SPC publishes new judicial interpretations on arbitration

The Supreme People's Court of China (SPC) has released two judicial interpretations (Interpretations) on arbitration. The Interpretations were passed on 20 November 2017 and 4 December 2017. The texts of both were made public on 29 December 2017 and became effective on 1 January 2018. The Interpretations are the latest in a series of steps by the SPC to improve the regime for both domestic and cross-border arbitration in mainland China.

The Interpretations primarily address the judicial review of arbitration cases. The important provisions that have been given effect include:

• Extending the existing "reporting system" to domestic arbitrations in order to achieve judicial consistency
• Granting parties limited opportunities to participate in the reporting system to improve transparency
• Encouraging parties to state expressly the law they intend to govern a foreign-related arbitration agreement
• Clarifying that the decisions of the PRC Courts under the "reporting system" are not subject to appeal.

Extending the reporting system to domestic arbitrations

The so-called "reporting system" was established in August 1995 by a circular issued by the SPC. Under the system, Intermediate People’s Courts that intend to refuse enforcement of a foreign or foreign-related arbitral award or arbitration agreement are bound to report the intended decision to, and request approval from, the relevant Higher People’s Court. If that court concurs with the Intermediate People’s Court, it is required to report to the SPC for a final review. The amended procedure now imposes, in certain circumstances, a similar duty in arbitrations of a purely domestic nature.

The changes aim to ensure consistency in the decisions of PRC Courts in arbitration-related cases, by giving the SPC powers to oversee more such decisions. They demonstrate the SPC's increasingly pro-enforcement approach, by ensuring that some domestic awards enjoy the same protections as foreign and foreign-related awards. This extension of the reporting system may prove particularly useful in disputes involving Sino-foreign joint ventures, where the foreign partner must transact using a local PRC entity, and where any subsequent arbitration with the Chinese party is likely to be classed as domestic, not foreign-related.

However, the Interpretations do not extend the reporting system as far as it might initially appear. Under to the Interpretations, the full reporting system applies to domestic arbitrations only when:  i) the parties in dispute reside in different provinces; or ii) the ground for refusing enforcement or setting aside the award is "infringement of public policy".

In those cases, it is mandatory to report to every level of higher court, up to and including the SPC. In all other domestic cases, the Higher People's Court will conduct the final review, without involving the SPC.

In addition, the Interpretations fail to fully address complaints that the reporting system frequently results in significant delays to enforcement. Although the system includes time limits for the courts' review process, these have not, historically, been enforced. This has been a major concern, as the review process can take unduly long in some cases. The amended procedure, however, fails to address the issue and no sanctions are imposed if the prescribed time limits are not met. Adding domestic cases is likely to increase, not reduce, such delays.

Party participation in the reporting system

The reporting system is frequently criticised as an opaque process, lacking transparency or any opportunity for parties to make their respective cases before the reviewing courts. The Interpretations go some way towards addressing this. Where a reviewing Higher People's Court feels that the facts before it are incomplete or unclear, it "can question" the parties, or direct the lower court to ensure that all relevant facts have been duly established. This should give parties an opportunity to answer the questions of the Court in the form of a reply letter, resulting in greater transparency and increased party participation in the reporting system. However, it is not a uniform right of parties to make submissions to the reviewing courts.

Express mention of applicable law

The Interpretations clarify that an arbitration clause will not necessarily be governed by the law that governs the underlying contract. Parties who intend to choose a particular law to govern the validity of a foreign-related arbitration agreement must ensure that this is expressly stated in the agreement.

If the parties fail to state the law governing the arbitration agreement, the Interpretations provide that PRC courts will apply the law of the seat, or the law of the place where the arbitration institution is located. In keeping with recent decisions by English, Singapore and Hong Kong courts, the PRC courts will adopt a pro-validation approach. Where the court is asked to choose between different laws, it will opt to apply the law most likely to result in a valid arbitration agreement.

Decisions not subject to appeal

The Interpretations clarify that decisions of the PRC courts under the reporting system shall have the force of law in all cases. If a party applies for a review, makes an appeal or requests for a retrial, the application shall be dismissed unless the law and the Interpretations provide otherwise.

Other useful provisions

The SPC has been consistent in introducing pro- arbitration provisions. In May 2017, the SPC introduced a Notice titled Some Issues Concerning the Centralised Handling of Judicial Review of Arbitration (Notice). The Notice introduced "Specialised Trial Divisions" in Higher People's Courts or "Collegial Panels" in lower courts to undertake judicial review of arbitration cases (foreign-related commercial cases). The "specialised" pool of judges will be equipped with the technical know-how to handle complex arbitration cases.

In the same Notice, it was directed that each level of People's Court establish a "Centralised Administrative Platform" for judicial review of arbitration awards. This provision should improve information management, and make data analysis of cases at various levels easier. The courts do not, however, plan to publish the data.

Conclusion

The Interpretations demonstrate that the PRC Courts are working to meet the requirements of arbitration users. The SPC has endeavoured to address a number of perceived flaws in the Arbitration Law and reporting system, and we are optimistic that these new measures will go some way towards achieving that aim.

The changes in the reporting system may place an added burden on the PRC courts, resulting in further delays. However, they should also lead to more consistent and higher-quality judicial decisions, and are therefore to be welcomed.