Is arbitration before a foreign institution in China on the way?

Recently, a reply given by the Supreme People’s Court (SPC) in March 2013 came to light in a publicly available publication (Min Si Ta Zi [2013] No. 13). The reply expressly recognises the validity of an arbitration agreement providing for “a foreign arbitration institution conducting arbitration in China” for first time.

In the case, Anhui LD Packing Printing and BP Agnati SRL provided as follows in their arbitration agreement: “Any dispute shall be referred to the ICC International Court of Arbitration … jurisdiction [place of arbitration] shall be Shanghai, China”. That means the ICC International Court of Arbitration would hear a case in Shanghai.

Earlier appearance

In fact, an arbitration agreement with “foreign arbitration institution plus arbitration in China” made its first appearance much earlier than this. In 2004, in the arbitration agreement validity case between Züblin International GmbH and Wuxi Woke General Engineering Rubber, an arbitration clause specifying “Arbitration: ICC Rules, Shanghai shall apply” was involved.

In its reply in that case (Min Si Ta Zi [2003] No. 23), the SPC pointed out that because Shanghai was selected as the place of arbitration, the validity of the arbitration agreement should be determined based on the laws of China. Furthermore, because the arbitration agreement only selected the arbitration rules of the ICC Court of Arbitration and did not expressly designate an arbitration institution, it did not satisfy the requirements of Chinese laws for a valid arbitration agreement and was, therefore, invalid.

Ten years later, the parties to the Min Si Ta Zi [2013] No. 13 case took the above-mentioned supposition and converted it into a provision of their arbitration agreement, and the SPC’s response this time crisply put the above question to rest.

Valid agreement

First, as was the case 10 years before, the SPC pointed out that as the parties selected Shanghai as the place of arbitration, the determination of the validity of arbitration agreement should be based on the laws of China; second, given that the parties had expressly opted for the ICC Court of Arbitration, the requirement in Chinese law that an arbitration agreement include “the selected arbitration commission” was satisfied. Based on this, the SPC found that the arbitration agreement was valid.

After Min Si Ta Zi [2013] No. 13 came to light, the industry deemed it major favourable news for foreign arbitration institutions. One opinion held that the reply signified that parties to a dispute with a foreign element could enjoy the tailored services of famous international arbitration institutions right at their doorstep, which could perhaps change the entire layout of the arbitration market in China. (As to whether parties to a case without a foreign element can benefit from this, please refer to the author’s columns this year in China Business Law Journal, volume 5 issue 3, and volume 5 issue 4).

However, it is the author’s opinion that it is still too early to come to such a conclusion. The following three issues require further scrutiny:

Lawfulness of foreign arbitration institutions conducting arbitration activities in China. It should be closely noted that the reply only indicates that the SPC found that the parties opting for the ICC Court of Arbitration was done “expressly”. As to whether the ICC Court of Arbitration is an “arbitration commission for the purposes of Chinese laws”, and whether arbitration activities conducted in China by the ICC Court of Arbitration would be “lawful”, the SPC has not indicated its stance. Besides, pursuant to the Arbitration Law, the authority to monitor the establishment of arbitration institutions and the conduct of arbitration activities is exercised by government authorities, not by courts.

Prospect of investigation

Accordingly, the SPC’s reply does not signify that the conduct of arbitration in China by foreign arbitration institutions is necessarily lawful or compliant, and foreign arbitration institutions and even arbitrators could face the prospect of being investigated and dealt with by local governments and industry and commerce, foreign investment and tax authorities. This administrative approach of “the compliance of this line does not indicate the compliance of that line” has repeatedly raised its head in administration in China in recent times.

Enforcement of an award after arbitration in China by a foreign arbitration institution. Provided that the validity of an arbitration agreement is confirmed, the probability of the award rendered in such arbitration being enforced in China is extremely high, absent any low-level procedural errors during the arbitration process. Pursuant to current Chinese laws, there are no barriers to enforcement regardless of whether it is directly deemed a domestic award or deemed a foreign or non-domestic award under the auspices of the New York Convention.

Important focus

However, the determination of the nationality of such arbitration awards by Chinese courts will remain an important focus of attention. In the past, Chinese courts have treated the nationality of the arbitration institution as the criterion for determining the nationality of an arbitration award, and there is a precedent in which an award by the ICC Court of Arbitration rendered in Hong Kong was determined to be a French award (Min Si Ta Zi [2004] No. 6).

However, in the Notice on Issues Relevant to the Enforcement of Hong Kong Arbitration Awards in Mainland China (Fa [2009] No. 415), the SPC moved to determining the nationality of arbitration based on the place of arbitration.

Interim measures in arbitration in China conducted by a foreign arbitration institution. Closely following on the previous issue, there is no harm in asking whether, if the award rendered in China by a foreign arbitration institution is recognised as being of Chinese nationality, the foreign arbitration institution could directly apply to a Chinese court for co-operation in enforcing interim measures in its arbitration procedure.

If the answer is yes, the arbitration activities of foreign arbitration institutions in China will get a powerful boost, and attract the participation of many more parties. Perhaps we will not have to wait another 10 years for the answer to this question.