The fast growth of China’s economy has gotten more and more foreign enterprises to invest in Mainland China. Foreign investors need to establish a local presence Chinese, for example, a representative office, a branch, a subsidiary, or a joint venture so that they can do business in China. As the business ties between China and the rest of the world strengthen, the number of China-related business disputes has been increasing.

Arbitration is one of the most favored international business transaction dispute resolution mechanisms because it is convenient, efficient, and the cross-border enforceability of arbitration awards tends to be higher than court judgments. However, in certain circumstances, even if the parties have agreed to submit their disputes to arbitration, they end up needing to bring their dispute to a court because they disagree on the validity of their agreement’s arbitration clauses. Companies and entrepreneurs that wish to build relationships and do business with Chinese companies or entrepreneurs should pay attention to the validity of their arbitration clauses and agreements. This need to pay attention to arbitration agreements stems from the fact that China’s requirements for what a valid and enforceable arbitration clause or agreement are different than other jurisdictions.

I. International Arbitrations, Foreign Related Arbitrations, and Domestic Arbitrations

Chinese law recognizes three types of arbitrations: international arbitration, foreign related arbitration and domestic arbitration.

An “international arbitration,” also known as a “foreign arbitration,” is an arbitration that is governed by a mediator that is based outside of the People’s Republic of China (“PRC”). A “foreign related arbitration” is an arbitration that involves “foreign elements,” but the mediator for the arbitration is within PRC territory. The “foreign elements” in these kinds of arbitrations entail: (i) one or both parties being citizens of another country, stateless individuals, or foreign entities; (ii) the subject matter of the dispute is located outside of China; or (iii) the facts establishing, altering, or terminating the parties relationship occurs outside of the PRC. A “domestic arbitration” is an arbitration that has no foreign related elements, and the arbitration panel is within PRC territory.

One of the questions about arbitrations that remains is whether domestic parties that agree arbitrate outside of the PRC should be considered domestic arbitrations or international arbitrations. Chinese law does not prohibit parties from choosing a mediation panel outside of Chinese territory, even if the dispute does not have any foreign related elements. However, Chinese law does establish that the international arbitration awards are only enforceable after they are recognized by a people’s court. This people’s court recognition is legally required under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) to which the PRC is a signatory party. The New York Convention does not establish that the court can review the decision the panel has reached, instead, it only empowers a court to review the panel’s arbitration procedure to verify that the panel effectively heard both sides of the issues it mediated.

Yet, the PRC Arbitration Law establishes that when a court decides whether it will recognize a domestic arbitration, it may examine the panel’s procedural steps, and the substantive issues it decided. Therefore, if the parties agree to nominate an arbitration panel outside of the PRC, and their dispute has no foreign elements, a Chinese court is very likely to consider the choice an attempt to evade Chinese law, and it will refuse to recognize the award. This analysis implies that the arbitration parties may have significant practical barriers to using non-PRC mediator to settle a dispute with no foreign elements.

II. Law Governing Arbitration Agreements

The parties’ arbitration clause or agreement largely decides what arbitration panel or arbitrator has jurisdiction over a specific dispute. However, before the validity of an arbitration clause or agreement can be evaluated the law governing the arbitration clause or agreement or clause needs to be determined.

The Interpretation of Issues Relating to Application of the Arbitration Law of People’s Republic of China, promulgated by the Supreme Court of the People’s Republic of China, establishes that there is a procedure for determining the validity of an arbitration clause or agreement in an international or foreign related arbitration (“Interpretation”). It states that an arbitration clause or agreement’s governing law should be determined in the following order: First, the law that parties agree should govern the issue; Second, the law governing the domicile where the parties choose to have the arbitration; Finally, the law governing the court that the parties petition for to rule on the validity of their agreed on arbitration clause or agreement. However, the Interpretation does not state what law governs when a domestic arbitration has a arbitration clause or agreement that comes into play. As discussed above, the parties may choose another jurisdiction’s law to govern their arbitration clause or agreement or clause, or they may designate an arbitration panel outside of China to settle their dispute. However, Chinese courts may apply PRC law when they determine the validity the parties’ arbitration clauses or agreements for domestic arbitrations, the court’s right to intervene is intended to help prevent the evasion of Chinese law.

III. The Validity of Arbitration Agreement under Chinese Law

A. Written Arbitration Agreements

An arbitration clause or agreement must be in writing. In writing means that the arbitration clause or agreement has been codified in a written contract, a letter, an electronic message, including, telegraph, facsimile, electronic data exchange, and e-mail, or any other form that the PRC Contract Law accepts as being in writing. Chinese law does not recognize a verbal arbitration clause or agreement or clause, and in turn, they are not valid under PRC law.

B. Contents of Arbitration Agreements

A valid arbitration clause or agreement must contain:

(1) An expressed intention to resolve the parties disputes via arbitration;
(2) What issues will be decided through arbitration; and
(3) What arbitration tribunal or institution the parties agree to use.

(a) Expressed Intention

The parties’ intention settle disputes via arbitration must be clearly and unequivocally stated in a valid arbitration clause or agreement. The parties often agree include a section in their contract that states they will submit any dispute arising out the contract to “either arbitration or court,” or “first to arbitration, then to court”. Such an arbitration clause will be deemed void. However, the arbitration institution that the parties choose needs to be able to take jurisdiction over the dispute. The arbitration panel will be considered to have jurisdiction over a dispute if one party submits the dispute for arbitration, and the other party does not dispute the validity of the arbitration clause before the arbitration’s first oral hearing takes place.

(b) The Subject Matter of an Arbitration

The arbitration clause or agreement establishes what matters the parties would like to have resolved by an arbitration panel or they may simply provide that “all disputes” shall be submitted to arbitration. In the latter case, “all disputes” means any dispute over the formation, validity, amendment, transfer, performance, default, liability for breach, interpretation, termination of the contract. The people’s courts do not have jurisdiction over disputes arising from a foreign related commercial contract if the cause of action is infringement, and the parties to the contract have a valid arbitration agreement that requires all disputes arising from the contract to be submitted to arbitration.

(c) The Agreed on Arbitration Institution

The “agreed on arbitration institution” is a very complicated issue, which can confuse the parties and their counsel.

i. Ad Hoc Arbitration

The “agreed on arbitration institution” is a necessary component of an arbitration agreement, and when potential disputes may be subject to either domestic or foreign related arbitration an ad hoc arbitration agreement is considered invalid. However, ad hoc arbitration may be acceptable for international arbitration disputes, since the mediators will not be based in the PRC, a Chinese court may recognize the validity of an arbitration agreement provided that the agreement is legally effective under the law that the parties established governs the arbitration agreement, or it is effective under the law of the domicile of the arbitration.

Another question is whether an arbitration agreement or clause that states the parties will apply a specific set of rules, without specifying the place that the arbitration will be held, or the law that will govern an arbitration clause or agreement is currently valid under Chinese law. The answer to this question is clearly “No”. An arbitration agreement that has a specific set of rules that must be followed, but does not clearly establish where the arbitration will be held or what law will govern the arbitration is not enforceable under Chinese law. When the parties fail to nominate an arbitration tribunal or institution then the clause or agreement or clause will be considered an ad hoc arbitration agreement, and unless, the parties agreed on arbitration rules expressly provide for applying ad hoc arbitration, then rules that automatically determine what arbitration institution must be used will determine what arbitration panel has authority over the dispute. For example, an arbitration agreement will be valid if the parties nominate the China International Economic and Trade Arbitration Commission (“CIETAC”) arbitration rules to govern the agreement. This validity stems from that fact that Article 4 paragraph 4 of CIETAC’s rules clearly establishes that “[w]here the parties agree to refer their dispute to arbitration under these [CIETAC] Rules without providing the name of an arbitration institution, they shall be deemed to have agreed to refer the dispute to arbitration by the CIETAC”.

When the parties choose the ICC rules or the UNCITRAL rules the arbitration clause or agreement will be invalid since neither the ICC rules nor UNCITRAL’s rules have a provision similar to Article 4 paragraph 4 of CIETAC’s rules. The Supreme People’s Court has made it clear in its reply to the Jiangsu High People’s Court on Züblin International GmbH vs. Wuxi Woke General Engineering Rubber Co., Ltd. that an arbitration clause that does not establish the law that will govern a dispute or an arbitration panel, but instead, states that the ICC’s rules will be use to resolve a dispute is invalid. In this case, the parties petitioned the Jiangsu High People’s Court to determine the validity of their arbitration agreement. The Supreme People’s Court ruled that the parties’ arbitration clause was void, since Chinese law requires a valid arbitration clause to establish that the law of the domicile of the arbitral seats will govern the agreement and it requires the agreement to name an arbitration institution. Here, the parties did not establish that the law of the domicile of the arbitration seat will govern the agreement, nor what arbitration panel had jurisdiction over a dispute, and the fact that the ICC rules do not have a provision that automatically determines what the applicable rules are.

ii. Place of Arbitration

China has about 190 arbitration institutions, and almost all of them will accept both domestic and foreign related arbitration cases. Therefore, if the parties only agree on the place of arbitration but do not establish the name of the arbitration institution that they will use, then the arbitration agreement will probably be considered to be invalid, unless, the parties add a supplementary agreement that names an arbitration tribunal or unless, there is only one arbitration institution in the place the parties agree to have the arbitration take place. For example, in Shanghai there are two arbitration institutions, the Shanghai branch office of CIETAC and the Shanghai Arbitration Commission. If a contract between two parties’ arbitration clause or agreement only states that their potential disputes will be arbitrated in Shanghai, the clause or agreement will be considered invalid because the parties do not give the name of the arbitration institution that will mediate their disputes. However, if the parties establish that Qingdao will be the location of their arbitration, the clause or agreement will be valid because Qingdao’s only arbitration institution is the Qingdao Arbitration Commission.

(Edited by: China West Lawyer)