China: ICC Arbitration in Mainland China: Validity of Arbitration Clauses and Enforcement of Awards

Last Updated: 19 November 2006
Article by Yuwu Liu

Introduction

In recent years, more and more Chinese companies are using the International Court of Arbitration of the International Chamber of Commerce ("ICC Court") to resolve their disputes arising from international trade and commerce. According to ICC statistics, seven parties from Mainland China were involved in ICC cases in 2001, ten in 2002, fifteen in 2003, twenty-four in 2004 and twenty-six in 2005.

Under Article 14.1 of the Rules of Arbitration of the International Chamber of Commerce ("ICC Rules"), parties are free to agree upon the place of arbitration; where the parties fail to do so, the place shall be fixed by the ICC Court. In fact, in two out of three ICC cases, the place of arbitration is not Paris, where ICC headquarters are located.

Nevertheless, uncertainty may arise when parties choose for ICC arbitration to take place in Mainland China, ignoring the fact that ICC arbitrations may be conducted elsewhere in the world.

The Validity of Arbitration Clause provided for ICC Arbitration in Mainland China

The standard arbitration clause recommended by the ICC Court to all parties wishing to obtain recourse to ICC arbitration is as follows:

"All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules."

However, if the parties include the above standard ICC arbitration clause in their contract, while at the same time provide for arbitration to take place in Mainland China, such a clause may be declared null and void by Chinese courts.

For example, in regards to the validity of the arbitration clause in Züblin International GmbH (Germany) v. Wuxi Woke General Engineering Rubber Co., Ltd., the Supreme People's Court of the People's Republic of China ("PRC") replied on July 8, 2004 to the Jiangsu High People's Court that:

"The arbitration clause in the contract in this case provides that Arbitration: ICC Rules, Shanghai, shall apply'. According to the well-established principle, the law of the place of arbitration shall apply where the contract is silent on the governing law for the validity of the arbitration clause. Therefore, Chinese law shall be applied to determine the validity of the arbitration clause in the present case. Pursuant to the relevant provisions of the Arbitration Law of China, a valid arbitration clause shall contain three particulars, i.e., an expression of intention to apply for arbitration, matters for arbitration, and a designated arbitral institution. From the wording of the arbitration clause in this case, there are an expression of intention to apply for arbitration, applicable arbitration rules and the place of arbitration, but there is no explicit designation of an arbitration institution. Thus, this arbitration clause shall be held as invalid."

To avoid similar cases from arising in the future, the ICC Court suggested in January 2005 on its website that:

"ˇt would in any case be prudent for parties wishing to have an ICC arbitration in Mainland China to include in their arbitration clause an explicit reference to the ICC International Court of Arbitration, so as to avoid the risk of having the standard ICC clause declared null and void for lack of a sufficiently explicit reference to the arbitration institution of their choice."

It further advised that such parties may adapt the wording of the standard ICC arbitration clause as follows:

"All disputes arising out of or in connection with the present contract shall be submitted to the International Court of Arbitration of the International Chamber of Commerce and shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules."

The author believes that it is necessary for China to accept the standard ICC arbitration clause and permit foreign arbitral institutions, including the ICC Court, to conduct arbitration in Mainland China, not only because the arbitration is contractual and private in nature, but more importantly, the service provided by domestic Chinese arbitral institutions may be improved upon by learning from foreign arbitral institutions. As a result of the internationalization and modernization of Chinese arbitration, parties' confidence in Chinese arbitral institutions will be enhanced.

In addition, permitting foreign arbitral institutions, including the ICC Court, to conduct arbitration in Mainland China would make it more convenient for those parties who wish to choose Mainland China as their venue for arbitration. This will also allow for more opportunities for Chinese lawyers and arbitrators to participate in international arbitration and thus promote the development of the Chinese legal profession and arbitration practice.

On the contrary, if foreign arbitral institutions are not allowed to conduct arbitration in Mainland China, the parties may in many cases have to conduct arbitration in countries other than China, which, consequently, will cause unnecessary inconvenience to and increase the costs of those parties who wish to have the arbitration taken place in Mainland China by foreign arbitral institutions.

Enforcement of ICC Awards Made in Mainland China

Article 25.3 of the ICC Rules provides that "The Award shall be deemed to be made at the place of the arbitration and on the date stated therein." Hence, an ICC award will be deemed to be made in China when the place of arbitration is in Mainland China, regardless of whether it is chosen by the agreement of the parties or fixed by the ICC Court . However, uncertainty still exists as to the legal basis for the enforcement of ICC awards made in Mainland China.

First, China ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention") on December 2, 1986 with reciprocity and commercial reservations. According to the reciprocity reservation, "the People's Republic of China will only apply the Convention to recognize and enforce arbitral awards made in another convention country on the basis of reciprocity". In addition, the concept of a "non-domestic award" does not exist under Chinese law. As a result, the New York Convention could not be applied to the enforcement of an ICC award made in Mainland China.

Second, the Civil Procedure Law of the People's Republic of China adopted on April 9,1991 ("Civil Procedure Law") classifies arbitral awards into three categories, i.e., "award made by arbitral institution established according to law" (Article 217), "award made by foreign-related arbitral institution of the PRC" (Article 260), and "award made by foreign arbitral institution" (Article 269). Article 269 of the Civil Procedure Law provides that "If an award made by a foreign arbitral institution requires the recognition and enforcement by a people's court of the PRC, the party concerned shall directly apply to the intermediate people's court in the place against whom arbitration award will be enforced has its domicile or where its property is located. The people's court shall deal with the matter in accordance with the relevant provisions of the international treaties concluded or acceded to by the PRC or on the principle of reciprocity." Hence, Article 269 of the Civil Procedure Law could not be applied to enforce an ICC award made in Mainland China, because the legal basis for the enforcement of such an award is neither the New York Convention (the international treaties concluded or acceded to by the PRC), nor the principle of reciprocity.

Third, the Arbitration Law of the People's Republic of China ("Arbitration Law"), which took effect as of September 1 1995, categorizes an arbitral award as either "domestic" or "foreign-related". Article 58 and Article 63 of the Arbitration Law stipulate for the setting aside and refusal of enforcement of a "domestic arbitral award", whilst Article 70 and 71 of the Arbitration Law stipulate for the setting aside and refusal of enforcement of a "foreign-related arbitral award". In recent years, the Supreme People's Court in practice no longer sticks to the arbitral institution criteria but decides an award as "domestic" or "foreign-related" by the nature of each case. However, the court has not confirmed whether an ICC award made in Mainland China is a "foreign-related arbitral award" or not.

When the Civil Procedure Law and the Arbitration Law were drafted, there were no foreign arbitral institutions conducting arbitration in Mainland China; nor was there arbitration taking place outside of China by Chinese arbitral institutions. Therefore, it is not surprising that there are loopholes under current Chinese laws as to the categories of arbitral awards. It is submitted that, before the revision of relevant laws by Chinese legislature, it would be appropriate for the Supreme People's Court to issue an interpretation clarifying the questions of the place of arbitration, nationality of arbitral award, etc. The Supreme People's Court should adopt criteria regarding the place of arbitration to distinguish "foreign arbitral award" from "Chinese arbitral award". As to Chinese arbitral awards, they may be further differentiated as "domestic arbitral award" and "foreign-related arbitral award" based on whether there are foreign elements involved.

The author believes that an ICC award made in Mainland China should be a "Chinese arbitral award" and such an award should be enforced in accordance with the relevant provisions on a "foreign-related arbitral award" stipulated in the Arbitration Law. In the meantime, the Supreme People's Court should, by means of judicial interpretation, confirm that it is the Chinese courts' authority to set aside and thus exercise judicial control over an arbitral award made in Mainland China by foreign arbitral institutions.

Conclusion

Based on universally accepted international practices, it is absolutely necessary for China to accept the standard ICC arbitration clause and permit foreign arbitral institutions, including the ICC Court, to conduct arbitration in Mainland China. In addition, the awards made in Mainland China by the ICC or other arbitral institutions should be enforced pursuant to relevant provisions on a "foreign-related arbitral award" stipulated in the Chinese Arbitration Law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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