The Disputes and Amendment Approaches of the Determination on the Mutual Consent of Parties for Arbitration in the Judicial Review of China—Empirical Analysis Based on 53 Judicial Documents

*Authored by Yue Cao, DPhil Law student at Faculty of Law, University of Oxford

Introduction

Dr Wang started the presentation with an introduction of the relevant background of the problem. According to Art.16 and 18 of the Arbitration Law of the People’s Republic of China (PRC), a clearly selected “Arbitration Commission” (i.e. an “Arbitral Institution”) is a mandatory element for the effectiveness of a mutual consent of arbitration. However, it is not uncommon for parties to international transactions to conclude arbitration agreements that do not specify such a qualified arbitral institution (“defective clauses” or “defective arbitration agreements”), either due to contractual negligence or for the purpose of effecting the transaction. These “defective arbitration agreements” typically arise in the following three situations:

• The parties involved in a foreign-related dispute have not specified an arbitral institution;
• The parties choose to have the arbitration managed by an overseas arbitral institution but with the seat in China;
• The parties involved in a domestic dispute choose an overseas arbitral institution.

Dr Wang then introduced her observations from the research into these three scenarios.

Empirical Observations

For scenario 1, i.e. where the parties involved in a foreign-related dispute have not specified an arbitral institution, Dr Wang examined 37 Supreme Court Replies, 1 Supreme Court Awards, and 2 District Court Awards. In 11 cases where no agreements regarding the arbitral seat/ the place of arbitration institution or the arbitral rules was reached, the Courts consistently held the arbitration agreements to be ineffective. In 9 cases where agreements were concluded only regarding the arbitral seat/ the place of arbitration institution but not regarding the specific arbitral rules, the Courts distinguished between domestic and foreign arbitral seat/place and reached different conclusions: if the parties selected a foreign seat/place, the arbitration agreements were generally held to be effective except for one case in 2009; by contrast, if the parties selected a domestic seat/place, the arbitration agreements were all held to be ineffective.

Moreover, in 10 cases where the arbitration agreements designated specific arbitral rules, the Courts made a similar distinction between domestic and foreign arbitral seat/place: if the parties selected a foreign seat/place, the arbitration agreements were all held to be effective except for one case in 1996; conversely, if the parties selected a PRC arbitral seat/place, the arbitration agreements were held to be ineffective from 1996 to 2013 except for one case decided by a Xiamen Court in 2004, and were held to be effective after 2013. In 6 cases where the arbitration agreements specified an arbitral institution but with a wrong name, the arbitration agreements were held to be ineffective before 2006; since then, however, the arbitration agreements may be deemed effective if the institution can still be identified by the wrong name. Finally, in 4 cases where the arbitration agreements specified two or more arbitral institutions, the Courts consistently held the agreements to be ineffective.

For scenario 2, i.e. where the parties involved in a foreign-related dispute choose to have the arbitration managed by an overseas arbitral institution but with the seat in China, Dr Wang analysed 6 Supreme Court Replies and 6 District Court Awards. She observed that the Courts held such arbitration agreements to be ineffective before 2013 except for 2 cases decided by District Courts, whereas they have consistently held such agreements to be effective since then.

For scenario 3, i.e. where the parties involved in a domestic dispute choose an overseas arbitral institution, Dr Wang reviewed 3 Supreme Court Replies, 1 Supreme Court Awards and 4 District Court Awards. She found that such arbitration agreements were consistently held to be ineffective before 2015, but since the Siemens case in 2015, Courts have held such arbitration agreements effective if they are made by wholly foreign-owned enterprises (WFOEs) in Free Trade Zones (FTZs) by broadening the concept of “foreign related” factors.

Critique of Judicial Practice

Dr Wang then critiqued the practice of the Courts in the above observations.

Firstly, there have been dramatic shifts of judicial positions on the issue without persuasive reasoning. For example, the Supreme Court refused to recognize a foreign arbitral institution as satisfying the requirement of a specified arbitration commission in the Shenhua case in February 2013, while it suddenly recognized a similar arbitration agreement that only designated a foreign arbitral institution to be effective in the Longlide Case just one month later in March 2013.

Second, there has been inconsistent decisions between the Supreme Court and District Courts at the same time. For example, with respect to the effectiveness of an agreement to choose a foreign arbitration as case manager with the seat in China, the Supreme Court held them to be ineffective in cases before 2013, while the Xiamen District Court and Ningbo District Court held them to be effective in 2004 and 2009 respectively.

Third, the Courts’ interpretation of contractual terms in several cases was too rigid. For example, in the 2008 Xinyeshiye case, the Court rigidly interpreted the terms of “the arbitral institution in the country of defendants” as one in the PRC and held the arbitration agreement ineffective because a specific institution could not be identified.

Fourthly, the Courts interpreted the scope of “foreign-related” factors inconsistently since the Siemens case in 2015. Although the Supreme Court confirmed in Siemens the “foreign-related” nature of disputes between two WFOEs registered in the FTZ and hence the effectiveness of arbitration agreements concluded between them, it still held that WFOEs not registered in FTZs constituted domestic enterprises and invalidated arbitration agreements between them in subsequent cases.

Amendment Approaches

Based on the above observations and critiques, Dr Wang finally provided two normative suggestions that may improve the existing rules. Firstly, she proposed the establishment of a principle of judicial review that any interpretation should be premised on the “fulfilling of the parties’ commercial purpose”, except under specific circumstance (e.g. regarding the mutual consent made between merchants and consumers). Secondly, Courts should distinguish the standards of review in different stages of the proceedings: in the jurisdictional stage, it is reasonable for the Courts to strictly interpret the mutual consent of the parties to arbitration; however, in post-award stages (e.g. recognition or execution of arbitral awards), the “pro-arbitration principle” and “pro-enforceability principle” should be given top priority.

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