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Dispute resolution in China: Has the arbitral market opened up?

Introduction

The arbitral market on Mainland China is regarded as a closed shop for foreign arbitral institutions in two ways.

Firstly, it is unclear whether foreign arbitral institutions, such as the International Chamber of Commerce ("ICC") and Hong Kong International Arbitration Centre ("HKIAC"), can administer arbitrations seated on the Mainland. The concern is whether they are an "arbitral commission" within the meaning of the PRC Arbitration Law. In this regard, the PRC Arbitration Law is considered to be the Great Wall of China for foreign arbitral institutions.

Secondly, parties cannot arbitrate outside Mainland China unless there is a foreign element. This includes seating the arbitration in Hong Kong, and choosing institutions based in Hong Kong such as the ICC and HKIAC. The Chinese courts have denied enforcement of arbitral awards issued by foreign arbitration institutions seated outside the Mainland between two PRC legal entities without any foreign related elements. In refusing to stay proceedings between two Mainland Chinese entities that had agreed to arbitrate in Hong Kong before the HKIAC, the Supreme People's Court in Liupanshui Hidili Industry Co. Ltd. v. Zhang Hongxin1 was of the opinion that:

"the issue of resolution of civil and commercial disputes arising within a country's territory has a bearing on that country's judicial sovereignty. It also falls within the realm of that country's public policy. The parties may only reach an agreement only to the extent that current laws permit them to do so."

However, there have been some recent cases which suggest that the market for foreign arbitral institutions is opening up.

In Anhui Longlide Packaging Co. Ltd. v. BP Agnati S.R.L.2 ("Longlide"), the Supreme People's Court ("SPC") held that an arbitration agreement providing for ICC arbitration seated in China was valid. After Longlide, the HKIAC, ICC, and the Singapore International Arbitration Centre ("SIAC") have established representative offices in the Shanghai Pilot Free Trade Zone ("FTZ").

The Shanghai No.1 Intermediate People's Court ("IPC") in Siemens International Trading (Shanghai) Co., Ltd v. Shanghai Golden Landmark Co., Ltd ("Siemens") has enforced a foreign arbitral award even though the SIAC award involved two PRC entities.

Nevertheless, these recent developments do not support that the Chinese arbitral market has opened up for foreign arbitral institutions. Although the recent cases are a welcome development, uncertainty still prevails over the validity of foreign arbitral institutions conducting their arbitrations in China.

The problems for foreign arbitral institutions remain

The PRC Arbitration Law neither expressly allows, nor prohibits foreign arbitral institutions to administer arbitrations on the Mainland. Whether foreign arbitral institutions can administer arbitrations seated on the Mainland has not been clarified by a Judicial Interpretation. So there is a risk for the parties that their arbitration agreements are invalid, or any arbitral award rendered not enforced, if they stipulate a foreign arbitral institution to administer proceedings on the Mainland. Another undesirable consequence if the arbitration agreement is invalid is that it allows the parties to litigate before the PRC courts.

Although in Longlide, the SPC held that the arbitration agreement providing for ICC arbitration in Shanghai was valid under Article 16 of the PRC Arbitration Law3, it did not consider whether the ICC, as a foreign arbitral institution, complies with Article 10 and Article 66 of the PRC Arbitration Law. These provisions require arbitral institutions in China to be established by the departments and chambers of commerce of the People's Municipal Governments, or in the case of foreign-related arbitral institutions, by the China Chamber of International Commerce. As the ICC and other foreign arbitral institutions are not established in accordance with Article 10 and Article 66, it is unclear whether they are qualified as arbitration institutions4 under the PRC Arbitration Law to provide arbitration services in China. Further, the SPC's ruling in Longlide is not binding and it is questionable whether the SPC would reach the same conclusion in subsequent cases.

In 2009, for the very first time, a Chinese court enforced an arbitral award made in China by a foreign arbitral institution: Duferco S.A. v. Ningbo Arts & Crafts Import & Export Co., Ltd5.

However, the legal basis used to enforce the award raises doubts as to the correctness of the decision. The Chinese court used the New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards as the basis of enforcement. Since the seat of arbitration was Beijing, any award would be domestic in nature, and outside the scope of the New York Convention. However, the award was treated as non-domestic despite being made in China and the court recognised the award based on the New York Convention.

It is also important to note that the Ningbo IPC's decision to reject the respondent's challenge to the enforcement of the ICC award was on the basis that the respondent failed to raise any objection to the validity of the arbitration agreement prior to the first arbitral hearing.

Parties would be advised to avoid providing for China-seated arbitrations to be administered by foreign arbitral institutions, as the uncertainty has not been eradicated.

The representative offices of foreign arbitral institutions are not administering arbitrations

Around early 2016, HKIAC, SIAC and ICC established representative offices in the FTZ. Before that, no foreign arbitration institution had a presence on Mainland China. The legal basis for this is the State Council's Circular on Issuing the Plan for Further Promoting the Reform and Opening-up the China Shanghai Pilot Free Trade Zone6 which supports the "introducing of international, renowned dispute resolution institutions"7 to the FTZ. However, the word "introducing" is undefined. The scope of activities for the representative offices are limited to encouraging best international arbitration practices through cooperating with local authorities and arbitration commissions, providing professional training to local arbitrators and practitioners, and supporting hearings and promotion activities in China8. Therefore, the representative offices currently do not conduct case management services and are, at least for now, merely a marketing tool to build up ties with the users of arbitration.

The impact of Siemens is limited

Chinese laws do not allow two PRC entities to choose a foreign arbitration institution or to engage in ad hoc arbitration outside China if there is no foreign related element. The Chinese courts in various cases9 have denied the validity of the arbitration agreements and refused to enforce arbitral awards where two Chinese entities agreed to arbitrate outside of China without any foreign related elements. The SPC's Interpretations10 provide that a dispute is "foreign-related" when (i) one or more parties are foreign citizens or legal entities; (ii) the subject matter is located outside China; (iii) the facts which create, modify or terminate the legal relationship occurred outside China; (iv) the habitual residence of one or more parties is located outside China; or (v) other circumstances that can be considered as foreign-related. Based on this, the PRC courts have traditionally interpreted foreign-related elements narrowly and declined to find a dispute foreign-related if (i) both parties are registered in China; (ii) the subject matter of the agreement is in China; and (iii) the contract is concluded and performed in China.

In Siemens, however, the Shanghai IPC departed from previous rulings, and for the first time found foreign-related elements in the "other circumstance" category. The Shanghai IPC noted that the parties were wholly foreign owned entities registered within the FTZ, where the sources of capital, beneficiaries, and control were all foreign. Also, the performance of the contract involved use of international customs in the FTZ, and hence should be distinguished from solely domestic contract case. Accordingly, the IPC enforced a foreign arbitral award even though the award was made by SIAC between two PRC entities.

This case is considered to be a significant shift by the Chinese courts for a broader interpretation of foreign-related elements, and hence allowing PRC entities to arbitrate abroad and choose foreign arbitral institutions. However, the unique facts of Siemens may limit its impact. The claimant, who objected to enforcement, initiated the SIAC arbitration. The respondent to the SIAC arbitration initially challenged the tribunal's jurisdiction arguing that the arbitration clause was invalid under PRC law. The tribunal rejected the challenge. The respondent participated in the arbitration and raised counterclaims, which succeeded. Accordingly the claimant's subsequent contention of invalidity of the arbitration agreement on enforcement breached the principle of good faith. Furthermore, the two PRC legal entities were established within the FTZ, and the international customs which the Shanghai IPC relied on are applicable only in the FTZ. The Shanghai Court also took into account the policy of promoting trade and investment within the FTZ.

Conclusion

Recent developments do not support that the Chinese arbitral market is opening. Given that it is unclear whether a foreign arbitral institution such as the ICC or HKIAC is an "arbitral commission" under the PRC Arbitration Law, there is a risk in specifying them or any other foreign arbitral institutions with a China seat. This could lead to an unenforceable arbitration agreement leading to an unenforceable award.

The Siemens case is also distinguished on its facts. Parties should only choose to arbitrate outside of China if there is a clear foreign element. Unless the validity of foreign arbitral institutions administering arbitrations on the Mainland is confirmed by a Judicial Interpretation, for parties who have to arbitrate in China for the lack of a foreign element or who prefer to, it is recommended that they use a recognised Chinese arbitration commission such as CIETAC to administer their disputes.


* Partner, International Arbitration, Hong Kong.
^ Admitted to practise law in the PRC since 2012.
1 (2010) Min Er. Zhong Zi No. 86.
2 Anhui Longlide Packaging Co. Ltd. v. BP Agnati S.R.L. [2013] Min Si Ta Zi No.13
3 Under Article 16 of the PRC Arbitration Law, an arbitration agreement shall contain three elements to be valid. They are 1) an express intention of arbitration 2) matters of arbitration and 3) a designated arbitration commission.
4 Under Article 18 of the PRC Arbitration, if an arbitration agreement contains no or unclear provisions concerning the matters for arbitration or the arbitration commission, the parties may reach a supplementary agreement. If no such supplementary agreement can be reached, the arbitration agreement shall be null and void.
5 (2008) Yong Zhong Jian Zi No. 4
6 The Circular is promulgated by the State Council on 8 April 2015
7 The Circular is promulgated by the State Council on 8 April 2015
8 See HKIAC Achieves Breakthrough by Launching Office in Mainland China, HKIAC (20 Nov.2015); Opening of SIAC Office in Shanghai, SIAC (25 Jan.2016); New Shanghai office lays groundwork for ICC Asia developments, ICC (24 Feb.2016)
9 See Jiangsu Aerospace Wanyuan Wind Power Co., Ltd v LM Wind Power (Tianjin) Co (2012) Min Si Te Zi No.2 and Beijing Chaolaixinsheng Sports and Leisure Co Ltd v Beijing Suowangzhixin Investment Consulting Co Ltd (2013) Er Zhong Min Te Zi No.10670
10 See Article 1 of the Interpretation of the Supreme People's Court on Several Issues Concerning Application of Law of the PRC on Choice of Law for Foreign-related Civil Relationship (2012); See Article 522 of the Interpretation of the Supreme People's Court on the Application of the Civil Procedural law of the PRC