On 8 September 2006, the People's Republic of China’s Supreme People’s Court issued a Judicial Interpretation (a statement of official policy as to how legislation is to be interpreted), to resolve a number of questions of arbitral procedure. This long awaited Interpretation addresses a number of important issues for both those who have already agreed to PRC seated arbitration, and also to those who are considering doing so in the future.

The Most Significant Changes

In terms of what constitutes a valid arbitration agreement under PRC law, it is clear that the requirement for such an agreement to be ‘in writing’ will, as in most jurisdictions, now include more modern mediums such as e-mail, electronic data interchange, telegram, telex, and facsimile (Article 1 of the Interpretation).

Article 2 of the Interpretation is similarly progressive in addressing what matters can be arbitrated, holding that where the matters for arbitration are contractual in nature, they may include disputes arising from the execution, validity, modification, assignment, performance, breach, interpretation or rescission of a contract.

Traditionally, the appointment of an arbitration institution has been an absolute requirement for a valid arbitration agreement under PRC law. Whilst this has not been changed, the rules for qualification have been relaxed. Now, where a clause has failed to nominate an institution to conduct the proceedings, but the selection of an institution can be ascertained from any selected arbitral rules, then the clause will not be invalid as it would previously have been (Article 4). This modification is of particular value where the parties have chosen the CIETAC Rules but have failed to expressly nominate CIETAC as the administering body thanks to Article 4.3 of the CIETAC Rules. It is likely that a reference to the ICC Rules would be similarly interpreted, however, there remains doubt as to whether a foreign arbitral institution may conduct PRC seated proceedings. On the flip side of these provisions, it has been made clear (Article 5) that where an arbitration agreement names two (or more) potential institutions and the parties cannot agree on which of them shall conduct an arbitration that has arisen, then the arbitration agreement will be deemed invalid.

On the subject of the arbitration agreement being invalid, the Interpretation has confirmed that the Chinese courts will now move towards the generally accepted principle of “kompetenz kompetenz” and not interfere with an arbitral institution’s determination as to the validity of any particular arbitration clause (Article 13). In addition, it is made clear that a challenge should be brought at the time of the first arbitral hearing (at the latest); otherwise such a challenge will be considered to be waived. Building on this and on previous Interpretations Article 16 appears to make clear that the Chinese courts now accept that the question of validity should be determined according to the law the parties have selected to govern the arbitration clause (normally the same as that which governs the rest of the contract), and shall not be determined by Chinese law unless the parties have failed to select both a substantive law and place of arbitration.

The Interpretation also contains a series of clarifications to the challenge and enforcement provisions for foreign and domestic awards. Of particular interest is the clarification that where only one aspect of an award is successfully challenged then a partial set aside is possible (Article 19). Equally a partial or complete remission of the award is possible in certain circumstances, with the court sending the award back to the tribunal with the instructions to ‘re-arbitrate’. In addition, the Interpretation confirms that where a party has attempted to challenge an award and lost, it may not at the enforcement stage raise the same arguments in its defence as made up its challenge application (Article 26).

Unusually, the Interpretation provides that, when called upon to consider challenge proceedings, the Court may request documentary evidence and testimony from the arbitral institution which conducted the proceedings. This clarification (Article 30) follows a number of previous attempts by institutions to assert confidentiality as a defence to the handing over of such internal documents.

Shortfalls of New Interpretation

Unfortunately, the new Interpretation fails to address two important open issues affecting the interests of foreign investors who may be subject to PRC seated arbitration. The first, mentioned above, concerns the question of whether a selection of a foreign arbitral institution to conduct proceedings is permitted. The second is whether Hong Kong counts as part of “China” for the purposes of Article 128.2 of the PRC Contract Law. If it is accepted that Hong Kong counts as part of “China”, this would, in the eyes of mainland courts, permit domestic PRC arbitrations to be conducted in Hong Kong.  Such domestic proceedings would be effectively governed by pre-1996 English arbitral law (as enacted in Hong Kong law) and as such would avoid many of the complications of Chinese arbitration whilst still benefiting from qualifying for domestic enforcement.

Overall Effect of the New Interpretation

In essence, the new Interpretation has led to increased legal certainty by clarifying a number of points in terms of the form, interpretation and effect of arbitration agreements and the law applicable to the validity of foreign-related arbitration agreements. Further, the new Interpretation has reduced the scope for the technical challenges to arbitration agreements and arbitral awards by resolving a number of jurisdictional and procedural issues. Whilst Chinese arbitration still lacks the reliance on party autonomy that characterises Western arbitral proceedings, it appears to be continuing to evolve in a direction that most foreign investors would find comfortable.

For more information on this topic, contact James L. Loftis or Nicholas Song. Please visit our website for more information on our International Dispute Resolution practice.