Supreme People's Court Provides Clarification on Commercial Arbitration

China's state-run press announced on September 7 that the Supreme People's Court had issued an Interpretation Regarding Certain Issues Relating to the Application of the "People's Republic of China Arbitration Law," (Interpretation) to take effect on September 8. The Interpretation is the Supreme People's Court's second during the past year providing clarification about commercial arbitration. In December 2005, the Supreme People's Court issued Minutes of the Second National Work Meeting on Adjudications Involving Commercial and Maritime Affairs, Chapter Six of which provides guidelines regarding court treatment of foreign-related arbitrations and foreign and foreign-related arbitration awards.

The Interpretation represents progress toward conforming China's arbitration regime with international practice, but it "falls short of addressing several questions that concern foreign entities," according to a September 2006 briefing published by the Freshfields Bruckhaus Deringer law firm. Shortcomings of the Interpretation include, according to Freshfields, its failure to:

• clarify whether the International Chamber of Commerce and other foreign arbitration institutions can conduct arbitrations in China; and
• allow Chinese parties to agree to arbitrate outside China.

The Interpretation provides guidance to contracting parties in China in several areas including:

• Establishing that the requirement in Article 16 of China's Arbitration Law that arbitration agreements must be in "written form" includes letters and electronic data (including telegrams, telexes, faxes, electronic data exchanges, and e-mails) (Article 1);
• Stipulating that the scope of arbitral disputes includes those "arising on the basis of a contract's formation, effectiveness, modification, assignment, performance, liability for breach of contract, interpretation, or termination" (Article 2);
• Clarifying the validity of arbitration agreements in which the arbitration institution is not specified (Articles 3-6) and in which an agreement provides that disputes may be submitted to either an arbitration institution or a court (Article 7);
• Confirming that, once an arbitration institution has determined that an arbitration clause is valid, a party may not appeal the decision to a people's court based on the ground that the clause is invalid (Article 13);
• Requiring that objections to the validity of an arbitration agreement either be raised during the arbitration or waived (Article 27);
• Mandating people's courts convene formal hearings with the parties presided over by a panel of judges for objections to the validity of an arbitration agreement and applications to set aside an arbitration award (Articles 15 and 24).

The Interpretation also provides clarification regarding the transferability (Articles 8 and 9) and severability (Article 10) of arbitration agreements, as well as when they may be incorporated by reference (Article 11).

The Interpretation devotes significant space to re-arbitration and setting aside arbitration awards (Articles 17-23). The Interpretation restricts the ability of courts to order re-arbitration to circumstances where evidence has been falsified or concealed. A spokesperson for the Supreme People's Court said that this restriction is conducive to "avoiding arbitrariness in judges' notices of re-arbitration," according to a September 7 Xinhua report on the Interpretation.

A Supreme People's Court spokesperson said that the Interpretation also restricts to intermediate people's courts the jurisdiction to review the validity of arbitration agreements and the enforceability of arbitration awards, because of the "relatively large degree of arbitrariness" in basic level people's courts, according to another September 7 Xinhua article.

The Interpretation also includes several provisions that specifically deal with foreign-related arbitrations. Article 12 provides that cases involving an application to affirm the validity of a foreign-related arbitration agreement are subject to the jurisdiction of the intermediate people's court located in the place where the arbitration institution is located, where the arbitration agreement was signed, or where the applicant or the person against whom the application is being sought resides. Article 16 provides that courts shall apply the law agreed to by the parties when determining the validity of foreign-related arbitration agreements. If parties did not agree on the law to be used but have agreed on the location of the arbitration, then the law of the place of arbitration will be applied. Where the parties have neither agreed on the law to be used nor on the place of arbitration, or where the place of arbitration is not clear, the law where the court is located will be used.