iii. Inaccurate Name of an Agreed Arbitration Institution

Sometimes, parties agree to submit their dispute to a specific arbitration institution, but they fail to accurately state the name of the institution. In these kinds of circumstances, the general rule is to attempt to determine the validity arbitration clause or agreement by seeing if a specific arbitration institution can be inferred from the name the arbitration clause or agreement uses for the arbitration panel. If an arbitration institution can be determined from the name the clause or agreement used in the clause or agreement, then the arbitration institution inferred will be considered to be the nominated an arbitration institution. If no actual institution can be inferred from the arbitration clause or agreement, then that clause or agreement will probably be deemed as invalid.

In many cases, the parties will choose CIETAC to be their arbitration institution. However, parties will often use CIETAC’s old name, the Foreign Trade Arbitration Commission, or an incorrect name like Beijing Foreign Economic and Trade Arbitration Commission, in their attempt to name CIETAC their arbitration institution in their arbitration clause or agreement. In cases where CIETAC’s old name is used, or it is incorrectly named the validity of an arbitration clause or agreement will not be affected because CIETAC’s name can be inferred from the name that parties use. This acceptance of a flawed arbitration clause or agreement stems from the fact that CIETAC is the only arbitration institution that can be inferred from either of those names, even though, both of those names are inaccurate. However, if the parties agree to use the “Beijing Foreign Arbitration Commission” to settle their disputes, the relevant arbitration clause or agreement will probably be considered invalid, unless, the parties create a supplementary agreement. The clause or agreement would be invalid in this circumstance because the Beijing Arbitration Commission (“BAC”) is an arbitration institution in Beijing, and the name used might refer to BAC instead of CIETAC.

iv. Nominating Two or More Arbitration Institutions

Sometimes the parties would like to nominate more than one arbitration institution in their arbitration clause or agreement, and having the option to choose which institution it submits each dispute to. However, trying to reserve this option by nominating more than one institution will cause the overall arbitration clause or agreement to be invalid, unless, the parties create a supplementary agreement that chooses a specific arbitration institution to resolve a dispute.

In other situations, a contract’s arbitration clause establishes that if Party A is the claimant, then the dispute will be submitted for Arbitration Institution A to resolve, but if Party B is the claimant, then the dispute will be submitted for Arbitration Institution B to resolve. At present, no Chinese judicial interpretations provide guidance on the validity of this kind of an agreement. However, an overwhelming majority of Chinese judges, arbitrators, and legal scholars believe that an arbitration agreement that establishes that each individual party’s claims will be submitted to separate specific arbitration institutions is an effective way to nominate an arbitration institution. Yet, the question that arises is: when Party A initiates an arbitration with Arbitration Institution A and Party B wishes to file a counterclaim to the Party A initiated arbitration with Arbitration Institution A, which arbitration institution should Party B file its counterclaim at? In other words, Party B, the respondent to the initial claim, has the right to initiate a counterclaim against Party A, the claimant. It appears that many Chinese judges, arbitrators, and legal scholars believe that Arbitration Institution A would be the only institution that has jurisdiction to accept Party B’s counterclaim. I agree with this thought. This approach is the most convenient and efficient way for the parties to resolve a dispute that was initiated by one of the parties as an institution that the parties’ arbitration clause established the disputes will be resolved by. In addition, I also believe that Arbitration Institution B has the right to accept Party B’s counterclaim against Party A if it would like to accept the counterclaim, as long as, there is no law or regulation prohibits Party B from submitting its counterclaim to Arbitration Institution B.

Another hypothetical that creates an interesting situation is where a Chinese company (Party A) and a Hong Kong company (Party B) enter into an arbitration agreement, which establishes that any dispute must be arbitrated in the respondent’s domicile. In these kinds of situations, if a dispute arises and Party A wants to initiate an arbitration, then the arbitration will be considered an ad hoc arbitration conducted in Hong Kong. Hong Kong law allows ad hoc arbitrations, therefore, the arbitration will be is recognized under Hong Kong law. On the other hand, if Party B wishes to initiate an arbitration against Party A, the arbitration panel will be in China and Chinese law will probably consider this arbitration agreement to be invalid because the arbitration agreement does not nominate a specific arbitration institution. Thus, this kind of an arbitration agreement would only entitle Party A to initiate an arbitration.

The Arbitration Law’s requirement of naming an arbitration institution in an arbitration clause or agreement has caused a lot of confusion and uncertainties. Often, parties are told to be sure that they nominate one arbitration institution and accurately name that institution to help avoid their arbitration clause or agreement from being held void.

C. Other Requirements

Chinese law establishes that an arbitration clause or agreement or clause is invalid if:

(1) The matter to be submitted for arbitration is a dispute relates to marriage, adoption, guardianship, maintenance and inheritance, or has an administrative nature.

(2) The agreement that has the arbitration clause is entered into by an individual that Chinese law establishes does have the capacity to make civil acts, or has a restricted capacity to make civil acts.

(3) A party enters the arbitration agreement under coercion.

IV. Challenging the Validity of an Arbitration Agreement

A. Jurisdiction over a challenge to the validity of an arbitration agreement

A challenge to the validity of the arbitration clause or agreement can be submitted to the parties’ agreed arbitration institution for it to decide whether the agreement is valid, or it can brought before the people’s courts for a ruling on its validity. If one party submits the agreement to an arbitration institution and the other party petitions a court for a ruling, the court’s actions will have precedence over the arbitration proceeding. Moreover, the arbitration proceeding will be suspended until the court renders its decision. However, if the arbitration institution has already finished deliberating on the validity of arbitration agreement, its decision on the validity of the agreement will stand and neither party has the right to challenge that opinion in court.

In domestic arbitrations, the intermediate people’s court in the domicile of the agreed arbitration institution has jurisdiction over the validity of an arbitration clause or agreement. However, if the parties have not agreed on an arbitration institution, the intermediate people’s court where the arbitration agreement was signed, or the domicile of the respondent will have jurisdiction to decide the validity of the parties’ arbitration agreement. In a foreign related arbitration or an international arbitration, the intermediate people’s courts in the domicile of the parties’ agreed on arbitration institution, the intermediate people’s court in the place where the arbitration agreement was signed, or the intermediate people’s court in the domicile of either party will have the jurisdiction to decide the validity of the parties’ arbitration agreement. Whichever, intermediate people’s court first accepts the case will have jurisdiction to decide the validity of the parties’ arbitration clause agreement.

B. Statute of Limitations for Challenging the Validity of an Arbitration Agreement

If a party would like to challenge the validity of an arbitration clause or agreement it must make the challenge before the arbitration proceeding’s first oral hearing. However, PRC law only provides that the people’s courts will not accept a party’s challenge to the validity of an arbitration agreement if it is not raised before the arbitration proceeding’s first oral hearing, but the law does not state that an arbitration institution or tribunal cannot accept a challenge to the validity of an arbitration clause or agreement after the proceeding’s first oral hearing has started. In practice, arbitration institutions often take a cautious approach towards one party challenging an arbitration agreement, this cautiousness stems from the fact that the institution wants to make sure that its arbitration award can be successfully recognized and enforced. For example, in one arbitration case, a party challenged the validity of the parties arbitration agreement after the first oral hearing had started. The other party strongly objected to the party’s late challenge, and requested that the tribunal not to consider the challenge. However, the tribunal decided to accept the party’s challenge to the validity of the agreement after it consulted with the arbitration institution secretariat.

C. Validity of an Arbitration Agreement and the Enforcement of an Arbitration Institution’s Award

Both PRC law and the New York Convention establish that a valid arbitration clause or agreement is a prerequisite for enforcing an arbitration award. However, the PRC court’s will not support a party’s petition to revoke an arbitration award, if either party fails to challenge the validity of a defective arbitration clause or agreement within the PRC or any other applicable law’s procedure for challenging the validity of an arbitration agreement. The situation is different if either party challenges the validity of the arbitration clause or agreement during the arbitration proceeding. In that case, even if the arbitration institution or a people’s court has rendered an award or a decision, then the party that challenged the arbitration clause or agreement has the right to petition the court to revoke, not recognize, or nor enforce the arbitration award. The party may also petition the court to retry the case.

These rules have a strong impact on what Chinese enterprises’ attitudes are towards arbitration, especially, international arbitration. Before the Interpretation was published, a substantial portion of Chinese enterprises, including some foreign invested enterprises, preferred not to respond to international arbitration claims against them. Instead, these enterprises would commonly wait until a default award was rendered, then they would petition a people’s court to not recognize or enforce the award in the PRC based on fact that the arbitration clause or agreement was not valid. However, since this strategy is no longer effective, more and more Chinese enterprises are now responding to international arbitrations.

D. Reporting System

In addition to the rules that have been discussed, the SPC established a special reporting system to protect the parties’ right to submit their disputes to arbitration. The reporting system applies to any case where the validity of a foreign related or an international arbitration’s arbitration clause or agreement is questioned.Under this reporting system, any intermediate people’s court must report a foreign related or international arbitration case to a competent high people’s court before it issues a ruling on validity of the foreign related or an international arbitration parties’ arbitration agreement. If the high people’s court disagrees with the ruling the intermediate people’s court was going to make, the intermediate people’s court must follow the high people’s court’s decision, and it must issue a ruling that is inline with the high people’s court’s order. However, if the high people’s court agrees with the intermediate people’s court decision, the high people’s court must report its decision to the SPC for it to make the final judgement. After the Supreme Court considers whether the arbitration clause or agreement valid, the intermediate people’s court can issue an official ruling on the arbitration clause or agreement that is inline with the SPC’s decision.

When the SPC established this reporting system it effectively removed the local courts power to invalidate an arbitration agreement. This system also helps eliminate the influence that “local protectionism” has in enforcing arbitration agreements. Moreover, Chinese law has established some special mechanisms to help determine the validity of an arbitration agreement. The Chinese laws and regulations, which are legal basis of this mechanism to determine validity, have been refined since the Interpretation was promulgated and implemented. These improved rules establish stricter requirements for parties to create of legal and valid arbitration clauses or agreements.

For these reasons, it is recommended that when parties, particularly foreign entrepreneurs or entities that are not familiar with Chinese law, would like to create a legal and valid arbitration agreement under Chinese law they should use standard clauses that arbitration institutions have created, and then customize them for Chinese law. It is also suggested that foreign parties consult with a PRC arbitration lawyer before amending the standard clauses, this consultation will help insure that the arbitration clause or agreement is not invalidated or the foreign parties do not lose their standing to demand arbitration.

(Edited by: China West Lawyer)