Hong Kong arbitration may file an application for an interim measure from a PRC court with the arbitral institution administering the case. The institution will then forward the application to the court which will decide it pursuant to PRC law. A prospective claimant seeking an interim measure before the commencement of arbitration may file the application directly with the court. However, the court must discharge the measure if within 30 days after it has been taken, the court has not received confirmation from the administering institution that it has accepted the case.

A.2      Institutions, Rules and Infrastructure

On 21 February 2019, Shenzhen Court of International Arbitration (SCIA) released a set of new arbitration rules, including the SCIA Arbitration Rules, SCIA Arbitration Rules for Financial Loan Disputes, SCIA Guidelines for the Optional Appellate Arbitration Procedure, SCIA Guidelines for the Administration of Arbitration under the UNCITRAL Arbitration Rules, SCIA Rules of Maritime and Logistics Arbitration, and SCIA Online Arbitration Rules.

The most notable innovation brought by SCIA’s new rules is an optional appellate arbitration procedure. Specifically, a party may appeal an award to SCIA if the parties so agree. The purpose of such a mechanism is to ensure substantive justice, as some arbitration users are generally concerned about the finality of a one instance arbitration, meaning that there is no remedy available to rectify a seriously erroneous award.

The following conditions shall be satisfied in order for the appellate arbitration procedure to be applied:

  • Such procedure is not prohibited by the laws of the place of arbitration applicable to the case
  • There is an agreement under which either party may file an appellate arbitration petition
  • The case involves an amount in dispute of more than RMB 3 million and is not subject to the expedited procedure

In respect of the first condition described above, it means that the optional appellate procedure is not applicable in China. This is because article 9 of the PRC Arbitration Law expressly provides that an arbitral award shall be final.

In addition, the following requirements need to be observed for the initiation of the procedure:

  • There is an arbitration agreement between the parties which contains the right to petition for appellate arbitration,
  • The appellant shall file an appeal within 15 days of receipt of the original award,
  • The appellant needs to submit a written appeal petition which contains the required information,
  • The appellate arbitration fees are paid in advance within the required time limit.

B. CASES

B.1      Validity of the arbitration agreement

SPC considered it invalid to agree to an arbitration clause that the dispute shall be referred to arbitration first and then, if not working, to litigation[1]

Jiangsu Jinxia and Shanxi Yirong entered into a construction contract on 16 April 2016 which provided that any dispute arising out of the contract shall be submitted to Jinzhong Arbitration Commission. On 23 March 2017, the two parties entered into a supplemental contract which provided that any dispute arising out of the supplemental contract shall be submitted to the relevant authority for mediation, failing which the dispute shall be submitted to the Jinzhong Arbitration Commission for arbitration. If mediation in the course of arbitration also failed, the dispute was to be submitted to the People’s Court at the place where the supplemental contract was signed.

In April 2018, Shanxi Yirong applied to the Jinjiang Arbitration Commission for arbitration against Jiangsu Jinxia Limited. In May 2018, Jiangsu Jinxia applied to Jinzhong Intermediate People’s Court to declare that the arbitration clauses under both the construction contract and the supplemental contract were invalid. The Jinzhong Intermediate People’s Court dismissed Jiangsu Jinxia’s application by ruling that the arbitration clauses in the two said contracts were valid. In July 2018, the Jinzhong Arbitration Commission rendered an arbitral award in favor of Shanxi Yirong.

Separately, Jiangsu Jinxia filed a lawsuit against Shanxi Yirong with the Shanxi High People’s Court in respect of the two previously mentioned contracts. The Shanxi High People’s Court dismissed Jiangsu Jinxia’s case on the ground that Jinzhong Intermediate People’s Court had confirmed the validity of the relevant arbitration clauses in a civil ruling which had already taken effect. Jiangsu Jinxia appealed against the Shanxi High People’s Court’s ruling before the SPC.

The SPC held that the supplemental contract superseded the construction contract. Therefore, the dispute resolution clause agreed under the supplemental contract should prevail. However, since the arbitration clause under the supplemental contract provided for litigation in case the arbitration-mediation failed, it did not consider arbitration as the final dispute resolution forum, hence the said arbitration clause was invalid.

Notably, the above ruling of the SPC was inconsistent with some other decisions of PRC courts. For example, in the case of (2016) Jing 01 Min Te No. 289, an arbitration clause provided that any party may submit the dispute to Beijing Arbitration Commission for arbitration, but if both parties were unsatisfied with the award, either party could file a lawsuit with the people’s court. Beijing 3rd Intermediate People’s Court ruled that despite the agreement that the parties could resort to litigation if unsatisfied with the award, this was in violation of article 9 of the PRC Arbitration Law (i.e., the finality of the arbitral award). This did not affect the validity of the arbitration clause as the parties had the clear intention to submit to arbitration at the time of signing the contract.

Beijing 3rd Intermediate People’s Court elected to interpret an arbitration clause as valid were both ways were possible[2]

In 2011, Tianrun Hechuang Company (“Buyer”) and Shanghai Automotatic Company (“Supplier”) entered into a purchase and sale contract. An arbitration clause provided that any dispute shall be submitted to the arbitration commission located at the place of the Buyer. The Buyer was located at Chaoyang District, Beijing. Later, the Supplier submitted a request for arbitration to the Beijing Arbitration Commission, but the Buyer applied to the Beijing 3rd Intermediate People’s Court to declare that the arbitration clause was invalid on the ground that it violated article 18 of the PRC Arbitration Law and article 6 of the Interpretation of the Supreme People’s Court concerning Some Issues on Application of the Arbitration Law of the People’s Republic of China (“SPC Interpretation”).

The Beijing 3rd Intermediate People’s Court first cited article 6 of the SPC Interpretation, which states that “where an agreement for arbitration stipulates that the disputes shall be arbitrated by the arbitration institution at a certain location and there is only one arbitration institution in this location, the arbitration institution shall be deemed as the stipulated arbitration institution; if there are two or more arbitration institutions, the parties concerned may choose one arbitration institution for arbitration by agreement; if the parties concerned fail to agree upon the choice of the arbitration institution, the agreement for arbitration shall be invalid.”

It then went on to comment that in practice it was disputable as to the scope of location and in the present case the controversy was whether the location of the Buyer should be interpreted as Beijing or the Chaoyang district. If the former, since there were more than two arbitration commissions in Beijing, the arbitration clause should be considered invalid. By contrast, if the location of the Buyer was the Chaoyang district, the arbitration clause would be valid as there was only one arbitration commission in this district (i.e., the Beijing Arbitration Commission). The Beijing 3rd Intermediate People’s Court further held that since the parties had the clear intention of referring their dispute to arbitration. Out of respect for party autonomy, it would be inappropriate to deny the validity of the arbitration clause. Therefore, the Beijing 3rd Intermediate People’s Court affirmed the validity of the arbitration clause and dismissed the Buyer’s application.

Shijiazhuang Intermediate People’s Court considered choice of arbitration rules short of choice of arbitration institutions[3]

In 2007, Zhongxing Company and AG Company entered into two agreements, namely (1) CKD and Agency Agreement, and (ii) Technical Cooperation Agreement. The former provided that “In case of breach of any the articles of this agreement by either of the parties, both Parties agree to put best efforts to remedy by negotiation. Otherwise, both Parties agree to arbitration as per the International Chamber of Commerce [Rules] and held in CHINA” The latter provides that “Any dispute, controversy or difference which may arise between the parties out of or in relation to this Agreement or for the breach thereof shall be amicably settled by the parties, but in case of failure, it shall be finally settled in CHINA by arbitration pursuant to the Rules of the International Chamber of Commerce whose award shall bind the parties thereof.” Zhongxing Company applied to the Shijiazhuang Intermediate People’s Court to declare that the arbitration clauses in the two agreements were both invalid.

In 2018, Shijiazhuang Intermediate People’s Court issued its ruling, which first decided that given the lack of express agreement on the place of arbitration in the said two arbitration clauses, PRC law should be applied to determine the validity of the same. It then held that at the time the two agreements were signed (2007) and Zhongxing Company applied to the court regarding the validity of the two arbitration clauses (2011), the then effective rules of the International Chamber of Commerce were found in the 1998 edition. According to that version, the choice of the ICC arbitration rules in the arbitration clause did not lead to the choice of the ICC as the arbitration institution. Therefore, Shijiazhuang Intermediate People’s Court ruled that the two arbitration clauses were invalid.

B.2      SPC ruled that certain antitrust related disputes were not arbitrable[4]

Shell (China) Limited (“Shell”) and Hohhot Huili Materials Co., Ltd (Huili) entered into a distributorship agreement which provided for arbitration. Later Huili filed a monopoly civil lawsuit with Hohhot Intermediate People’s Court. Shell objected to the jurisdiction of the court on the ground that the distributorship agreement contained an arbitration clause. Hohhot Intermediate People’s Court dismissed the objection and Shell applied to the SPC for appeal.

The SPC held that the PRC Antitrust Law provided administrative suit and civil suit as the two means for determining whether monopolistic conduct was in place and how to deal with it, and arbitration was not named therein. The SPC further held that in the present case, the lawsuit filed by Huili was an antitrust statute related to a civil dispute, rather than a contractual dispute. Although the distributorship agreement provided an arbitration clause, the PRC Antitrust Law was obviously of a public law nature. Whether monopolistic conduct was perpetrated went beyond the rights and obligations between the two civil parties, hence the dispute, in this case, fell outside the scope of the contractual dispute and other property-related disputes between equal citizens, legal entities and other organizations under article 2 of the PRC Arbitration Law. Therefore, the SPC affirmed the decision of the Hohhot Intermediate People’s Court.

B.3      Enforcement of arbitral awards

Guandong High People’s Court ruled that place of hearing could be different from the location of an arbitration commission [5]

In 2018, the Zhanjiang Arbitration Commission accepted a request for arbitration arising out of a loan dispute between Yinsheng Microfinance and Jinmo Construction. The Commission conducted a hearing in Shenzhen in March 2019 and rendered an award. Jinmo Construction subsequently applied to Shenzhen Intermediate People’s Court for enforcement of the award. In the course of enforcement, Shenzheng Intermediate People’s Court could not find any record that the Zhanjiang Arbitration Commission had obtained the approval to set up a sub-commission in Shenzhen and therefore held that the award did not have any legal effect. This was because the Zhanjiang Arbitration Commission violated the PRC Arbitration Law which requires the arbitration commission to be set up and to conduct its business in accordance with these laws. Yinsheng Microfinance applied to the Guangdong High People’s Court to reconsider the issue. Guangdong High People’s Court held that the fact that Zhanjiang Arbitration Commission conducted a hearing in Shenzhen was insufficient to establish that Zhanjiang Arbitration Commission was set up illegally or that it had illegally set up a sub-commission in Shenzhen. The original order of Shenzhen Intermediate People’s Court was set aside.

Xiamen Maritime Court dismissed an application to recognize and enforce a foreign award due to the applicant’s failure to provide duly notarized and legalized procedural documents[6]

Sea Dolphin Shipping Limited (Dolphin Shipping) was the forwarder for Xiamen Jianfa Agriculture Product Co., Ltd (Jianfa) to ship goods sold by Jianfa in August 2015. Later in September 2015, Jianfa filed a lawsuit with Xiamen Maritime Court requesting Dolphin Shipping to pay damages. TheXiamen Maritime Court accepted the case and rendered a default judgment on 10 March 2018 (Dolphin Shipping was absent from the court hearing). In February 2017, Dolphin Shipping initiated an arbitration proceeding in London pursuant to the parties’ agreement. On 16 May 2017, the tribunal rendered a final award declaring that Dolphin Shipping was not liable to Jianfa for any damages and that Jianfa had violated the arbitration agreement by filing a lawsuit in China. The tribunal ordered Jianfa to compensate for any fees and costs incurred by Dolphin Shipping. In August 2017, Dolphin Shipping applied to Xiamen Maritime Court to recognize and enforce the award. However, Xiamen dismissed the application on the grounds that Dolphin Shipping, as a legal entity incorporated in The Republic of Marshall Island had failed to provide a duly notarized and legalized incorporation certificate and POAs pursuant to PRC laws as specifically requested by the Court. Xiamen Maritime Court also directed that Dolphin Shipping could always re-file the application once the notarization and legalization procedure was duly completed.

Shenzhen Intermediate People’s Court held that exceeding time limits for rendering an award was not enough to warrant setting aside. [7]

Jinshan Company applied to the Shenzhen Intermediate People’s Court to set aside the arbitral award rendered by Shenzhen Arbitration Commission on the grounds that the arbitration procedure was in violation of due process due to the Shenzhen Arbitration Commission exceeding the two month time period for rendering the award as provided under the arbitration rules. Shenzhen Intermediate People’s Court ruled that although the tribunal did delay by failing to render the award within the two month time period, such a delay did not affect the merit of the award and hence should not be set aside.

It is worth noting that the rationale of the above ruling applies to domestic arbitration only. According to article 20 of the SPC Interpretation, for domestic arbitration, an award can be set aside if (i) there is a breach of the arbitration procedures prescribed in the PRC Arbitration Law or the arbitration rules chosen by the parties, and (ii) the merit of the award may have been affected due to the breach. However, for foreign-related awards and foreign arbitration, the second element is not required. For example, according to the PRC Arbitration Law and PRC Civil Procedure Law, a foreign-related arbitral award can be set aside merely because the arbitration procedure is inconsistent with Chinese arbitration rules. For foreign arbitration, the New York Convention provides that an award may be refused enforcement if the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place. In another instance, the SPC once refused to enforce a Japanese award simply on the ground that the award exceeded the time limit specified under the arbitration rules without further elaboration as to whether the merit of the award was affected or not. [8]

 

[1] (2019) Zui Gao Fa Min Zhong No. 279.

[2] (2017) Jing 03 Min Te 405.

[3] 2011Shi Min Li Cai Zi No. 00002.

[4] (2019) Zui Gao Fa Zhi Min Xia Zhong No.47.

[5] (2018) Yue 03 Zhi No. 2494(1).

[6] (2017) Min 72 Xie Wai Ren No.1.

[7] (2016) Yue 03 Min Te 772.

[8] (2007) Min Si Ta Zi No. 26.

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