Judicial Review of Ad Hoc Arbitration Agreements in China
Author:张光磊 张金辉 Date:2022-08-24

This article was published in July 2022 Issue of the Asian Dispute Review.

 

This article discusses the enforceability of an ad hoc arbitration agreement in the Mainland under the current legal framework and developments in light of the draft revisions to the PRC Arbitration Law released in July 2021.[1]

 

Introduction

Institutional arbitration and ad hoc arbitration are the two major forms of arbitration in the world. The term ‘institutional arbitration’ refers to an arbitration process that is administered by a permanent arbitral institution, whereas ‘ad hoc arbitration’ refers to one that allows parties to submit a dispute to a temporarily constituted arbitral tribunal for its resolution. On paper, an arbitration agreement can easily be identified as institutional or ad hoc, depending on whether it specifies an arbitral institution.

 

Ad hoc arbitration is the earliest form of arbitration, and is still widely used today to resolve disputes in sectors such as the maritime industry and commodity markets. Compared to institutional arbitration, ad hoc arbitration is preferred for its procedural flexibility, efficiency and enhanced party autonomy throughout the arbitration process.

 

The limited availability of ad hoc arbitration in the Mainland

 

Traditionally, institutional arbitration remains the only recognised form of arbitration in the Mainland. According to arts 16 and 18 of the PRC Arbitration Law 1994 (as amended in 2017), an arbitration agreement must specify an arbitral institution, the absence of which will render the agreement invalid and unenforceable.[2] These provisions basically close the door to the conduct of ad hoc arbitration in the Mainland.

 

Attempts have since been made to legalise ad hoc arbitration in a limited manner in the Mainland but notable breakthroughs are yet to be seen. Thus, for example, on 30 December 2016, the Supreme People’s Court released a Notice setting out its Opinion on Providing Judicial Safeguards for the Development of Pilot Free Trade Zones (FTZ Opinion)[3], which, for the first time, recognised the legality of ad hoc arbitrations between companies registered within China’s free trade zones. The relevant part of the provision reads: 

 

“…[I]f companies registered in the free trade zones agree to conduct arbitration of a relevant dispute at a specific location in China, in accordance with specific arbitration rules and by a specific person or persons, such arbitration agreement may be found to be valid.”

 

As a result, a number of arbitral institutions in China have adapted their arbitration rules to accommodate this innovative form of arbitration.

 

According to the FTZ Opinion, however, the availability of ad hoc arbitration in the Mainland is limited to companies registered in free trade zones. Moreover, in the absence of a comprehensive legal framework regulating ad hoc arbitration, this opinion has hardly elevated the popularity of ad hoc arbitration in the Mainland.

 

Judicial review of ad hoc arbitration agreements by PRC courts

 

Introduction

 

The validity and enforceability of ad hoc arbitration agreements may be subject to judicial review by PRC courts in a number of scenarios, including where:

 

1

a party requests a PRC court to determine the validity of an ad hoc arbitration agreement;

2

a party challenges the PRC court’s jurisdiction by invoking an ad hoc arbitration agreement between the parties;

3

a party requests the PRC court to recognise or enforce an ad hoc arbitral award in the Mainland; or

4

a party requests the PRC court to set aside or refuse enforcement of an arbitral award on the ground that the underlying ad hoc arbitration agreement is invalid.

 

Although the PRC Arbitration Law does not allow an ad hoc arbitration to be conducted in the Mainland, the validity and enforceability of ad hoc agreements that are brought to PRC courts for review are not categorically excluded. This paradoxical situation, in essence, underlies the applicability of non-PRC laws to the examination of ad hoc agreements by PRC courts.

 

In short, if the governing law of an ad hoc arbitration agreement is PRC law, an ad hoc arbitration agreement shall generally be invalid; if, however, the governing law of such an agreement is not PRC law, PRC courts would defer to the examination of its validity under non-PRC laws. Thus, the key to the examination of the validity of an ad hoc arbitration agreement is the governing law of the arbitration agreement.

 

Ascertaining the governing law of ad hoc arbitration agreements

 

The rules for determining the governing law of an arbitration agreement vary, depending on whether or not the arbitration agreement is ‘foreign-related’. An arbitration agreement is ‘foreign-related’ if it satisfies any of the following criteria, in accordance with art 1 of the Supreme People’s Court’s Interpretation of Several Issues Relating to Application of the PRC Law on the Application of Laws to Foreign-related Civil Relationships (I)[4] (as amended in 2020):

 

1

one or more of the parties are foreign persons or stateless persons;

2

the habitual residence of one or more of the parties is outside the Mainland;

3

the subject matter is situated outside the Mainland;

4

the civil relationship or its alteration or termination originates from a fact that took place outside the Mainland; or

5

there exists any other circumstance identified as a foreign-related civil relation.

 

An arbitration agreement that has none of the above elements is purely domestic and so shall be governed by PRC law, including in particular the PRC Arbitration Law. In such circumstances, an ad hoc arbitration agreement shall be invalid because it fails to specify an arbitral institution, as required by arts 16 and 18 of the PRC Arbitration Law. In such a case, PRC courts rather than the tribunal shall have jurisdiction over the relevant dispute.

 

On the other hand, an arbitration agreement meeting any of the above criteria qualifies as a ‘foreign-related arbitration agreement’. For example, in Unicore Resources Pte Ltd v Rizhao Zhongrui Properties Co Ltd (2016),[5] Shandong High People’s Court ruled that “the arbitration clause in the Contract of Iron Ore Trade is a foreign-related arbitration clause, because one of the parties in this dispute, Unicore Resources Pte Ltd, is a juridical person of Singapore.”

 

Once an arbitration agreement qualifies as a ‘foreign-related arbitration agreement’, PRC courts would then identify the governing law of such an agreement to examine its validity. For example, the Supreme People’s Court’s Reply to Request for Opinions Regarding the Validity of the Arbitration Clause[6] states that “the arbitration clause in the present dispute is a foreign-related arbitration clause, and the first task is to determine the law governing the validity of the arbitration clause.”

 

The substantive rules for ascertaining the law governing a foreign-related arbitration agreement are primarily laid down by art 18 of the Law of the PRC on the Application of Laws to Foreign-related Civil Relations 2011 and art 16 of the Supreme People’s Court’s Interpretation Concerning Some Issues on Application of the Arbitration Law (as amended in 2008).[7] According to these provisions, a foreign-related arbitration agreement shall be governed by:

 

1

the law chosen by the parties to govern the arbitration agreement; or

2

in the absence of such choice, the law of the place of the chosen arbitral institution or seat of the arbitration;or

3

in the absence of any choice of the arbitral institution or seat of the arbitration, PRC law.

 

Thus, for example, in Application for Recognition and Enforcement of a Hong Kong Arbitration Award by the Applicants David Dein Consultancy Ltd and Bramley Corporation Ltd (2020),[8] the Supreme People’s Court opined that –

 

“Beijing Fourth Intermediate People’s Court held upon examination that first, the parties in the present case agreed only on the application of substantive English law as the governing law of the agreement, without stating explicitly the law to be applied in confirming the validity of the foreign-related arbitration clause. As both the location of the arbitral institution and the seat of arbitration were in Hong Kong SAR, the Arbitration Ordinance of Hong Kong [Cap 609] should apply in the conduct of the examination, and the agreement was valid under the relevant provisions…”

 

Furthermore, the expression ‘the law chosen by the parties to govern the arbitration agreement’ is defined narrowly as an explicit choice of law for the determination of the validity of the arbitration agreement, according to art 13 of the Supreme People’s Court’s Provisions on Several Issues relating to the Trial of Cases Concerning Judicial Review of Arbitration (2017).[9] In particular, the parties’ choice of the governing law in the main contract or the law chosen to resolve disputes arising from the contract does not automatically become the governing law of a foreign-related arbitration agreement.

 

Thus, for example, in Maersk Line A/S v Tianjin Starshipping International Ltd et al (2018), [10]the arbitration clause read:

 

“This agreement shall be construed in accordance with English law; any disputes arising out of or in connection with this agreement shall be settled amicably, failing this it shall be referred to arbitration in London in accordance with the Arbitration Act 1996 or any statutory modification or reenactment thereof.”

 

Tianjin High People’s Court decided (inter alia) that “since the Agreement fails to provide the law governing the arbitration clause, the validity of the arbitration clause shall be determined in accordance with the law of the seat of arbitration, that is, English law…”

 

Similarly, in Unicore Resources Pte Ltd v Rizhao Zhongrui Properties Co Ltd (2016),[11] Shandong High People’s Court held that –

 

“…the arbitration clause at issue provides that the dispute shall be resolved by arbitration in Hong Kong and the governing law is English law, but fails to expressly provide the law governing the validity of the arbitration clause. Therefore, the law of the seat of arbitration, ie Hong Kong law, shall apply to the determination of the validity of the arbitration clause.”

 

In order for parties to choose effectively the governing law of the arbitration agreement, the arbitration agreement will have to provide, for example, that “the governing law of this arbitration clause is Hong Kong law”. In practice, however, it is rare that the parties choose the law that specifically governs the arbitration agreement.

 

Thus, in the absence of such choice of law, the PRC courts would then look to the law at the place of the chosen arbitral institution or seat of the arbitration. In the case of an ad hoc arbitration agreement, no arbitral institution is chosen, and that would result in the application of the law of the seat.

 

Examining the validity of ad hoc arbitration agreements under different governing laws

 

In the absence of choices of law and arbitral institution, if the seat of the arbitration is Mainland, PRC law shall apply to determination of the validity of an ad hoc arbitration agreement, which shall be deemed invalid in accordance with the PRC Arbitration Law. If the seat of the arbitration is outside the Mainland, the validity of the ad hoc arbitration agreement will be examined under the non-PRC law of the seat.

 

A considerable number of jurisdictions outside the Mainland recognise ad hoc arbitration. Consequently, ad hoc arbitration agreements may be valid and enforceable under certain non-PRC laws. In recent years, PRC courts have, pursuant to a ‘foreign law discovery’ exercise, recognised the validity of foreign-related ad hoc arbitration agreements, having found them to be consistent with the applicable non-PRC laws, such as those of Hong Kong, Switzerland, London or Vietnam.

 

For example, in Maersk Line A/S v Tianjin Starshipping International Ltd et al (2018),[12] Tianjin High People’s Court found that “English law as discovered by this court does not require ‘a designated arbitral institution’ as an essential element for an arbitration agreement to be valid. Therefore, the arbitration clause of the Booking Agency Agreement shall be valid, although it merely provides for arbitration in London without specifying an arbitral institution.”

 

Similarly, in Henan Kanghui Aviation Technology Co Ltd v Jetstar Pacific Airlines Aviation Joint Stock Company (2019),[13] Zhengzhou Intermediate People’s Court ruled that “the validity of the arbitration clause in the contract at issue shall be determined pursuant to the law of the seat of arbitration, namely Vietnamese law…According to the Law of Vietnam on Commercial Arbitration [2010], where the parties have entered into an arbitration agreement, the failure to specify the arbitral institution or form of arbitration will not necessarily render the arbitration agreement invalid.”

 

Once a foreign-related ad hoc arbitration agreement is found to be valid, PRC courts will not exercise jurisdiction over disputes between the parties. If such an arbitration agreement is found to be invalid, any award made by a tribunal pursuant to such agreement may be set aside by PRC courts (if the award is made in China) or refused recognition and enforcement in the Mainland.

 

Developments in the ad hoc arbitration legal framework in the Mainland

 

On 30 July 2021, the Ministry of Justice released draft revisions to the PRC Arbitration Law (the Draft Revisions) for public comment. The Draft Revisions cover several ground-breaking changes and are widely recognised as a positive signal that China’s arbitration legislation is embracing best practice in international arbitration.

 

Among other highlights, the Draft Revisions would allow the conduct of ad hoc arbitration in the Mainland in foreign-related cases, pursuant to art 91 thereof. Further, the Draft Revisions make provision for procedural matters with regard to (inter alia) the composition of an ad hoc arbitral tribunal and withdrawal of ad hoc arbitrators. The Draft Revisions would also waive the requirement for a chosen arbitral institution as a necessary component for a valid arbitration agreement, thus making room for ad hoc arbitration agreements.

 

As of 7 July 2022, the Draft Revisions are still pending further review and approval by the National People’s Congress, China’s supreme legislative authority.

 

Conclusion

Although ad hoc arbitration has very limited availability in the Mainland at the moment, ad hoc arbitration agreements and awards may still be recognised by its courts. As China embarks upon further reforms of its arbitration regime, the landscape of ad hoc arbitration in the Mainland is about to be reshaped. The authors remain optimistic that ad hoc arbitration will bloom and gain popularity in the Mainland in the days to come.

 

注释

[1] This article is limited to the discussion of laws and developments in the jurisdiction of the PRC. Thus, unless stated otherwise, the expressions ‘PRC’, ‘China’ or ‘Mainland’ used herein do not include the Hong Kong SAR, Macau SAR and the Taiwan region, which are separate jurisdictions of China. Likewise, the terms ‘PRC law’ or ‘PRC court’ used herein refer to the laws or courts of Mainland.

[2] Article 16 of the PRC Arbitration Law provides:

“Arbitration agreements include arbitration clauses of a contract and other written agreements concluded before or after the occurrence of a dispute that refer to arbitration. An arbitration agreement shall provide the following: (1) an express intention to refer to arbitration; (2) matters to be referred to arbitration; and (3) a chosen arbitration commission.”

Article 18 of the PRC Arbitration Law provides:

“If an arbitration agreement fails to specify or fails to clearly specify matters to be referred to arbitration or the arbitration commission, the parties may reach a supplementary agreement. If the parties fail to reach a supplementary agreement, such arbitration agreement shall be invalid.”

However, according to art 95 of the Minutes of the National Symposium on Foreign-related Commercial and Maritime Trial Work of Courts released by the Supreme People’s Court on 24 January 2022 (Editorial: see Supreme People’s Court Monitor (22 January 2022), available at

https://supremepeoplescourtmonitor.com/2022/01/28/supreme-peoples-court-issues-new-guidance- on-cross-border-commercial-procedural-issues/), an exception is allowed. This states that “if the parties fail to expressly choose an arbitration institution in the arbitration agreement, but agree to apply the arbitration rules of a certain arbitration institution, the parties shall be deemed to have chosen such arbitration institution for arbitration, unless the arbitration rules provide otherwise.”

[3] Fa Fa [2016] No 34.

[4] Fa Shi [2012] No 24.

[5] Case No 2016 Lu Min Xia Zhong No 78.

[6] 2006 Min Si Ta Zi No 6.

[7] Interpretation No 7 [2006].

[8] Case No 2020 Jing 04 Ren Gang No 5. This case was one of ten Model Cases of Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region jointly published by the Supreme People’s Court and the Department of Justice of Hong Kong SAR on 27 November 2020. Editorial: see

https://www.pkulaw.com/en_law/d9148d588758d607bdfb.html.

[9] Fa Shi No 22 [2017].

[10] Case No.: 2018 Jin Min Zhong No. 264

[11] Note 4 above.

[12] Note 10 above.

[13] Case No 2019 Yu 01 Min Te No 18.

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