The invisible seat

The first issue that arises is this: to which institution did the parties intend to refer their disputes? In the arbitration proceedings, the Ningbo companies objected to the ICC's jurisdiction by arguing that the intention of the arbitration agreement is to submit the dispute to arbitration by the China International Economic and Trade Arbitration Commission (Cietac) since the ICC has no branches in China. Typically, the validity of an arbitration clause is determined by reference to the law expressly chosen in the contract. However, as the CISG does not deal with the validity of arbitration agreements, it will therefore have to be determined by reference to lex arbitri, Chinese law. This triggers another question: under Chinese law, can parties validly agree to have an arbitration administered by non-Chinese arbitration institutions, such as the ICC, when the seat of arbitration is China? It relates to the fundamental issue as to the application of a “non domestic award” under the New York Convention. The second prong of Article 1, Section 1 of the New York Convention (the Convention) states that “the Convention shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought”. Unlike the first prong of Article 1, Section 1, which applied the territorial criteria to the applicability of the Convention, the second prong is obscure and has caused some confusion in the past.

The Ningbo Companies argued that pursuant to Article 16 of the PRC Arbitration Law (中华人民共和国仲裁法) (the Law), a valid arbitration agreement must include the choice of arbitration commission, which is defined in Article 10 of the Law as arbitration institutions established under the auspices of PRC government bodies. The Swiss steel company's defence was that neither the Law nor the PRC Civil Procedure Law (中华人民共和国民事诉讼法) prohibits foreign arbitration institution from holding arbitration in China.

In the Zublin International GmbH vs. Wuxi Woco-tongyong Rubber Engineering Co. Ltd case, which was relied on by the Ningbo Companies, the arbitration clause stated the following: “Arbitration: ICC Rules, Shanghai shall apply.” The Higher People's Court of Jiangsu referred the question to the SPC, which directed as follows:

According to Chinese arbitration law, a valid arbitration clause should include an intention to refer disputes to arbitration, the scope of matters so referred, and the choice of an arbitration institution. In the present case, the arbitration clause contains an intention to refer disputes to arbitration, the arbitration rules to be applied and the place of arbitration, but did not specify the arbitration institution. Therefore the arbitration clause should be deemed invalid.

It can be inferred from this case that the objection of the SPC was not directed at the administration by the ICC of China-seated arbitration. In the Tribunal's view, Article 10 is, based on a literal reading of the provision, meant to set out the procedure for the establishment of arbitration commissions in China, rather than to define the term “arbitration commission”.

Furthermore, the SPC has since clarified in its Arbitration Law's Judicial Interpretations that the lack of an express stipulation of an arbitration institution does not automatically invalidate an arbitration clause. Actually the question that the arbitration institution - the ICC International Court of Arbitration - can be ascertained from the ICC rules, therefore, the Tribunal holds that the arbitration clause in question is valid under Chinese law.

Another direct supporting case is Xiamen Xiangyu Group Corporation vs. Michelle Trade Company. The arbitration clause provided that all disputes shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce and the place of arbitration shall be Beijing. The Xiamen Intermediate Court made a ruling supporting the validity of the arbitration clause. Its reasoning is that the arbitration clause is clear and it can be inferred that the only arbitration institution is the ICC without further supplementary agreement. In addition, the arbitration clause is not in breach of the prohibitive regulations of the PRC law.

Practical Advice

Although it is uncertain whether the decision obtained support from the SPC, it should be noted that the decision was taken at the Higher Court level. It would therefore be a very significant development by showing the provincial Court's willingness to enforce awards made under the auspices of a foreign arbitration institution with a seat in the PRC. It is additionally noted that the promises made at the time of China's entry into the World Trade Organization (WTO) have no limitations on arbitration services offered by foreign arbitral institutions in the PRC. This is consistent with the SPC's attitude in recent years of being more open to the validity of arbitration agreements, recognition of and enforcement of foreign arbitral awards in China.

It cannot be denied, however, that no current PRC law offers a clear stipulation that allows the foreign arbitral institution a seat in China, particularly as the PRC Arbitration Law only deals with arbitration under the auspices of a PRC arbitration commission. Nor did the Ningbo Court give a detailed explanation as to what constitutes a non-domestic award under the New York Convention. Therefore, unless there is greater clarity on this issue by the SPC, prospects are still uncertain. For the sake of prudence, the parties that wish for the seat to be in the PRC are advised to use a PRC arbitration commission, such as Cietac, and in cases where foreign parties may have concerns of fairness, they can ask to set up conditions under which arbitrators are to be appointed (for example, only foreign arbitrators). Alternatively, if parties do not agree on using the mainland arbitration institution, they shall specify in the arbitration clause that the seat shall be located someplace outside the PRC but with the hearing to be held in one PRC city.

The successful enforcement of two Beijing-seated ICC Awards also provides the following indications:

1. The SPC requires that the arbitral award shall be enforced within two months of receiving the enforcement application, however in practice, it often lasts longer in some courts in view of the internal reporting mechanism. Taking the three aforementioned cases as examples (two ICC awards and one HKIAC award), although they were successful in the end, all of them were referred by the Ningbo Court to the Appeal Court for determination, each case lasting for over two years. Therefore, it is an ongoing battle. (However, it is not the case in some courts. For example, an interim award of a London arbitration award was recognised and enforced within a short time by the Ningbo Maritime Court in favor of a foreign entity relating to a ship-building contract dispute)

2. Under PRC law, the PRC Court would not second guess the validity of an arbitration agreement should the respondent fail to raise an objection prior to the first arbitration hearing or if the agreement has been examined in the arbitration proceedings. In the hearing proceedings of the Ningbo Court, the Ningbo Companies again objected to the validity of the arbitration clause, however it was rejected by the Ningbo Court based on this ground. Therefore, in order to prevent the respondent from challenging the validity of the arbitration agreement in the phase of recognition and enforcement, it is best for the parties to resolve this question as early as possible in the arbitration hearing by asking the Tribunal to clarify this point in the arbitral award.

3. Importance should be placed on the recent cases published by the SPC or Intermediate or Higher Courts. Though China is not a country of case law, these cases can, without doubt, produce important influence on the PRC Court's determination on similar cases. The SPC periodically publishes some leading cases in the Guide on Foreign-Related Commercial and Maritime Trial as to whether or not to recognise and enforce arbitral awards.

4. A close eye should be kept on the developments of the Court. Upon hearing that the Intermediate Court has declined to enforce an arbitral award, timely communication with the Higher Court appears very necessary. At this stage, the claimant is advised to seek assistance from the Embassy or the foreign arbitration institution and have them write to the Court in petition or for further clarification.

Bin Yuan, ZM & Co Law Firm, Ningbo