Under Chinese arbitration law, there exists a special requirement that for an arbitration clause to be valid, the arbitration institute must be designated. This article analyses the reasons for this requirement and in particular, considers two civil rulings delivered by the Chinese Supreme People's Court in 2009 invalidating clauses which simply provide for "Beijing Arbitration."
In international maritime transportation, the shipping industry is accustomed to ad hoc arbitration and the use of standard short form contracts. As regards dispute resolution clauses, the parties may simply state "London Arbitration" or "Beijing Arbitration."1 However, there is a long history of controversy regarding whether a clause simply providing for "Beijing Arbitration" is valid under Chinese law. In 2009, the Chinese Supreme People's Court delivered two Replies2 to lower courts invalidating such a "Beijing Arbitration" clause, in Zhujiang Steels Co. v. Shenzhen Fanbang International Freight Forwarder Co.3 and COSCO v. CMEC International Commercial Transportation Agency Co.4 Although China does not have a system of binding case precedents and even the judgments of the Supreme People's Court are not viewed as a source of law,5 these civil rulings will nonetheless send very important signals to the Chinese shipping industry and shipping lawyers, as well as to interested parties, concerning the Chinese judicial attitude on other similar "Beijing Arbitration" clauses.
1.Chinese Arbitration Law and the Preference for Institutional Arbitration
As early as 1954, the Chinese central government decided to establish a Foreign Trade Arbitration Commission (FTAC) within the China Council for the Promotion of International Trade,6 which is now called the China International Economic and Trade Arbitration Commission (CIETAC). In 1958, the central government also established the Maritime Arbitration Commission,7 which is now called the China Maritime Arbitration Commission (CMAC). Further, up until the ratification of the Arbitration Law of the People's Republic of China (1994), there existed fourteen Laws, eighty Administrative Regulations and about 200 Local Regulations in which stipulations in relation to arbitration could be found. However, their particulars were quite different from each other, and most ran contrary to the fundamental theories of classical arbitration.8
In August 1991, the Legislation Committee of the Standing Committee of the National People's Congress (NPC) began to draft a new arbitration law and in 1994, the Arbitration Law of the People's Republic of China was successfully enacted9 and this Law took effect on September 1, 1995. Article 16 of the Arbitration Law (1994)10 provides that:
An arbitration agreement refers to an arbitration clause provided in the contract or other written agreements requesting arbitration concluded prior or subsequent to the occurrence of disputes. An arbitration agreement shall have the following contents: (1) an expressed intent to request arbitration; (2) items for arbitration; and (3) the chosen arbitration institution.
According to this article, the parties can only choose an arbitration institution in China and ad hoc arbitration is not recognized. In addition, Article 18 of the Arbitration Law further provides that if the parties fail to designate an arbitration institution in the arbitration agreement, or if such designation is unclear, the arbitration agreement will be considered invalid, unless the parties reach a supplementary agreement.
Prior to the introduction of the Arbitration Law, it was in fact common for many arbitration agreements to merely recite that any disputes between the parties would be resolved via arbitration in Beijing. In such cases, it was deemed that the parties had elected for arbitration before CIETAC or CMAC, depending on the nature of the case.
In M.V. "Long Xu" Demurrage Dispute,11 the Supreme People's Court held the "Beijing Arbitration" clause to be valid. This was a charterparty demurrage dispute and the charterparty was concluded on August 28, 1995. The arbitration clause in the charterparty provided "arbitration in Beijing and Chinese law apply." Later, the parties raised a dispute as to whether this arbitration clause was valid and on March 27, 1999, Qingdao Maritime Court ruled that:
after the coming into force of the Chinese Arbitration Law as of September 1, 1995, there are more than one arbitration institutions in Beijing and the "arbitration in Beijing" clause concluded by the parties has not specified the arbitration institution and is not enforceable.
The jurisdictional dispute was appealed to Shandong High People's Court, which also held that the arbitration clause was invalid. Finally, the case was referred to the Supreme People's Court and on December 25, 1997, the Supreme People's Court overturned the conclusion of Shandong High People's Court for the reason that:
the charterparty was concluded before the coming into force of the Arbitration Law and the "arbitration in Beijing" clause is the true intention of the parties and is clear; the so called "arbitration in Beijing" specifically directs to the Beijing CMAC.12
However, following the introduction of the Arbitration Law, such arbitration agreements were deemed to be invalid, though some parties were able to conclude a supplementary arbitration agreement, enabling the arbitration to proceed.13 As to the reason for this rigid and specific requirement regarding the arbitration institution in arbitration clauses, Prof. Fan Kun of Chinese University of Hong Kong disclosed that, during a research trip which she conducted in March–April 2007 in China, some legal experts explained that the reluctance of Chinese legislators to recognize ad hoc arbitration reflected the fear that if arbitration was allowed to be conducted without supervision by an established administrative body, it would be difficult to control the behavior of arbitrators and ensure the quality of the arbitration; and also the government would remain ignorant about ad hoc arbitrations unless a party initiated court proceedings. They believed that it was still too early to introduce ad hoc arbitration, which presupposes a system of trust that has not yet fully developed in China.14
China's preference for institutional arbitration and its rigorous attitude towards ad hoc arbitration has been criticized by many scholars and practitioners. For example, Prof. Zhao Xiuwen of China Renmin University made the criticism that:
The refusal of Chinese law to recognize ad hoc arbitration causes inequalities not only between Chinese parties and non-Chinese parties, but also between the mainland and other Special Administration Areas inside China, such as Hong Kong or Macau ...While the CAL (Chinese Arbitration Law) refuses to recognize ad hoc arbitration in China, Chinese law recognizes ad hoc arbitration abroad under the New York Convention.15
Mr. Cai Hongda, Deputy Secretary General of CMAC, also complained that:
CMAC has received large quantities of consultations regarding "Beijing Arbitration" clauses and even if CMAC accepted the case, the respondent will raise jurisdiction objections, which will greatly delay the arbitration proceedings ... The court's rigid position toward "Beijing Arbitration" clauses has become the major barrier to the development of the Chinese maritime arbitration industry.16
2. Arbitration Practices of CMAC Toward "Beijing Arbitration" Clauses
In 1997, a charterer and owners concluded a charterparty. However, because the charterer failed to provide the cargo as agreed, the owners suffered detention loss. The owners brought arbitration proceedings before CMAC. On September 25, 1999, the charterer raised a jurisdictional objection that the "arbitration if any in Beijing and Chinese laws to be applied" clause was invalid under Chinese law as it had not specifically designated the arbitration institution. On January 19, 1998, CMAC issued an interim award regarding the jurisdictional dispute, holding that:
at the time when the parties concluded the charterparty, there are two arbitration institutions in Beijing and the parties can launch arbitration before CMAC or other arbitration institution in Beijing. The parties can choose one of the arbitration institutions to fulfill its intention of resolving the disputes by arbitration. In this case, in order to realize its intention of arbitration the charterer chose to arbitrate before CMAC, which means that the arbitration institute is clearly chosen and enforceable.17
Also, in M.V. "Antelute No. 1" Charter Party Dispute,18 with respect to the "arbitration if any in Beijing, to apply Chinese law" clause, on August 15, 2000, CMAC made an award holding that:
the arbitration clause in the charterparty is the true intention of the parties and it is clear that the parties have chosen to resolve their disputes by arbitration; the parties choose to arbitrate in Beijing and when the parties launch arbitration before CMAC or Beijing Arbitration Commission, it should be deemed that such selection conforms to the parties' intention of resolving the dispute by arbitration. Further, the selection can then manifest that the parties' arbitration agreement regarding the arbitration institute is clear and enforceable.19
Further, in M.V. "Hai an Cheng" Shipping Line Cooperation Dispute,20 with respect to the "arbitration in Beijing, Chinese law apply" clause, on March 26, 2002, CMAC also issued an interim award upholding the validity of this arbitration clause.
3. The Landmark Civil Rulings of the Supreme People's Court
In Zhujiang Steels Co. v. Shenzhen Fanbang International Freight Forwarding Co., Zhujiang Steels Co. concluded a charterparty for the carriage of steel pipes from China to Chile. The arbitration clause of the charterparty provided: "Beijing arbitration, applying Chinese law." Later, Fanbang Freight Forwarding Co. sent a letter to Zhujiang Steels Co., claiming that Zhujiang Steels Co. had failed to perform the charterparty and requesting to refer the case to CMAC. On May 8, 2008, Zhujiang Steels Co. applied to the Guangzhou Maritime Court for confirmation that the arbitration clause was invalid. As regards the arbitration clause, the Guangzhou Maritime Court then pointed out that it was not clear whether "applying Chinese law" should mean the applicable law that governs the substantive rights and obligations of the parties or the applicable law of the arbitration clause. The Guangzhou Maritime Court therefore concluded that the parties had not chosen the law applicable to the arbitrating clause and as the parties had chosen the seat of the arbitration as Beijing, Chinese law should be applied to determine the validity of the arbitration clause. The Guangzhou Maritime Court then ruled that according to Chinese Arbitration Law, the arbitration clause should specify the arbitration institution. Because there are three arbitration institutions in Beijing, i.e., Beijing Arbitration Commission, CIETAC, and CMAC, the arbitration clause in the charterparty was not valid. The Guangzhou Maritime Court's decision was then referred to the Guangdong High People's Court and finally to the Supreme People's Court. The Supreme People's Court upheld the Guangzhou Maritime Court's decision and invalidated the arbitrational clause for the reason that the "arbitration institution was not specifically selected."
At the end of 2009, the Supreme People's Court considered COSCO v. CMEC International Commercial Transportation Agency Co., which also concerned the validity of a "Beijing arbitration" clause. In this case, COSCO (China Ocean Shipping Company) concluded a charterparty with CMEC (China National Machinery & Equipment Import & Export Corporation) Transportation Agency Co., which provided that "the seat of arbitration is Beijing and Chinese law shall apply." A dispute arose between the parties with respect to whether this arbitration clause was valid under Chinese law. When the case was referred to the Supreme People's Court, it ruled on November 6, 2009 that:
the parties had only chosen the law applicable to the main contract, but had not chosen the law applicable to the arbitration agreement. According to the judicial interpretation of the Supreme People's Court, the law where the arbitration was seated, i.e., Chinese law shall be applied. According to the Arbitration Law, this arbitration agreement is invalid as it has not chosen the arbitration institution.
Arbitration, unlike litigation, derives its existence and form from the arbitration agreement or agreement clause. The arbitration agreement is the foundation of the dispute resolution mechanism which is to be employed.22 Because of the consensual nature of arbitration and the various requirements for the validity of the arbitration clause, it is very common to see heated disputes arise regarding the validity of the arbitration clauses, and the most ambitious claimant may have to retreat, sorely wounded, after a protracted dispute at the very beginning of the arbitration process, or perhaps receive a bitter blow in falling at the last hurdle of the enforcement of the arbitral award.21 Plainly, significant attention should be paid to the fact that a "Beijing arbitration" clause is not deemed valid by China's highest judicial agency.
As analysed above, China's harsh position toward "Beijing arbitration" clauses has created inconvenience and imbalance between domestic and foreign-related ad hoc arbitrations, and will apparently impede the healthy development of Chinese arbitration. Meanwhile, it should be noted that the Chinese Supreme People's Court has also expressed some dissatisfaction with respect to this "arbitration institution preference" system:
the judicial practices of many countries in the world are that when the parties select arbitration to resolve the disputes, even if the name of the arbitration institution is not correctly put forward, the court will deem the arbitration agreement as valid and will help the parties to realize their intention of arbitration ... Under Chinese arbitration law, whether the arbitration institution is clearly selected is one of the conditions for the validity of the arbitration agreement ... this is different from most judicial systems of the world.23
Although CMAC had attempted to resolve this problem by giving a wide and flexible interpretation of "Beijing arbitration" clauses, it is difficult for such CMAC arbitration awards to be sustained over the clear civil rulings of the Supreme People's Court. Therefore, the author hopes this article may remind practitioners that, although China does not have a system of case law precedent, it is advisable to avoid drafting "Beijing arbitration" or similar arbitration clauses in contracts to avoid unnecessary legal hurdles.
1. Cai Hongda, The Development and Cooperation in Maritime Arbitrations Between China and Chinese Taipei, available at: http://cn.cietac.org/hezuo/chd.htm.
2. On August 28, 1995, in an effort to address the lower courts unlawfully setting aside or refusing to enforce foreign arbitration awards, the Supreme People's Court issued a Notice of the Supreme People's Court on the People's Court's Handling of the Issues in Relation to Foreign Related Arbitration and Foreign Arbitration, requiring that an Intermediate People's Court should first report any proposed decision to refuse enforcement to the High People's Court of the province for approval; and should the High People's Court agree on the lower court's refusal, a further report must be made to the Supreme People's Court. This is the so-called Reporting System under Chinese arbitration law and the Supreme People's Court will issue a Reply to the High People's Court confirming whether the decision of refusal should be upheld. See Xiaobing Xu & George D. Wilson, One Country, Two—International Commercial Arbitration—Systems, 17 J. Int'l Arb. 47, 100 (No. 6, 2001).
3. Guide on Foreign-related Commercial and Maritime Trial 85–89 (Fourth Division of the Civil Trial Department of the Supreme People's Court ed., Issue 1, 2009).
4. Guide on Foreign-related Commercial and Maritime Trial 108–100 (Fourth Division of the Civil Trial Department of the Supreme People's Court ed., Issue 2, 2009).
5. For a detailed discussion regarding Chinese sources of law, see Jianfu Chen, Chinese Law: Context and Transformation, in Sources of Law and Law-Making ch. 5 (2008).
6. Tang Houzhi, Arbitration: A Method Used by China to Settle Foreign Trade and Economic Disputes, 4 Pace L. Rev. 519, 520 (1984).
7. Ralph Haughwout Folsom & John H. Minan, Law in the People's Republic of China: Commentary, Readings, And Materials 124 (1st ed. 1989).
8. Chen Min, The Arbitration Act of the People's Republic of China: A Great Leap Forward, 12 J. Int'l Arb. 29, 30 (No. 4, 1995).
9. Gu Ang'ran, Director of the Legislation Committee of the Standing Committee of the NPC, Explanation on the Draft Arbitration Act of the People's Republic of China, available at www.law-lib.com/fzdt/newshtml/20/20050805195952.htm.
10. Adopted at the Ninth Standing Committee Session of the Eighth National People's Congress on August 31, 1994. The English translation of this Arbitration Law can be found in the November 1995 issue of World Trade and Arbitration Materials, 7 W.T.A.M. 6.
11. M.V. "Long Xu" Demurrage Dispute, in Selected Awards of CMAC (1997–2002) 206 (CMAC eds., Beijing, Law Press, 2003).
13. Jingzhou Tao, Arbitration Law and Practice in China (2d ed. 2008).
14. Fan Kun, Arbitration in China: Practice, Legal Obstacles and Reforms, available at http://law.nus.edu.sg/asiansil/workingpapers/2007/doc/Kun_article_16122008_4.pdf.
15. Prof. Zhao Xiuwen & Prof. Lisa A. Kloppenberg, Reforming Chinese Arbitration Law and Practices in the Global Economy, 31 U. Dayton L. Rev. 436 (No. 3, 2006).
16. Cai Hongda, Several Issues Relating to the Development of Chinese Maritime Arbitration, in Commercial Arbitration Law Report 41 (Han Jian ed., 2005).
17. M.V. "Nan Jing" Charter Party Dispute, available at www.cmac-sh.org/file/09.htm.
18. M.V. "Antelupu No. 1" Loss of Detention, Award, in Selected Awards of CMAC (1997–2002) 524–25 (CMAC ed., Beijing, Law Press, 2003).
20. M.V. "Hai an Cheng" Shipping Line Cooperation Agreement Dispute, in Selected Awards of CMAC (2002–2006) (CMAC ed., 2007).
21. Paul Myburgh & Elsabe Schoeman, Jurisdiction in Transnational Cases, New Zealand L. J. 403 (2004).
22. Michale Pryles, Drafting Arbitration Agreements, 15 Adel. L. Rev. 5 (1993).
23. The Understanding and Application of the Arbitration Judicial Interpretation of the Supreme People's Court 30–31 (Research Office of the Supreme Court & Fourth Division of the Civil Trial Department of the Supreme People's Court eds., Beijing, Peoples' Court Publication, 2007).
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