China as an emerging economic superpower is an active player in the field of arbitration. The enforcement of arbitral awards in China has become an important topic not only in the legal community but also for those looking to do business with Chinese companies.
There are two components of the Chinese Arbitration Law ("the Law") which are critical to the validity of arbitration.
- Article 16 of the Law provides that an arbitration agreement shall contain a designated arbitration commission.
- Article 10 of the Law further provides that arbitration commissions may be established in municipalities directly under the Chinese Central Government, and the establishment of an arbitration commission shall be registered with the administrative department of justice of the relevant municipality, directly under the Chinese Central Government.
There are few instances where an arbitration agreement (which provides for the arbitration to be administered by a non-Chinese institution under its own arbitration rules) also provides for the seat of arbitration to be in China. In fact such an agreement will likely be declared invalid by Chinese Courts. This is of vital importance to foreign companies trading with Chinese counterparts.
A recent decision in the BP vs Long Li De case indicates the Chinese judicial position may be changing. We include below details of the case.
|BP vs Long Li De
In 2010 BP Agnati ("BP") and Anhui Long Li De ("Long Li De") entered into a commercial contract. The contract contained a clause for the disputes to be submitted to the ICC Court of Arbitration. It also stated that "the place of arbitration shall be Shanghai, China" and that any arbitration was to be conducted in English.
A dispute arose between the parties and BP commenced proceedings against Long Li De. Long Li De submitted a jurisdictional challenge to the Intermediate People's Court of Hefei (Hefei Court). The basis of this challenge was that the arbitration clause was invalid and in breach of Article 16 of the Law. Long Li De contended that the arbitration clause did not identify a Chinese arbitration commission. It was further asserted that the appointment of the ICC to administer the arbitration in China violated the judicial sovereignty of China.
The Hefei Court took judicial notice of the provisions of Article 10 of the Law. The Hefei Court then found that as Chinese arbitration was not open to foreign arbitral institutions these institutions (such as the ICC) did not qualify as arbitration commissions for the purposes of Article 10 of the Law. Accordingly, Article 16 of the Law is not satisfied by inclusion of an ICC arbitration clause.
On the basis of these findings the Hefei Court was prepared to find the arbitration clause to be invalid. Under the Chinese judicial reporting system the Hefei Court referred the case to the Anhui Higher People's Court ("AHPC").
The AHPC was divided on the question of the validity of the arbitration clause under Article 16 of the Law. While a minority supported the Hefei Court's reasoning, the majority held that the arbitration clause was valid in accordance with the requirements of Article 16 of the Law. Upon further referral to the Supreme People's Court ("SPC") in 2013, the SPC concurred with the majority decision of the AHPC, and agreed that the requirements of Article 16 of the Law were satisfied. The arbitration clause was accordingly determined to be valid via the reply from the SPC ("the Reply).
The Reply on the Long Li De decision is a positive development and reverses the earlier predominant Chinese judicial position. However, the decision has no binding effect upon Chinese Courts.
To streamline and regulate the position the SPC needs to issue a binding, judicial interpretation on this issue once and for all. Until such time, traders are advised to avoid agreeing to China-seated arbitration which is administered by a foreign arbitral institution.
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