China: PRC Pro-Arbitration Legislation Updates

Last Updated: 22 January 2018
Article by Aaron Yizhou Deng

As a member state to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards("NY Convention"), the P. R. China ("PRC") has been practicing a pro-arbitration policy. On December 26, 2017, to reiterate and further honor its promises in this regard, the PRC Supreme People's Court, the highest court of the country ("PRC Supreme Court") released two pieces of formal Judicial Opinions in respect of arbitration-related judicial review, substantially covering topics of international arbitration practice.

The two Opinions are respectively entitled

  1. Rules on the Reporting and Verification Matters in Cases of Arbitration-Related Judicial Review (In Chinese, 《关于仲裁司法审查案件报核问题的有关规定》(法释[2017]21号, "Reporting Rules")and
  2. Rules on Several Substantive Matters in Hearing Cases of Arbitration-Related Judicial Review (in Chinese, 《关于审理仲裁司法审查案件若干问题的规定》(法释[2017]22号), "Hearing Rules")

both of which are of semi-legislation nature binding upon courts nationwide and came into force as of the first day of January, 2018. This Article is to explore and discuss their legislative background, major provisions bearing upon international arbitration, implication and impact upon the practice of PRC-related arbitration in future.

I. Legislative Background and Purposes

In recent years the PRC court system has been overburdened with abruptly increasing caseloads of civil and commercial disputes. Many cases were filed to the courts without being previously resorted to any extra-judicial dispute resolution mechanisms such as arbitration, conciliation or ADR. To relieve the caseload burden of the courts and more importantly, to explore, build and ameliorate a comprehensive, multi-dimensional, inclusive and long-term mechanism of extra-judicial dispute resolution framework nationwide, both the PRC central authority and the Supreme Court released several nationally applicable policies in this regard. Concerning international dispute resolution, the PRC Supreme Court released in June, 2016 a judicial policy entitled Several Opinions on Provision of Judicial Services and Shields to the "One Belt , One Road" Initiative ("Initiative"), promising to enhance arbitration-related judicial review involving parties from countries of the Initiative and strength the existing pro-arbitration policy. The two Opinions are to implement the aforesaid promises.

II. Major Provisions Bearing Upon International Arbitration

1. Major Provisions under the Reporting Rules("Rules")

  1. Applicable scope of the Rules (Article 1).

    The Rules regulate various types of arbitration-related judicial review cases, including without limitation disputes over the validity of arbitration clauses, application for revocation or enforcement of domestic awards, recognition or enforcement of Hong Kong, Macau or Taiwai awards, and recognition or enforcement of foreign awards.
  2. Reiteratio and restatement of the so-called "Progressive Reporting" requirements in judicial review of international arbitration (Article 2).

    In hearing cases of the validity of cross-border arbitration clauses, application for revocation(or non-enforcement) of the international awards made by PRC domestic arbitration institutions, as well as application for recognition or enforcement of foreign awards, if the PRC intermediate courts reviewing such cases intend to give a negative ruling(i.e., vacation of said arbitration clauses, refusal to enforce said international awards made by PRC domestic arbitration institutions, or refusal to recognize or enforce said foreign awards), then such courts shall report said cases together with intended rulings for verification to the High Courts that would have jurisdiction to review appeals of said intermediate courts. Further, if such High Courts intend to uphold the intended negative rulings of said intermediate courts, they shall in turn report said cases and intended rulings to the PRC Supreme Court for a final verification. That is the way the so-called "Progressive Reporting" procedure operates.
  3. Enlargement of the scope of "Progressive Reporting" requirements.

    The enlargement applies to judicial reviewing cases in which validity of arbitration clauses are contended or the courts' jurisdiction is challenged. If an appeal is filed against the writs of refusal to docket the cases or the rulings on such jurisdictional challenge by courts of first instance, and the appellate courts believe that the arbitration clauses involved in such cases are defective in their validity, then such appellate courts should be subject to the "Progressive Reporting" procedures as above. This is a new requirement.

2. Major Provisions under the Hearing Rules

  1. Specification of applicable scope of the Rules(Article 1), which are identical to Article 1 of the Reporting Rules above.
  2. Increase of courts with jurisdiction over cases on contended validity of international arbitration clauses(Article 2).

    Under this Article cases on contended validity of international arbitration clauses can be subject to jurisdiction of four categories of intermediate people's courts, the venues of which are located at (a) the venue of arbitration institutions as agreed to under the contended arbitration agreements/clauses; (b) the location where such arbitration agreements/clauses were concluded; (c) the domicile of the Applicant to such cases; or (d) the domicile of the Respondent to such cases. In contrast, previously only the latter three categories of courts could have jurisdiction over said cases.
  3. Creation of the principle of affiliated jurisdiction over affiliated litigation/arbitration (Article 3).

    1. If an affiliated litigation is pending before a PRC court in connection with a foreign award the recognition and/or enforcement of which is to be applied for in PRC, then such application shall be filed to the same court hearing such affiliated litigation provided that neither the domicile nor the enforceable property of the Respondent are located within PRC .
    2. If an affiliated arbitration is pending before a PRC domestic arbitration institution in connection with a foreign award the recognition and/or enforcement of which is to be applied for in PRC, then such application shall be filed to the court located in the venue of said arbitration institution.
    These are creative arrangements to the benefit of the parties and in the interest of justice and efficiency as well.
  4. Gap-filling and amelioration of jurisdictional challenge procedures (Article 10)

    Previously there were no statutory rules governing jurisdictional challenge procedures in arbitration-related judicial review cases in PRC. Under Article 10, however, a respondent to an arbitration-related judicial review case may file a challenge to the jurisdiction of the reviewing court, within 30 days following services of process if the respondent has no domicile within PRC, and within 15 days if the respondent has a domicile within PRC. An appeal may be further filed against a ruling by the reviewing court on said jurisdictional challenge as well.

    The new provisions under Article 10 above function to fill the previous gap and ensure procedural interest of the parties.
  5. Inapplicability of the governing law of a "major" agreement to disputes over validity of arbitration clauses (Article 13)

    Under Article 13, if the parties to an international agreement contemplate that the law to govern a dispute over the validity of an arbitration clause in such agreement is one of a different jurisdiction from that governing the entire agreement, then the agreement should so state in a separate and unambiguous manner. That being said, even if the agreement has provided for the law of a certain jurisdiction to govern the entire agreement, such law shall not be able to govern a dispute over the validity of an arbitration clause in such agreement without a separate and express provision to that effect. In one word, an agreement should expressly states that the law to govern a dispute over the validity of an arbitration clause in such agreement is one of a different jurisdiction than the law governing the entire agreement, if the agreement so contemplates.
  6. The law governing a dispute over the validity of an arbitration clause should be determined in a pro-arbitration manner (Article 14).

    However, this principle is subject to the following conditions:

    • Its application is limited to disputes over the validity of an arbitration clause, not any other types of arbitration-related judicial review cases;
    • There is no agreement between the parties as regards the law governing a dispute over the validity of an arbitration clause(and if yes, Article 13 above should apply);
    • If under applicable PRC law the dispute over the validity of an arbitration clause should be governed by either the law of "the venue of the arbitration institution" or "arbitration venue", and if under one of them such arbitration clause would be deemed valid and enforceable, then such law should be applied.
  7. Restatement that where an arbitration agreement/clause does not specify an arbitration institution as required by the PRC Arbitration Law while such institution is ascertainable in the light of the arbitration rules as have been agreed to, such institution would be deemed as the one the parties contemplated for the arbitration(Article 15).

Obviously, this Article once again shows China's pro-arbitration policy, which helps to improve the safety of cross-border transactions. Previously, an arbitration clause without expressly providing for the name of an arbitration institution tended to be deemed as invalid.

III. Impact upon Cross-Border Transactions and Related Disputes in Future

It is worth noting that those two "legislations" are the first ones by which the PRC Supreme Court regulates arbitration (including international arbitration) -related judicial review through the form of "Judicial Opinions", which as mentioned above is of a semi-legislative nature binding upon all PRC courts nationwide, while previously there were only the so-called "internal notices"or "replies" delivered from the PRC Supreme Court to courts nationwide or an individual court hearing a given arbitration-related case, which were not officially published nor of any legislative nature, though as a matter of fact they were indeed followed by courts nationwide because they were made by the Supreme Court. Again, this progress in respect of legislative method helps to reiterate the pro-arbitration stance of the PRC authorities and improve legislative transparency and standardization as well.

With specific and down-to-earth measures embodied in the two Judicial Opinions, certainty and predictability of PRC-related arbitration will be substantially improved. As such, hopefully more parties to PRC-related transactions and their lawyers will be ready to select arbitration as the method of their dispute resolution. Consequently, both PRC domestic arbitration institutions (there is no ad hoc arbitration in PRC so far) and their foreign counterparts will accept and arbitrate more arbitration applications. Anyway, going forward arbitration clauses would be no longer vulnerable as before. For instance, those arbitration clauses failing to expressly provide for a specific arbitration institution which would otherwise have been considered invalid previously would become valid provided that a specific arbitration institution can be deduced pursuant to the arbitration rules as agreed to between the parties.

Those two Judicial Opinions will also change the way the dispute resolution clauses of cross-border transaction agreements are drafted. For example, if the parties so wish, their agreement will need to separately and expressly specify that a law of a different jurisdiction shall govern the dispute over the validity of their arbitration clauses despite that their agreement text has already specified a general governing law for the entire agreement.

Furthermore, under Article 3 of the Hearing Rules, it is likely that the PRC courts will take more disputes affiliated or otherwise related to or arising from a foreign arbitration award. So will the PRC domestic arbitration institutions. Accordingly, under the those Rules the jurisdiction over an application for recognition and enforcement of such foreign arbitration award will be consolidated with such disputes. Therefore, for consideration of litigation strategies or otherwise, affiliated lawsuits or arbitration application could be filed in PRC after or even before a related foreign arbitration is awarded.

In summary, in the scenario of China's "One Belt, One Road" Initiative, those two Judicial Opinions serve to show China's constant pro-arbitration stance and improve worldwide faith in the impartiality and trustworthiness of China's judicial system. This is because those two Judicial Opinions have adopted such robust measures as increasing and diversifying jurisdictions of PRC courts over arbitration-related judicial reviewing cases, turning arbitration clauses which would otherwise have been invalid previously into valid ones, adopting a more tolerable altitude towards ambiguous arbitration institution clauses, restating and enlarging the scope of the "Progressive Reporting" requirements, and the like. Consequently, the new "legislations" will facilitate the resolution of cross-border commercial and civil disputes through arbitration and strength the protection mechanism of related parties' legitimate rights.

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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