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China’s Supreme People’s Court (“SPC“) recently issued two pieces of judicial interpretations, namely, the Provisions of the Supreme People’s Court on Certain Issues Related to the Conduct of Judicial Review of Arbitral Cases and the Provisions of the Supreme People’s Court on Certain Issues Related to the Reporting System of Arbitral Cases (collectively, “New SPC Interpretations“).

The New SPC Interpretations became effective on 1 January 2018 and aim to strengthen the arbitration regime in China. Among other things, they extend the judicial reporting system in arbitration-related judicial review procedures to arbitral agreements without foreign elements and domestic arbitral awards. They also clarify the applicable laws in deciding the validity of foreign-related arbitral agreements. These measures aim to ensure judicial consistency across PRC courts and give parties located in China increased options for dispute resolution.

Our alert discusses the implications and key features of the New SPC Interpretations.

What it means for you

For Chinese parties or Foreign Invested Enterprises (“FIEs“) that are regarded as Chinese entities, the New SPC Interpretations are a positive development.

Previously, the internal reporting system established by the SPC applied only in relation to foreign-related arbitral agreements, foreign-related arbitral awards or foreign arbitral awards. Any Intermediate People’s Court intending to invalidate any foreign-related arbitral agreements, set aside foreign-related arbitral awards or deny enforcement of foreign or foreign-related arbitral awards was required to report to the Higher People’s Court. If the Higher People’s Court agrees with the proposed decision, it should report the case to the SPC for final approval. Without the SPC’s final approval, local courts are not allowed to decide against a foreign-related arbitral agreement, a foreign-related award or a foreign award.

Therefore, compared to domestic awards, foreign and foreign-related awards appeared to enjoy special protection under PRC law. However, as FIEs are regarded as Chinese entities, they faced a risk that their cases would not be regarded as foreign-related. There are also procedural differences between domestic and foreign-related judicial review cases. By extending the judicial reporting system to domestic cases, parties who submit their dispute to a domestic arbitration institution will now have greater certainty as to the validity of their arbitral agreements and the enforceability of arbitral awards resulting from those agreements.

The New SPC Interpretations also give parties reason to be optimistic that the new provisions will bring judicial consistency to local courts, and encourage local courts to treat domestic awards and foreign or foreign-related awards equally.

Key Features of the New SPC Interpretations

  1. This is the first time that the SPC has officially categorized arbitration-related judicial review cases – the six types of cases are:
  • Affirming the validity of an arbitral agreement;
  • Setting aside an arbitral award made in China;
  • Enforcing arbitral awards made in China;
  • Recognizing and enforcing arbitral awards made in Hong Kong, Macau and Taiwan;
  • Recognizing and enforcing arbitral awards made in foreign states; and
  • Other arbitration-related judicial review cases.

2. The judicial reporting system has been extended to domestic cases and will operate as follows:

  • If the Intermediate People’s Court intends to invalidate an arbitral agreement, set aside an arbitral award, or refuse enforcement in a domestic judicial review case, it shall report to and obtain approval from the Higher People’s Court.
  • If the Higher People’s Court agrees with the decision proposed by the Intermediate Court, it should report the intended decision to the SPC for final approval. This applies only to circumstances where the parties reside in different provinces or if the proposed decision to refuse enforcement or set aside a domestic arbitral award is made on the ground of “violating the public interests”.

3. The New SPC Interpretations clarify an ambiguity arising from Article 18 of Law of the People’s Republic of China on Choice of Law for Foreign-related Civil Relationships. Article 18 stipulates that if parties fail to agree on the applicable law of the arbitral agreement, the law of the locality of the arbitral institution or law of the arbitral seat shall apply. This does not resolve the situation where the law of the locality of the arbitral institution conflicts with the law of the arbitral seat. The new provisions confirm that when deciding on the validity of foreign-related arbitral agreements, the law that results in a valid arbitral agreement shall prevail.

Actions to take

These latest developments indicate the SPC’s attitude to streamline judicial approach and encourage domestic arbitration. Parties doing business in China should consider the following steps:

  1. Companies located in China, including Chinese companies and FIEs, may consider submitting their disputes under domestic commercial contracts to arbitration institutions located in China such as CIETAC, BAC and SHIAC. They no longer need to create foreign elements such as adding a foreign parent party in the transaction in order to protect their arbitral agreement. When negotiating a commercial contract in China, parties should seek legal advice on how to optimize their options in the event of a dispute.
  2. To avoid a potential dispute arising from a conflict between the laws of the locality of the arbitral institution and the law of the arbitral seat, we recommend that parties expressly specify the applicable law of the arbitral agreement in a commercial contact.
Author

Anthony Poon is a partner at Baker & McKenzie in Hong Kong. He practices mainly in the area of dispute resolution and he has substantial experience in commercial and insurance litigation, as well as insolvency, defamation and media liability matters. He also handles corporate disputes, corporate governance and corporate compliance matters. Ranked by Chambers Asia Pacific and PLC Which lawyer? as a leading lawyer in the field of dispute resolution, Mr. Poon frequently advises clients on directors & officers liability, media liability, insolvency, insider dealing, fraud prevention and corporate compliance, as well as anti-bribery and corruption investigation, and banking fraud issues. Anthony Poon can be reached at [email protected] and +852 2846 1919.

Author

Simon Hui is a member of the Dispute Resolution team at Baker & McKenzie Hong Kong. Simon Hui is a partner in Baker & McKenzie's Dispute Resolution Practice Group in Shanghai. Mr. Hui has 18 years of experience and focuses his practice on commercial and insurance dispute resolution, and regulatory and compliance matters. He also has extensive experience representing clients in both domestic and international arbitration institutions including CIETAC, SHIAC, HKIAC. Simon Hui can be reached at [email protected] and + 61 2 8922 5221.

Author

Peng Shen is a member of the Dispute Resolution team at Baker McKenzie Beijing . Peng Shen is a special counsel in Baker & McKenzie's Beijing office. Before joining the Firm in October 2010, he worked as a senior associate in one of the largest China-based law firms. He also served as a judge at a Beijing court, worked for the Docketing Division and No. 2 Civil Division, and served as the secretary of the court’s judicial committee. Mr. Shen is seasoned in PRC contract law, and an experienced litigator and skilled investigator. Mr. Shen’s practice focuses on US Foreign Corrupt Practices Act (FCPA) investigations, compliance, commercial litigation and international arbitration matters. Peng Shen can be reached at [email protected] and + 61 2 8922 5221.

Author

Haifeng Li is a partner in Baker McKenzie FenXun's Beijing office. Haifeng specializes in litigation and commercial arbitration. He also has extensive experience representing clients in both domestic and international arbitration institutions including CIETAC, BAC, ICC, HKIAC and SIAC.

Author

Philip Hanusch is a special counsel in Baker McKenzie’s Hong Kong office. He specializes in international commercial arbitration with a focus on shareholder, joint venture and M&A disputes. Philipp has represented parties in arbitrations under various arbitration rules, including the HKIAC Rules, ICC Rules, CIETAC Rules, ICDR Rules and UNCITRAL Arbitration Rules. Philipp Hanusch can be reached at [email protected] and +852 2846 1665.

Author

Paul Teo is a partner at Baker McKenzie in Hong Kong. Paul Teo leads Baker McKenzie's Arbitration Practice in Greater China. He handles disputes related to corporate and commercial transactions, energy, mining and resources, infrastructure and construction, offshore and marine, and telecommunications. Prior to joining Baker McKenzie, he jointly led a top-tier global law firm's international arbitration practice in Southeast Asia. Paul Teo is regularly appointed as arbitrator. He is a Chartered Arbitrator and is listed on the Presidential Panel of Arbitrators of the Chartered Institute of Arbitrators and he serves on the panels of many leading arbitral institutions. Paul Teo has 20 years of experience advising and representing parties in arbitration, adjudication, alternative dispute resolution including negotiation, mediation and med-arb, and litigation proceedings in Asia and Europe. He has advised and acted on many landmark projects in Hong Kong, China, Macau, Taiwan and the rest of the region, including Mongolia, Philippines, Vietnam, Thailand, Malaysia, Singapore, Indonesia, India and Bangladesh. Further afield, He has particular experience of acting for clients on disputes arising out of major projects in the Gulf Region, Central Asia, Africa and Latin America.