Significant Changes in 2018 to China’s Arbitration Legal Structure

Author:philip Qiao


On June 27, 2018, the Supreme People’s Court of the People’s Republic of China (“Supreme Court”) promulgated a new judicial interpretation-Provisions of the Supreme Court on Several Issues Regarding the Establishment of the International Commercial Court.  Article 2,Article 11 and Article 14 of the Interpretation provide that the International Commercial Court has jurisdiction of cases involving applications for preservation orders[1] in arbitration procedure, for setting aside or enforcement of international commercial arbitration awards when the applications or awards are applied through or issued by qualified international arbitration institutions. As a result, the Interpretation has eliminated significantly the problems relating to implementation of preservation orders when parties enter into an arbitration agreement which chooses an international arbitration institution that is not located in the territory of China.


Prior to the Interpretation being promulgated, parties to the arbitration found it challenging to enforce preservation orders in China issued by international arbitration institutions abroad. Traditionally, Chinese courts have not readily accepted applications when they were  submitted to local arbitration institutions. This traditional attitude is detrimental to China’s continued efforts to reform its legal system especially in the era of its Belt and Road Initiative. However, with the new judicial interpretation, the international arbitration institutions such as ICC and LCIA will be able to successfully have their preservation orders recognized as effective and enforceable in China by the International Commercial Court.


Specifically, on December 7, 2017, the Supreme Court promulgated a judicial interpretation- Notice of the Supreme Court on Clarifying the Level of Jurisdiction Standard for Foreign-related Civil and Commercial Cases of the First Instance and the Relevant Issues for Centralized Handling. As a result, disputes relating to wholly foreign-owned enterprises (“WFOEs”) are allocated and deemed as international disputes, and these will be directly governed by the relevant intermediate courts. Therefore, WFOEs are deemed as foreign enterprises when considering applicable jurisdiction. In conclusion, when WFOEs submit arbitration or preservation applications, the applications shall be submitted directly to the relevant intermediate courts rather than the basic courts. The Interpretation is beneficial for WFOEs which apply for preservation orders because intermediate courts are generally more efficient and authoritative than lower courts.


Second, on December 26, 2017, the Supreme Court promulgated a judicial interpretation- The Provisions of the Supreme Court on Certain Issues Related to the Conduct of Judicial Review of Arbitration Cases. This is systematically the first time for China’s legal system to standardize the scope and level of the court’s judicial review power over arbitration. We will find that the judicial review of Chinese court complies with global expectations, and focuses on two targets in arbitration practices. One target is related to arbitration agreement and the other is arbitral award. As for the level of the courts, the Interpretation provides that “the intermediate court or the special court in whose jurisdiction the arbitration institution designated in the arbitration agreement locates, or the arbitration agreement was signed, or the applicant or the respondent domiciles, shall be competent to hear an application to verify the validity of the arbitration agreement”. That is, the basic courts do not have this power. As for the appeal procedure in the judicial review, the Interpretation provides that only three types of the ruling may be appealed - a ruling of inadmissibility, dismissal of application or jurisdictional challenge. The remaining rulings are not permitted to be appealed because they become legally effective as of the date of the ruling.  As for the court’s basic value orientation, the Interpretation provides that “Where, absent the parties’ choice of the governing law, a people’s court is to ascertain the law governing the validity of a foreign-related arbitration agreement in accordance with Article 18 of the Law of the People’s Republic of China on the Law Applicable to Foreign-related Civil Relations, and application of the law of the place of the arbitration institution or the law of the seat of arbitration will bring about different results in respect of the validity of the arbitration agreement, then the people’s court shall apply the law that renders the arbitration agreement valid.” It is evident that the courts prefer to maintain the validity of the arbitration agreement. 


Third, on the same date (December 26, 2017), the Supreme Court promulgated a judicial interpretation -The Provisions of the Supreme Court on Application for Approval of the Arbitration Cases that are Subject to Judicial Review. The purpose of the Interpretation is to maintain the authority and autonomy of the arbitration system. The purpose of this promulgation, we believe, is to avoid local courts’ interference in arbitration. The Supreme Court hopes to put an end to the different and diverse judicial review practices which were  prevalent before 2018. When some courts hold narrow judicial review while others hold one that is broad, parties find it very difficult to predict their case direction and result. Now, with the authority to conduct a final judicial review, the Supreme Court is able to provide interested parties with reliable and fair ruling of the arbitration agreements and the arbitral awards. In addition, the interpretation provides that “ In conducting the judicial review of foreign-related arbitration cases or Hong Kong, Macao or Taiwan-related arbitration cases, each intermediate people’s court or special people’s court shall report for approval to the higher people’s court to whose appellate jurisdiction it is subject of any case it has reviewed, when it intends to determine that the arbitration agreement therein is invalid, or the enforcement of the arbitral award of a Mainland arbitration institution is to be refused, or such an award is to be set aside, or the recognition and enforcement of an arbitral award made in Hong Kong Special Administrative Region, Macao Special Administrative Region or Taiwan Region is to be refused, or the recognition and enforcement of a foreign arbitral award is to be refused. Where the higher people’s court, after reviewing the case, intends to agree with the lower court’s opinion, it shall report to the Supreme Court for approval.”


It is noteworthy that all three interpretations mentioned above came into effect on the same date, January 1, 2018, demonstrating that 2018 is a significant year for China in improving its arbitration legal structure. In fact, in addition to the changes mentioned above, 2018 has witnessed an interpretation regarding enforcement of arbitral awards - Provisions on Several issues concerning the Handling of Arbitration Award Enforcement Cases by the People's Courts. The Interpretation has supplemented some arbitration legislative rules, especially regarding (1) the judicial review standard for the circumstances of the vagueness which would cause courts to refuse recognizing the arbitral awards; (2) the relief procedures for non-parties of the arbitral awards in unfounded lawsuits;(3) the review standard to be implemented when the courts consider whether to enforce an arbitral award.


In conclusion, reforming China’s traditional rules regarding preservation orders from international arbitration institutions is only a small part of the achievements that China has made in 2018. In fact, a variety of significant changes in the legal structure of arbitration has been made this year. According to our analysis, it is clear that China’s legal environment reflects respect and independence of arbitration much more than before. We predict that increasing number of domestic and international claimants will choose arbitration to seek dispute resolution with these significant changes in China.


[1] Preservation Order has another title in common law system- Injunction or Interim Measure.


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