Under the 1994 PRC Arbitration Law, to be valid an arbitration agreement must refer to the arbitration commission (仲裁委员会) selected by the parties, among other things. But do foreign arbitration institutions qualify within the meaning of the law? Or must I choose the China International Economic and Trade Arbitration Commission (Cietac)? What language and rules should be specified? In short:

How should I construct my China arbitration clause to avoid future problems?

The international perspective

Foreign investors contracting with PRC counterparties should usually seek to agree on a place of arbitration outside the PRC: Hong Kong or Singapore are both good choices. But the relative bargaining power of the parties may mean this is not possible. If you are going to agree to submit disputes to arbitration in the PRC, there are a number of factors to consider when drafting your arbitration clause in order to make the process more user-friendly and minimise the risk of any challenges.

First, avoid ad hoc arbitration. This means you should specify the rules and an institution to administer the arbitration, and not just any institution. To be valid an arbitration clause must refer to a “designated arbitration commission”. There is uncertainty about whether a foreign institution such as the ICC (International Chamber of Commerce) qualifies. The risk of selecting a foreign institution to administer an arbitration in the PRC is that your opponent may seek to challenge the validity of the proceedings and a court might refuse to enforce any award. As a result it's preferable to specify a Chinese institution in your arbitration clause. Cietac is the most common choice, but the Beijing Arbitration Commission (BAC) is an up and coming competitor.

Second, avoid option clauses. These are particularly popular among banks and financial institutions, and may provide either for the jurisdiction of the courts with an option for one or both parties to refer disputes to arbitration, or vice versa. This type of agreement is invalid in the PRC, unless arbitration proceedings are commenced and the other party fails to challenge the proceedings. If a challenge is made, the dispute will be referred to the local courts.

Third, if you select Cietac, specify in the arbitration agreement that the parties may appoint arbitrators from outside Cietac's own panel of arbitrators (this is not possible under the BAC rules). This will give you greater choice when it comes to constituting the tribunal.

And finally, the default language for arbitrations conducted under both the Cietac and the BAC rules is Chinese. This can be a daunting prospect for foreign investors and limit the available pool of arbitrators and counsel. It's therefore sensible to specify that the language of the proceedings will be English.

Frances van Eupen
Senior associate
Allen & Overy

The domestic perspective

The best way to draft an arbitration clause valid and workable in mainland China is to follow clear and established laws and regulations while trying to stay away from open and unsettled legal issues. Liberally speaking, a foreign arbitration institution does not qualify as an “arbitration commission” as defined in the PRC Arbitration Law. It follows that there is a possibility (and uncertainty) that selecting a foreign arbitration institution for arbitration in mainland China might be held invalid if the PRC Arbitration Law is the governing law for the arbitration agreement and the relevant “arbitration commission” language in the PRC Arbitration Law has been mechanically interpreted. We suggest that you consider the following ways to avoid the above uncertainty and to formulate a valid China arbitration clause in the context of institutional arbitration:

1. Select a PRC domestic arbitration commission for domestic or international disputes. You may select Cietac, which is particularly known for its international arbitration services. You may wish to consider choosing other PRC domestic arbitration commissions as well. These PRC domestic arbitration commissions (including Cietac) are in practice allowed to take both domestic and international arbitration cases.

2. Select a foreign arbitration institution for international disputes. If the dispute is an international or foreign-related one, you may consider selecting a foreign arbitration institution (such as Hong Kong International Arbitration Centre, ICC, etc). If so, you may need to make it clear in the arbitration agreement that the seat of arbitration is somewhere outside of mainland China (like Hong Kong, Singapore, Paris, etc.), and/or the arbitration agreement is governed by laws of a foreign jurisdiction. In this case, the PRC Arbitration Law would not be applicable to determine whether such arbitration agreement is valid or not and, therefore, you do not need to worry about the possible uncertain interpretation of the “arbitration commission” language. Of course, you need to make sure that under the laws of the seat of arbitration or the foreign jurisdiction, as the case may be, the proposed arbitration agreement is valid.

Needless to say, these are general observations and shall not serve as formal legal advice. Consultation with your legal counsel is needed or suggested.

Jie Tao
Partner
Haiwen & Partners

The in-house perspective