Judicial Review of Ad Hoc Arbitration Agreements in China

文章首发于《亚洲争议评论》2022年第3期，经授权转载。

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.

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.

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:

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.

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.

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.

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.