Interpreting The PRC Arbitration Law

In line with China’s commitment to improve its dispute resolution system, the Supreme People’s Court of the People’s Republic of China issued its "Interpretation on Certain Application Issues of the PRC Arbitration Law" ("Interpretation") clarifying issues on the validity and interpretation of arbitration clauses commonly used in PRC related commercial agreements. The Interpretation came into effect on 8 September 2006.

The Interpretation gives clarification on inter alia the following issues :-

1. Forms of written arbitration agreement;
2. Whether parties may agree on both litigation and arbitration for resolving disputes;
3. Determination of arbitration institution in the absence of clear explicit agreement;
4. Deciding on the validity of the arbitration agreement; and
5. Application of arbitration agreement to an entity after merger or division.

Pursuant to Article 16 of the PRC Arbitration Law, arbitration agreements shall include arbitration clauses in contractual agreements and agreements reached in written forms. This is supplemented by the Interpretation clarifying that "written forms" shall include arbitration agreements reached by contracts, letters and other electronic means like telegrams, faxes and emails etc.

The Interpretation provides that where an arbitration agreement provides that a party may submit disputes to an arbitration institution for arbitration or commence litigation proceedings in court, such arbitration agreement shall be void.

Pursuant to Article 18 of the PRC Arbitration Law, where an arbitration agreement fails to specify or is not clear on the chosen arbitration institution, the arbitration agreement shall be invalid.

This position has been relaxed by the Interpretation, which provides that :-

1. If the name of an arbitration institution is inaccurately stated in the arbitration agreement but the same can be ascertained, the ascertained arbitration institution shall be deemed to be chosen by the parties.
2. Where the arbitration agreement merely specifies the applicable arbitration rules but fails to state the arbitration institution, the parties shall be deemed to have failed to agree on the arbitration institution unless a supplemental agreement on the arbitration institution can be reached or the arbitration institution can be ascertained on basis of the agreed applicable arbitration rules.
3. Where two (or more) arbitration institutions are specified in the arbitration agreement, the parties can further agree on commencing arbitration at any one of the specified arbitration institutions. However where no agreement can be reached by the parties on the arbitration institution to be used, the arbitration agreement shall be void.
4. If the arbitration agreement specifies the locality of arbitration and there exists only one arbitration institution at the chosen location, such arbitration institution shall be deemed to be the chosen arbitration institution. However where there exist two or more arbitration institutions at the chosen location, the parties can further agree on commencing arbitration at any one of such arbitration institutions, failing which the arbitration agreement shall be void.

Either the People’s Court or the arbitration institution may decide on the validity of an arbitration agreement. However it should be noted that the People’s Court will reject any application for :-

1. a declaration that an arbitration agreement is invalid if a party fails to lodge its objection on the validity of the arbitration agreement prior to the first hearing of the arbitration proceedings; and
2. a declaration that an arbitration agreement is valid or invalid after the arbitration institution has made its decision on the validity issue.

If a party undergoes merger or division after entering into an arbitration agreement, the arbitration agreement shall be binding on the entity accepting the rights and obligations of such party subsequent to the merger or division.

The Interpretation has clarified ambiguities on arbitration clauses and agreements used in PRC related transactions, and one should bear in mind the above in drafting arbitration clauses.

Our China Department regularly advises foreign investors on their investments and business set up in the People’s Republic of China and will be happy to assist you with any inquiries you may have. 

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.