More clarification on validity of foreign-related arbitration clauses

During the past year, for those who run international commercial activities, it is noteworthy that the Supreme People’s Court has, through a series of official replies to cases before lower-level courts, further clarified the criteria for determining the validity of foreign-related commercial arbitration clauses. Taking into consideration relevant cases, this column will explore how to distinguish the effectiveness of foreign-related commercial arbitration clauses in China.

Q: Is it possible to provide for arbitration by a foreign arbitration institution in a commercial dispute without any foreign-related elements?

A: The Supreme Court says no. In its Reply to the Request for Instructions in the Dispute Between Jiangsu Energine Wind Turbine Manufacture Co Ltd and LM Wind Power (Tianjin) Co Ltd Involving an Application to Confirm the Validity of an Arbitration Agreement, the Supreme Court arrived at the following answer by a two-step method.

Step 1. Pursuant to article 178 of the Opinions of the Supreme People’s Court on Several Issues Concerning the Thorough Implementation of the General Provisions of the Civil Code of the People’s Republic of China (for trial implementation) and article 1 of the Interpretations of the Supreme People’s Court of Several Issues Concerning the Application of the Law of the People’s Republic of China on the Application of Laws to Foreign-Related Civil Relationships it can generally be determined whether a dispute has foreign-related elements from the following three aspects: (1) the nationalities of the parties; (2) the location of the subject matter; and (3) the place of the occurrence of the legal facts that gave rise to, modified or extinguished the civil relationship.

Step 2. The Civil Procedure Law and the Arbitration Law bestow, and only bestow on parties to a foreign-related dispute, the right to provide, by way of a written agreement, that a dispute is to be referred to a foreign-related arbitration institution in the PRC or other arbitration institutions for arbitration. If a dispute does not have any foreign-related elements, the specification that the dispute can be brought before the jurisdiction of a foreign arbitration institution lacks legal authorisation, and such arbitration clauses are invalid under the laws of China.

Furthermore, if a foreign arbitration institution has already rendered an award in a commercial dispute without any foreign-related elements, will a people’s court enforce it? On 20 January 2014, the civil ruling (2013)Er Zhong Min Te Zi No. 10670, rendered by the Second Intermediate People’s Court of Beijing Municipality, refused to recognise and enforce the arbitration award in question because the circumstances set forth in item (a) of paragraph 1 and item (b) of paragraph 2 of article 5 of the New York Convention applied to the case, namely “the said agreement is not valid under the law to which the parties have subjected it”, and “the recognition or enforcement of the award would be contrary to the public policy of that country”.

Q: Is a clause providing for “arbitration in China by a foreign arbitration institution” in a foreign-related commercial dispute valid?

A: Can a “foreign arbitration institution” conduct arbitration “in China?” This has been a subject of hot debate.

In its Reply to the Request for Instructions in the Case Between the Applicant, Anhui Longlide Packing and Printing Co Ltd and the Respondent, BP Agnati SRL, Involving an Application to Confirm the Validity of an Arbitration Agreement, the Supreme Court confirmed the validity of the arbitration clause reading “any dispute arising in connection with the contract shall be arbitrated by the International Court of Arbitration of the International Chamber of Commerce (ICC), and the place of arbitration shall be Shanghai, China”.

First, concerning the applicable law for determining the validity of the arbitration clause, pursuant to article 16 of the Interpretations of the Supreme People’s Court of Several Issues Concerning the Application of the Arbitration Law of the People’s Republic of China, where the parties have not provided for the applicable law, the law of the place of arbitration shall apply. Pursuant to this, the laws of China apply in confirming the validity of the arbitration agreement.

Second, the arbitration agreement in question complies with article 16 of the Arbitration Law, namely: (1) there is a declaration of the intention to apply for arbitration; (2) the arbitration matters are specified; and (3) a clear and specific arbitration institution has been selected. So it should be determined to be valid.

Q: Is a clause in a foreign-related commercial dispute that specifies that “ICC rules of arbitration shall apply” but fails to select the “arbitration institution” valid?

A: Literally, the foregoing arbitration clause lacks the requirement of a “clear and specific arbitration institution” of article 16 of the Arbitration Law. However, in the Reply to the Request for Instructions in the Sale and Purchase Contract Dispute Between Ningbo Beilun Licheng Lubricating Oil Co Ltd and Famowanchi Corporation Involving the Issue of the Validity of an Arbitration Clause rendered by the Supreme Court, it recognises such arbitration clause as valid.

Because, pursuant to the ICC rules in effect at the time of the entry into the contract, namely paragraph 2 of article 6 of the ICC rules that came into effect on 1 January 2012, which reads “by agreeing to arbitration under the rules, the parties have accepted that the arbitration shall be administered by the court”, the arbitration clause should be deemed to fall under the circumstance where “the arbitration institution can be determined in accordance with the specified arbitration rules”. Accordingly the arbitration clause is valid.

Q: Is a clause in a foreign-related commercial dispute providing for “application of the UNCITRAL arbitration rules by the Chinese arbitration institution” valid?

A: As the original intent for formulating the arbitration rules of the UN Commission for International Trade Law (UNCITRAL) is to have them used by parties to international ad hoc arbitration not subject to the administration of an arbitration institution, a certain point of view has existed for a long period of time, namely, as ad hoc arbitration clauses in mainland China are invalid, the arbitration clause mentioned in the heading is invalid.

In civil ruling (2012) Zhe Yong Zhong Que Zi No. 4, rendered by the Ningbo Municipal Intermediate People’s Court, after forwarding through the hierarchy to the Supreme Court, it was determined that, notwithstanding the fact that the original intent of formulating the UNCITRAL arbitration rules was to have them apply to ad hoc arbitration, this does not exclude them from being used by permanent arbitration institutions. Based on this, the arbitration clause mentioned in the heading was ultimately found to be valid.

Arthur Dong is a partner at AnJie Law Firm in Beijing