Judicial Interpretation of Arbitration Law
Nov. 2006 – Morrison / Foerster
The Supreme People’s Court of China (“SPCâ€), the highest judicial authority in China, has issued a comprehensive interpretation, Interpretation of Issues Relating to the Application of the PRC Arbitration Law (最高人民法院关于适用ä¸åŽäººæ°‘共和国仲è£æ³•è‹¥å¹²é—®é¢˜çš„解释) Fa Shi [2006] No. 7, on the application of the PRC Arbitration Law (“Interpretation No. 7â€), effective September 8, 2006.
Background
In the context of a cross-border commercial transaction, China does not recognize and enforce a foreign court judgment in China unless China and the relevant foreign jurisdiction are both parties to a bilateral or multilateral judicial treaty. So far only a handful of countries have such treaties with China. However, China does recognize and enforce foreign arbitral awards rendered in countries that are members of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958) (“New York Conventionâ€). Therefore, in practice, arbitration has almost become a default choice for dispute resolution in cross-border commercial transactions with China.
Following a style of legislation drafting that is common in China, the Arbitration Law is drafted in general terms. At the same time, case law does not have the binding status under Chinese law that it does under common law systems. As such, a formal interpretation such as Interpretation No. 7 is very significant.
Highlights
Interpretation No. 7 is applicable to both domestic and foreign-related arbitrations unless the specific provisions provide otherwise. Compared with SPC’s prior interpretations concerning arbitration, Interpretation No. 7 is comprehensive in scope, addressing many issues arising in connection with arbitration agreements, court review of arbitral awards, and enforcement of arbitral awards, and will override prior interpretations in case of conflict. We highlight some points as follows.
* According to Interpretation No. 7, an arbitration agreement may take any written form such as electronic data including telegraph, telefax, facsimile, electronic data exchange, and email.
* When the parties to a contract generally agree to submit contractual disputes to arbitration, the matters subject to arbitration may include all disputes concerning the execution, validity, amendment, assignment, performance, liability, interpretation, and termination of the contract.
* Interpretation No. 7 clarifies the validity of an arbitration agreement in various situations, for example,
* If the arbitration agreement itself has a defect:
o PRC law generally requires the designation of an arbitration commission to administer arbitrations. Ad hoc arbitrations in China are not recognized. Under Interpretation No. 7, if the arbitration agreement designates an inaccurate name for the arbitration institution, the name of the institution will be ascertained from the context so that the validity of the clause is preserved. Similarly, if the arbitration agreement provides only the arbitration rules without stipulating the institution, and the intended institution can be ascertained from the agreed arbitration rules or the parties can reach supplemental agreement on the institution, the clause will be upheld;
o If two or more arbitration institutions are designated, the parties may reach agreement to select one institution for arbitration. But if the parties fail to reach agreement on the selection of the institution, the arbitration agreement will be invalid; or
o If the arbitration provisions provide for resolution by either arbitration or the court at the choice of a party, the arbitration clause will be valid unless the party not commencing arbitration objects promptly to the arbitration;
o When one of the parties undergoes a merger or corporate division or dies, the arbitration agreement should be binding on the successor unless there is an agreement to the contrary that was reached when the parties concluded the arbitration agreement;
o When there are some changes to a contract, such as an assignment of the rights and obligations, the arbitration agreement should be binding on the assignee unless the parties have agreed otherwise or the assignee has explicitly raised objections or does not know there is such a separate arbitration agreement. If the contract did not come into effect or was repudiated, the arbitration agreement nonetheless remains effective.
* Interpretation No. 7 provides that an arbitral award may be partially revoked if the portion in question exceeds the scope of arbitration provided in the arbitration agreement, unless that portion is inseparable from the other matters that were arbitrated. Therefore, an entire award cannot be set aside if only a portion of the award exceeds the scope of arbitration, unless that portion is inseparable.
* If a party has not objected to the validity of an arbitration agreement during the arbitration, after an arbitral award is rendered a court should not accept that party’s application to revoke the award or objection to enforcement of the award if the party’s application or defense is based on the argument that the arbitration agreement is invalid. Furthermore, if, as permitted under PRC law, the issue of the validity of the arbitration agreement has been submitted to an arbitration commission for determination, a PRC court will not overturn such a determination.
* In connection with the judicial review of the validity of a foreign-related arbitration agreement, Interpretation No. 7 specifically provides that the applicable law should be the law agreed on by the parties. However, if the parties have not agreed on the law applicable to the arbitration agreement, the law of the place of arbitration should be applied. If there is no agreed applicable law and no agreed place of arbitration, the law of the place of the court will be applicable. This provision makes it clear that parties to a cross-border transaction may opt out of the application of PRC law.
