China’s top court issues arbitration guidance

By John Choong and Eric Chan, Freshfields Bruckhaus Deringer

The Supreme People’s Court (SPC) has recently released two judicial interpretations on arbitration. The new rules are the most important SPC judicial interpretations on arbitration issued since 2006, addressing gaps in the more than 20-year old Arbitration Law.

The new rules focus on issues frequently encountered by the PRC courts in the judicial review of arbitration cases, and fill a number of significant gaps in the Arbitration Law and related laws.

Applicable law of an arbitration agreement. The new rules clarify that if the parties intend to choose a particular law to govern the validity of a foreign-related arbitration agreement, they should do so expressly. An agreement on the law governing the underlying contract will not necessarily mean that the same law will be applied to decide the validity of the arbitration agreement itself.

If the parties do not choose the applicable law of a foreign-related arbitration agreement, the court will apply either the law at the place of the arbitration institution, or the law at the seat of the arbitration. The new rules further clarify that if the choice of law leads to different results, the court will apply the law that results in a valid arbitration agreement.

The drawing of a distinction between the law governing the arbitration agreement and the law governing the underlying contract is consistent with the approach taken in a number of other jurisdictions. In addition, the pro-arbitration stance of the new rules is clear, given that the court will apply the law that upholds the validity of the arbitration agreement.

Extending the ‘reporting procedure’. A well-known feature of the PRC’s arbitration regime is its “reporting procedure”, which has applied since 1995 to the enforcement of foreign arbitration awards (awards made by tribunals seated outside the PRC) and foreign-related arbitration awards (awards made by tribunals seated in the PRC but involving a foreign element), as well as to applications to challenge the validity of arbitration agreements and to set aside foreign-related awards made in the PRC.

Under the reporting procedure, in general, lower courts cannot refuse to recognize and enforce an award without first referring their decision to the higher people’s court, followed by the SPC, for approval.

The new rules build on the reporting procedure in two ways. First, they extend the reporting procedure to domestic arbitrations – including any decision to invalidate an arbitration agreement, to set aside an award or to refuse to enforce an arbitral award. There is, however, an important limitation: Unlike the reporting procedure, which applies to foreign or foreign-related awards, in the case of domestic arbitrations the higher people’s court only needs to report to the SPC for approval in the following two scenarios:

(1) if the case involves parties from different provinces; or

(2) if the ground for refusing enforcement or setting aside of the award is “infringement of public interest”.

As a result, while the new regime provides greater safeguards than before, domestic awards still enjoy less protection than foreign-related and foreign awards, since it is not essential that the SPC’s approval is obtained in all cases.

Second, the new rules provide that if the higher court finds that the relevant facts are not clear, it can question the parties, or require the lower court to conduct further fact finding.

The parties may therefore have an opportunity to participate in the reporting procedure by way of answering the court’s enquiries on the facts. However, it remains to be seen whether this change is significant, given that the new rules do not expressly grant parties the unfettered right to make full submissions.

Other provisions in the new rules. The new rules contain more than 20 articles addressing a variety of matters, including: stipulating the PRC court that has jurisdiction to recognize a foreign arbitration award where there is a related litigation or arbitration in the PRC; setting out the documents and information required for the recognition and enforcement of a foreign award; and clarifying that court decisions in cases involving the judicial review of arbitration are generally not appealable.

A step in the right direction. The new rules are part of the SPC’s recent efforts to improve the arbitration regime. In May 2017, the SPC released a notice requiring the courts at all levels to designate specialized divisions to handle the judicial review of arbitration cases. This measure is likely to build up a core group of judges who are more familiar with arbitration matters, thereby ensuring greater consistency in the judgments rendered.

In addition, on the same day that the new rules were released, the SPC in principle also passed another judicial interpretation concerning the enforcement of arbitral awards. The text of this new judicial interpretation has not yet been made public.

Although there may be debate as to whether the SPC could have gone further, it is clear that the new rules are a step in the right direction, and indicate an arbitration-friendly approach by the PRC courts. For example, the clarification of the law governing an arbitration agreement underscores the pro-arbitration bias under the new rules, and the partial extension of the reporting procedure to cover domestic arbitrations may benefit foreign companies in situations where their contracts have no foreign element, and they have no option but to agree to PRC arbitration.

John Choong is a partner at Freshfields Bruckhaus Deringer in Hong Kong and the firm’s head of international arbitration for mainland China and Hong Kong. Eric Chan is a senior associate in the international arbitration group at Freshfields in Hong Kong