Based on existing judicial practice in China1, matters without foreign elements cannot be submitted to offshore arbitration or to arbitration institutions outside of China. Even if a party is a wholly foreign-owned company, as it is a company registered in China, it is not considered to be foreign related. However, the Supreme People's Court (SPC) in the recently issued Opinions on Providing Judicial Protection for the Construction of Pilot Free Trade Zones2 (Fa-fa  No. 34) (Opinions) has made special provisions for companies within the Pilot Free Trade Zones, which caused a breakthrough in the judicial practice stated above. We set out the details below:
Firstly, Article 9 paragraph 1 of the Opinions states: "where wholly foreign-owned companies registered in the Pilot Free Trade Zones agree to submit commercial disputes among them to offshore arbitration, the arbitration agreement shall not be deemed null and void simply on the basis that the disputes do not have any foreign elements," thereby providing a clear legal basis for wholly foreign-owned companies registered within the Pilot Free Trade Zones to submit their commercial disputes to offshore arbitration. This provision changed the existing judicial practice and has been viewed as a break-through.
Further, Article 9 paragraph 2 of the Opinions provides: "where one or both of the parties are wholly foreign-owned companies registered within the Pilot Free Trade Zones and agreed to submit disputes between them to offshore arbitration, after disputes arose and one of the parties submitted the disputes to offshore arbitration, and after an award was made, the claimant objects to the recognition, approval or enforcement of the award on the grounds that the arbitration agreement is null and void, the people's courts will not support such objection. Where the other party (to the dispute) did not raise any objection to the validity of the arbitration agreement during the arbitral proceedings, but after the award was made, argues that the arbitration agreement is null and void on the basis that the dispute does not contain foreign elements, and objects to the recognition, approval or enforcement of the award on such basis, the people's courts will not support such objection." This provision provides substantial support for the recognition, approval or enforcement of arbitral awards when wholly foreign-owned companies registered in the Pilot Free Trade Zones agreed to submit commercial disputes to off-shore arbitration. Accordingly, in offshore arbitration matters where one of the parties is a wholly foreign-owned company registered in the Pilot Free Trade Zones, if either of the party wishes to allege that the arbitration agreement is null and void because it does not contain any foreign elements, such allegations should be raised as early as possible. Otherwise, if an objection is made, after an award was rendered, requesting that the people's court refuse the recognition, approval or enforcement of an award on the grounds that there was no foreign element, the people's court will not give its supports. The SPC states that this provision is made under the requirement of the principle of estoppel.
Lastly, Article 9 paragraph 3 provides: "where companies registered in the Pilot Free Trade Zones agreed with each other to arbitrate related disputes at specified locations in Mainland China, in accordance with specified arbitration rules, by specified people, such arbitration agreement can be deemed valid. Where a people's court considers such arbitration agreement to be null and invalid, it should report to the next higher level court. Where the next higher level court agrees with the opinion of the lower people's court, it should further report its opinion to the Supreme People's Court and wait for the reply from the Supreme People's Court before any rulings can be rendered." Scholars' and practitioners' opinions differ as to how this paragraph should be interpreted. Some commentators believe that based on this para-graph, this opens the door for acceptance of ad hoc arbitration between companies registered within the Pilot Free Trade Zones. For example, if the "specified arbitration rules" are UNCITRAL Arbitration Rules, as the UNCITRAL Arbitration Rules were originally designed for ad hoc arbitration, it did not refer to any specific arbitration institutions. Only such interpretation can high-light the importance of this paragraph. However, others take a more conservative view and believe that the paragraph is limited to situations where the arbitration rules already specifically designate the arbitration institution. For example, Article 4(4) of CIETAC Arbitration Rules 2015 provides "where the parties agreed to arbitration in accordance with these Rules without providing the name of the arbitration institution, they shall be deemed to have agreed to refer the dispute to arbitration by the CIETAC." Alternatively, Article 2(2) of Beijing Arbitration Commission Arbitration Rules 2014 provides "Where the par-ties have agreed to apply the Rules, but have not designated an arbitral institution, they shall be deemed to have agreed to submit their disputes to the BAC for arbitration." Otherwise, this paragraph would conflict with the express provisions of Article 16 of the PRC's Arbitration Law. This will have to await judicial confirmation.
In any case, the implementation of the Opinions shows that the Chinese arbitration framework is piloted in the Pilot Free Trade Zones, and further narrows the gap between Chinese arbitration framework and the commonly accepted international arbitration practices.
- “China” means the People’s Republic of China, but solely for the purposes of this article, "China" herein refers to Mainland China, excluding the Hong Kong Special Administrative Region, the Macau Special Administrative Region and the Taiwan Region.
- Dated 30 December 2016; publicly released on 9 January 2017 by the Supreme People's Court. See: http://www.court.gov.cn/zixun-xiangqing-34502.html.