There are very few instances where an arbitration agreement, which provides for the arbitration to be administered by a non-Chinese arbitral institution (such as the ICC) under its arbitration rules, also provides for the seat of arbitration to be in China. There is a significant risk that such an arbitration agreement might be declared invalid by the Chinese Courts when a successful party later seeks to enforce an ensuing arbitral award.
This risk originates from the provisions of the Chinese Arbitration Law (“the Law”). 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.
As non-Chinese arbitral institutions are not established under the Law, and are also not registered with the Chinese department of justice, an arbitration agreement which provides for a China-seated arbitration to be administered by a non-Chinese arbitral institution under its arbitration rules, may be declared invalid under the Law which governs the arbitral proceedings in China.
By necessary implications, it would appear that only Chinese arbitral institutions may administer arbitrations in China in accordance with the Law. However, there has been no express judicial pronouncement on the mandate of international arbitration institutions operating in China. Generally speaking, and in accordance with the earlier Chinese Court decisions, the Courts only ruled on the validity of the arbitration clauses on narrow grounds; without making any pronouncement on the legitimacy of a non-Chinese arbitral institution administering the arbitration cases seated in China.
In an earlier case, the Supreme People’s Court (“SPC”) ruled invalid an arbitration clause that provided for ICC-administered proceedings seated in Shanghai. The SPC’s grounds for invalidation were limited to the finding of a breach of Article 16 of the Arbitration Law, in that no arbitral commission had been specified. This decision of the SPC underscores the significant danger of providing for China-seated arbitration to be administered by a non-Chinese arbitral institution.
BP vs Long Li De Decision
In 2010, an Italian party BP Agnati (“BP”) and a Chinese party Anhui Long Li De (“Long Li De”) entered into a commercial contract. The contract contained an arbitration clause providing for the disputes to be submitted to arbitration by the ICC Court of Arbitration, according to its arbitration rules. It also provided 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 arbitration proceedings against Long Li De. However, Long Li De submitted a jurisdictional challenge to the Intermediate People’s Court of Hefei (“Hefei Court”) on the basis 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 within the ambit of the Law. 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; regarding the establishment and regulation of arbitration commissions by the relevant municipalities directly under the Chinese Central Government. 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, as such a clause does not specify a qualified arbitration commission under the Law. On the basis of these findings, and without any express prohibition of the ICC administering to China-seated arbitrations, the Hefei Court was minded to find the arbitration clause to be invalid.
Under the Chinese judicial reporting system, which requires lower courts to refer their decisions when refusing enforcement of foreign-related awards in the PRC to a higher court to confirm the decisions, 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, that arbitration seated in China is not open to foreign arbitral institutions, the majority held that the arbitration clause was in fact valid in accordance with the requirements of Article 16 of the Law. Upon further referral to the 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 undoubtedly a positive development which reverses the earlier predominant Chinese judicial position – i.e. that an arbitration agreement which provides for a China-seated arbitration to be administered by a non-Chinese arbitral institution under its arbitration rules will be invalid. Be that as it may, the Reply on the Long Li De decision has no binding effect upon Chinese Courts. To streamline and regulate the position, the SPC therefore needs to issue a binding judicial interpretation on this thorny issue, once and for all. Until such time, parties would be well advised to avoid providing for China-seated arbitration to be administered by foreign arbitral institutions, as the risk has not been entirely eradicated by the Reply on the Long Li De decision.