International arbitration in China holds many of the same general advantages as international arbitration, making it more attractive than litigation. This includes the easier enforcement of international arbitral awards in China as compared to foreign court decisions. China has been a party to the New York Convention since 19861 and the Washington Convention since 1992.2 Furthermore, while China is a party to judicial cooperation treaties with only 30 countries, it is a party to well more than 100 bilateral investment treaties.
Arbitration in China has already been placed under the spotlight by the recent entry into force of the new China International Economics and Trade Arbitration Commission (CIETAC) arbitration rules. Arbitration in China is also governed by a dedicated set of national rules, namely the Arbitration Law (AL), adopted on 31 August 1994 and effective as of 1 September 1995, supplemented by the Supreme People's Court's (SPC) binding Interpretations and clarified by non-binding Chinese case law.
The AL, applicable since 1995, saw minor amendments in 2009 and 2017. There is an arbitration-friendly reform project which seeks to modernise the AL, called the Draft Revised Arbitration Law, published on 30 July 2021, which is nevertheless still being worked on and not applicable. It would be a welcome evolution, as it would remedy a few issues affecting arbitration in China.
These recent developments provide an appropriate occasion to delve into some potential issues parties could face over the course of arbitration in China. The two most salient issues are (1) foreign-administered disputes seated in China and (2) the lack of an applicable kompetenz-kompetenz doctrine. While these are not the only issues that parties could face during arbitration in China, they have been at the heart of Chinese case law and have the potential to delay or outright compromise arbitration.
1. Foreign Institution-Administered Disputes Seated in China
An issue with arbitration in China has been the purported inability of non-PRC arbitration institutions to administer proceedings in China, as Article 16 of the AL requires parties to designate an appropriate arbitral institution to manage their dispute. Through Article 10 or 15 of the AL and as visible in prior Chinese case law, foreign arbitral institutions could not administer disputes in China. Consequently, this can effectively compromise arbitration through both ad hoc tribunals and foreign arbitral institutions, although courts in China softened their stance starting in 2009. They notably held that arbitral awards rendered in China are, in fact, foreign as they were administered by foreign institutions.3
This issue with arbitration in China can be crucial as many foreign investors choose to establish domestic, PRC-registered entities to conduct their business with Chinese companies. As a result, arbitration between two domestic entities had to be based in China as a matter of Chinese law. The key issue here would arise when parties placed the seat of arbitration in China while administering it through a non-Chinese arbitral institution, as opposed to CIETAC or the Beijing Arbitration Center.
The Longlide case is an appropriate lens into this issue, in addition to being a landmark case.4 It included a ruling from the SPC. The question in the Longlide case was simple. What happens if a contract provides for arbitration through a non-Chinese arbitral institution, such as the ICC, with a seat located in mainland China? For a certain time, and for many Chinese judges and commentators, such an arbitration agreement was invalid, including due to key provisions of the AL. Yet, Longlide marked a shift in 2013.
In Longlide, the parties tried to submit their dispute to the ICC arbitration rules while designating Shanghai as the "place of jurisdiction". The SPC ruled the agreement valid while noting the parties never formally agreed on applicable rules. The SPC, therefore, ruled that the parties' dispute was subject to Chinese law. What could be expected before 2013 was that such an agreement would be deemed invalid by Chinese courts, as it does not designate an appropriate arbitration institution. This ruling was favourably received and marked a liberalisation of Chinese judicial perspectives on international arbitration in China.
More recently, the Daesung Praxair case from 3 August 2020 is an example of the increased acceptance of foreign institution-administered arbitral proceedings held in China.5 It opposed a Korean party to a Chinese party, with an arbitration seated in China, administered by the Singapore International Arbitration Commission (SIAC).
After lengthy proceedings in Singapore, where it was found that Chinese law applies to the arbitration agreement, and the seat was in China, the matter came before the Shanghai court. The argument made here was similar to that found in Longlide. The respondent party sought to prevent arbitration by arguing that the SIAC cannot administer an arbitration seated in China.
The Shanghai court strictly applied the findings of the SPC in the Longlide case. It found that the arbitration agreement was valid and the dispute could be submitted to the SIAC. Specifically, the court found nothing in the AL prohibiting a foreign institution from administering a China-seated arbitration. Though this is a welcome decision, in line with the SPC's findings in the Longlide case, it is not binding. Until these rulings reflect applicable law in China, parties could face these issues again, with the associated drawbacks including increased costs and time lost.
This issue with arbitration in China could be remedied by resorting to administering disputes via CIETAC. Indeed, as shown in its newly applicable 2024 rules, CIETAC aims to streamline arbitration in China, which is in line with other arbitration institutions around the world, which makes it an excellent option. Another solution can be found through Free Trade Zones (FTZ) in Hong Kong, Macau, and Shanghai, most recently in the Lin-gang area. These FTZs have a special, distinct status and are areas from which foreign arbitral institutions can, theoretically, administer cases in China.
Nevertheless, before the AL-derived framework in China is modified to enshrine these positive evolutions in law, these issues remain potential obstacles for parties. Indeed, parties can still seek to delay or compromise arbitration by challenging it before local courts. Unfortunately, the seat of arbitration is not the only salient issue with arbitration in China.
2. Kompetenz-Kompetenz and the Arbitral Tribunal's Jurisdiction in China
Beyond the issue related to the seat of arbitration, another key issue with arbitration in China relates to the doctrine of kompetenz-kompetenz. In plain terms, arbitral tribunals seated in China cannot autonomously determine their jurisdiction. If a party challenges the arbitral tribunal's jurisdiction or an arbitration agreement's validity before a domestic Chinese court, the arbitral tribunal stays the proceedings pursuant to Article 20 of the AL:
Where any party challenges the effect of an arbitration agreement, he may either submit it to the Arbitration Commission for a decision or bring it before the people's court for an order. If one party submits it to the Arbitration Commission for a decision while the other one brings it before the people's court for an order, the people's court shall rule an order. The party who intends to challenge the effect of the arbitration agreement shall put forward his challenge before the first hearing of the Arbitration Tribunal.
Unlike other similar provisions, the court has the final say, and Chinese courts tend to analyse the validity and existence of an arbitration agreement in depth. This issue could lead to additional costs and delays in international arbitration in China.
Another issue arises when a party to an arbitration agreement submits a dispute to domestic Chinese courts without notifying the court of the existence of such an arbitration agreement. Chinese courts do not verify an arbitration agreement's existence ex oficio, i.e., without being requested to do so by a party. This is a result of Article 26 of the AL:
In the event that a party, despite of the existence of an arbitration agreement, brings a lawsuit before a people's court without a statement of the existence of the agreement, and the people's court has accepted it as a case, if the other party submits the arbitration agreement before the first hearing of the court, the people's court shall reject the suit with the exception that the arbitration agreement is null and void; if the other party does not raise any challenge to the jurisdiction of the court before the first hearing, he shall be deemed to have abandoned the arbitration agreement, and the people's court shall continue its proceedings.
In such a case, a party to an arbitration agreement called before a domestic court would have to notify the court of said arbitration agreement's existence. If no party invokes the existence of an arbitration agreement before the first hearing, domestic courts will consider them to have renounced the arbitration agreement. Fortunately, domestic courts in China will reject a suit if an arbitration agreement is not "null and void".
Conclusion
These are some key issues that parties engaged in arbitration proceedings in China could face. Fortunately, the trend visible through Chinese case law, the new CIETAC rules, and the Draft Revised Arbitration Law reform project are promising signs of the liberalisation of arbitration in China. It remains to be seen whether and when the arbitration-friendly and modern provisions contained in the Draft Revised Arbitration Law will come to be applicable in China.
Footnotes
1 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958.
2 Washington Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, 14 October 1966.
3 See DUFERCO S.A. v. Ningbo Arts & Crafts Import & Export Co., Ltd., Ningbo Intermediate People's Court (22 April 2009).
4 Anhui Longlide Wrapping and Printing Co., Ltd v. BP Agnati S.R.L., The Supreme People's Court (25 March 2013).
5 Daesung Industrial Gases Co., Ltd. and Daesung (Guangzhou) Gases Co, Ltd v. Praxair (China) Investment Co., Ltd., Shanghai No. 1 Intermediate People's Court (3 August 2020).
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