In the People’s Republic of China (“PRC”), legal disputes in civil cases which cannot be resolved through pre-action negotiations between the parties can be finally resolved either by litigation or arbitration.

Litigation
As a matter of principle, according to Article 6 of the PRC Civil Procedure Law, jurisdiction over civil cases will be exercised by the PRC People’s Courts.

Arbitration
It is not possible for foreign parties, foreign invested enterprises (“FIEs”) or PRC parties (including FIEs) to avoid litigation before a PRC People’s Court unless the parties to the dispute have entered into a binding agreement to submit their dispute to arbitration. Such an agreement can be entered into before or after the dispute has arisen in the form of a valid arbitration clause in a contract or as a separate stand-alone agreement. According to Articles 5 and 26 of the PRC Arbitration Law, a People’s Court shall decline jurisdiction over a lawsuit if the parties have concluded a valid arbitration agreement in respect of the dispute in question.

Due Arbitration before a foreign arbitration institution or a reputable PRC arbitration institution is generally the preferable method of dispute resolution for foreign parties and FIEs. Firstly, proceedings before ordinary PRC People’s Courts can bear risks, in particular for foreign parties and FIEs for the following three reasons. Sometimes, judges are inclined to follow the instructions of PRC administrative bodies, to protect the interests of the local party or are susceptible to outside influences. Secondly, whilst it is theoretically possible under PRC law to agree to submit a dispute to the jurisdiction of a foreign court, the judgments of most foreign courts are still not recognised and enforced in the PRC due to a lack of reciprocity. Thirdly, arbitration offers the parties a means of resolving their disputes in private, whereas most PRC People’s Court proceedings are held in public.

Alternative Dispute Resolution
Apart from the two above-mentioned methods of dispute resolution, i.e. litigation and arbitration, another available option under PRC law is Alternative Dispute Resolution (“ADR”), i.e. mediation or conciliation. However, ADR often does not lead to final and binding decisions. If the ADR process does not produce a result or if the parties do not accept the result, the dispute still has to be submitted to litigation or arbitration to obtain a final decision.

The PRC Arbitration Law was promulgated by the Standing Committee of the National People’s Congress of the PRC on 31 August 1994 and came into effect on 1 September 1995. Prior to that date, arbitration proceedings in the PRC were governed exclusively by the arbitration rules of the relevant arbitration institution, e.g. the arbitration rules of the China International Economic and Trade Arbitration Commission (“CIETAC”) (for detailed information on CIETAC, please see below).

With the exception of Chapter VII of the PRC Arbitration Law, which only applies to disputes involving foreign interests, as a matter of principle, the PRC Arbitration Law applies to all arbitration proceedings with their seat in the PRC. However, in practice, the CIETAC Arbitration Rules, which are most commonly used for international and foreign-related disputes, supplement the provisions on arbitration procedures described in the PRC Arbitration Law and are more detailed.

The PRC Arbitration Law is strongly influenced by the UNCITRAL Model Law on International Commercial Arbitration. Accordingly, its provisions reflect the fundamental principles of modern international arbitration, e.g. procedural fairness and the independence of the arbitrators (Articles 1 and 14 of the PRC Arbitration Law).

According to Article 2 of the PRC Arbitration Law, contractual disputes and disputes over property rights between citizens, legal persons and other organisations can be resolved by arbitration. FIEs can, therefore, be parties to arbitration proceedings under the PRC Arbitration Law provided they are incorporated as a legal person. In practice, except for certain Sino-Foreign Cooperative Joint Venture Companies, most FIEs (e.g. Sino-Foreign Equity Joint Venture Companies and Wholly Foreign-Owned Enterprises) are incorporated as legal persons under PRC law.

Formal requirements
According to Article 16 of the PRC Arbitration Law, a valid arbitration agreement must be in writing and requires a clear expression of the parties’ intention to have their dispute resolved by arbitration, including an indication as to which issues shall be arbitrated and which arbitration institution has been selected. If the issues to be decided in arbitration are not clearly stipulated in the arbitration agreement, and the parties fail to cure this defect through a supplemental agreement, then Article 18 of the PRC Arbitration Law provides that the arbitration agreement shall be invalid.

Ad hoc arbitration not recognised
According to Articles 16 and 18 of the PRC Arbitration Law, ad hoc arbitration is not recognised in the PRC, i.e. an ad hoc arbitration award will not be enforced by the competent PRC People’s Court. Further, an arbitration clause providing for ad hoc arbitration will not prevent a PRC People’s Court from accepting jurisdiction to hear the dispute. There is currently a debate in the PRC legal literature as to whether or not an arbitration clause which only refers to the arbitration rules of a specific arbitration institution, but which does not expressly confer jurisdiction on that arbitration institution, constitutes an agreement to pursue ad hoc arbitration or institutional arbitration. To ensure that the validity of their arbitration agreement is upheld, parties are advised to name expressly a competent arbitration institution in their arbitration agreements.

Jurisdiction
According to Article 20 of the PRC Arbitration Law, the arbitration institution is not exclusively competent to decide upon the validity of an arbitration agreement. Each party can submit a request for a ruling on the validity of an arbitration agreement either to the agreed arbitration institution or to a PRC People’s Court. According to Article 20 of the PRC Arbitration Law, the decision of the People’s Court shall prevail. However, according to Article 13 of the Interpretations of the PRC Supreme People’s Court concerning Some Issues on the Application of the PRC Arbitration Law of 23 August 2006 (“Interpretations”), where a party has failed to object to the validity of an arbitration agreement prior to the first oral hearing before the arbitration tribunal, or where an arbitration institution has made a decision on the validity of an arbitration agreement, a People’s Court shall not accept an application for a ruling on the validity of the same arbitration agreement.

Interim measures
Either party can apply for interim protective measures before a PRC arbitral tribunal. However, the arbitral tribunal will not decide on its own but will forward the application to the competent PRC People’s Court. Available interim protective measures include orders preserving property and evidence (Articles 28, 46 and 68 of the PRC Arbitration Law). It is not possible under PRC law to apply for injunctions requiring specific performance of a party’s contractual obligations.

Composition of the arbitral tribunal
According to Article 30 of the PRC Arbitration Law, the arbitration tribunal shall be composed of one or three arbitrators, depending on the agreement of the parties. The PRC Arbitration Law is silent on what happens if the parties cannot come to an agreement as to the numbers of arbitrators. The above issue is solved differently under the arbitration rules of different arbitration institutions (as to the CIETAC Arbitration Rules, see below.)

Procedural requirements
The PRC Arbitration Law contains further provisions regarding the formal requirements for the request for arbitration, oral hearings, the procedure for rendering the arbitration award, etc. However, the above procedural issues are stipulated in more detail in the arbitration rules of the relevant foreign-related arbitration institutions (see below), which are in practice significantly more relevant for foreign parties and FIEs.

Setting aside the award
According to Article 9 Section 1 of the PRC Arbitration Law, as a matter of principle, it is not possible to appeal against an arbitration award before an arbi­tration institution or before a PRC People’s Court. Article 43 Item 8 of the CIETAC Arbitration Rules contains a corresponding provision. However, according to Article 70 of the PRC Arbitration Law, in connection with Article 258 of the PRC Civil Procedure Law, either party can apply to the Intermediate People’s Court to set aside an award rendered by an arbitration institution in the PRC relating to an international or foreign-related dispute. In such cases, the Intermediate People’s Court only reviews whether certain procedural requirements have been fulfilled, but does not re-examine the merits of the dispute. The award will only be set aside according to Article 258 of the PRC Civil Procedure Law if:

1. the parties have neither included an arbitration clause in their contract nor subsequently entered into a written arbitration agreement;
2. the party applying to set aside the award was not requested to appoint an arbitrator or to take part in the arbitration proceedings, or the party was unable to state its opinions due to reasons for which it was not responsible;
3. the composition of the arbitral tribunal or the arbitration procedure was not in accordance with the relevant arbitration rules;
4. the matters decided in the award exceed the scope of the arbitration agreement or are beyond the authority of the arbitration institution; or
5. the People’s Court determines that the execution of the said award would be contrary to public interests.

Awards rendered by PRC arbitration institutions relating to domestic disputes can be set aside by the competent Intermediate People’s Court at the place in which the arbitration institution is located, according to Article 58 of the PRC Arbitration Law. The grounds for setting aside domestic awards are similar to those described above in the context of foreign awards, i.e. serious procedural deficiencies or violation of public interests (see Article 58 of the PRC Arbitration Law).

If an arbitration award has been set aside or enforcement has been refused (see below for a detailed discussion of the enforcement of arbitral awards), Article 9 Section 2 of the PRC Arbitration Law provides that the parties may, in accordance with a new arbitration agreement concluded between them in respect of the dispute, re-submit the dispute to arbitration or initiate litigation proceedings before the People’s Court.

Article 128 of the PRC Contract Law entitles the parties to a contract involving foreign interests to agree on arbitration before a foreign arbitration institution.

According to Article 304 of the Opinions on Certain Questions Concerning the Application of the Civil Procedure Law issued by the PRC Supreme People’s Court on 14 July 1992, a contract involves a foreign interest where:

1. one or both parties are foreigners, foreign enterprises or foreign organisations;
2. the legal circumstances relating to the conclusion, modification or termination of the contract took place in a foreign country; or
3. the subject matter of the dispute is located in a foreign country.

It is important to note that FIEs incorporated as a legal person in the PRC constitute PRC domestic entities. Therefore, as a matter of principle, in contracts between an FIE and a PRC party, any arbitration clause must select a PRC arbitration institution unless one of the above-mentioned exceptions applies. The mere fact that the FIE has foreign shareholders is not sufficient to transform the dispute into a dispute involving foreign interests.

In contracts between foreign contract partners and PRC contract partners it is quite common to agree on a foreign arbitration institution, e.g. the Hong Kong International Arbitration Centre, the Singapore International Arbitration Centre, the Stockholm Chamber of Commerce, the Zurich Chamber of Commerce, the International Chamber of Commerce, the Deutsche Institution für Schiedsgerichtsbarkeit, the London Court of International Arbitration, etc.

In the event that the parties do not comply voluntarily with the terms of a foreign arbitral award, a party seeking to enforce that award in the PRC will need to apply to the competent PRC People’s Court for enforcement.

According to Article 267 of the PRC Civil Procedure Law, the competent court for the enforcement of a foreign arbitral award is the Intermediate People’s Court at the place of the defendant’s domicile or where his or her property is located. Article 267 of the PRC Civil Procedure Law provides that the Intermediate People’s Court shall handle the matter pursuant to the terms of any international treaties concluded or acceded to by the PRC or in accordance with the principle of reciprocity.

With effect from 22 April 1987, the PRC became a contracting state to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (“New York Convention”). However, in its Declaration of Accession, the PRC made a reciprocity reservation, as a result of which the PRC is only obliged to recognise and enforce awards made in the territory of another contracting state of the New York Convention.

According to the second reservation made by the PRC, the PRC will apply the New York Convention only to disputes arising out of legal relationships, whether contractual or not, that are considered commercial under the national PRC law. To date, the above reservation has never been invoked in practice due to the broad interpretation of the term “commercial disputes” issued by the PRC Supreme People’s Court on 10 April 1987.

Apart from the above limitations, the competent Intermediate People’s Court can only refuse the enforcement of a foreign arbitration award for the reasons provided in Article V of the New York Convention, e.g. serious procedural deficiencies or violation of public policy (ordre public) in the PRC. According to the Opinions on Certain Issues Concerning the Setting Aside of Foreign-related Arbitral Awards by the People’s Courts (“Opinions”) issued by the PRC Supreme People’s Court on 23 April 1998, if the competent Intermediate People’s Court refuses to enforce a foreign arbitration award, this fact shall be reported to the Higher People’s Court. If the Higher People’s Court intends to declare the arbitral award to be unenforceable, it must first seek the approval of the PRC Supreme People’s Court. The Opinions were issued to prevent local courts from refusing the enforcement of foreign arbitration awards in order to protect the local party. Before 1998, some PRC courts had refused to acknowledge and enforce foreign arbitration awards. The probability of enforcing a foreign arbitration award against a PRC individual or a PRC entity was estimated to be approximately 50% during the 1990s (Randall Peerenboom, Seeking Truth From Facts: An Empirical Study of Enforcement of Arbitral Awards in the PRC, 49 AM. J. COMP. L. 249, 254 (2001)), but has since increased significantly.

As mentioned above, Article 18 of the PRC Arbitration Law prohibits parties from agreeing to ad hoc arbitration. The PRC Arbitration Law is silent, however, on whether or not international arbitration proceedings can be conducted on an ad hoc basis. This silence has led to differing opinions amongst PRC legal scholars as to whether a foreign arbitration award issued by an ad hoc tribunal can be recognised and enforced by a People’s Court. On 3 December 1999 the Beijing Higher Court issued an opinion stating that an ad hoc arbitration award is enforceable in the PRC under the New York Convention if the award has been issued in another contracting State to the New York Convention and the law of that state recognises ad hoc arbitration. However, some courts in the PRC may still be reluctant to recognise and enforce foreign ad hoc arbitral awards.

Since 1993, the PRC has been a contracting State to the Convention on the Settlement of Investment Disputes between States and Nationals of other States (“ICSID Convention”). According to the ICSID Convention, if an investor from a contracting State has made an investment in another contracting State, disputes relating to that investment can be submitted for arbitration to the International Center for Settlement of Investment Disputes (“ICSID”). The PRC, however, has made a reservation to the ICSID Convention as a result of which ICSID arbitration is only a valid option against the PRC if the dispute relates to compensation for expropriation. Any award rendered by an ICSID tribunal within the scope of the above limitation, must, in theory, be enforced by a PRC People’s Court according to Article 54 of the ICSID Convention as if the award were a final judgment of a PRC People’s Court, i.e. the PRC People’s Courts are obliged to enforce an ICSID arbitration award immediately without the necessity of following any recognition or enforcement procedure. However, it is currently unclear whether the PRC People’s Courts will enforce such awards in practice.

PRC arbitration institutions comprise so-called foreign-related arbitration institutions and so-called domestic arbitration institutions.

Foreign-related arbitration institutions
According to Article 66 of the PRC Arbitration Law, foreign-related arbitration institutions shall be organised and established by the China Chamber of International Commerce. In addition, the approval of the State Council is required.

The best-known of such foreign-related arbitration institutions is CIETAC, which was established in 1956 to resolve economic and trade disputes. CIETAC is also one of the largest arbitration centres in the world. It is headquartered in Beijing with Sub-Commissions in both Shanghai (since 1989) and Shenzhen (since 1990). Before the adoption of the PRC Arbitration Law, CIETAC and the China Maritime Arbitration Commission (“CMAC”) – which only administers maritime disputes – were the only institutions in the PRC qualified to administer international arbitration proceedings. Even though domestic arbitration institutions are now able to hear international cases, CIETAC maintains its leading position in international arbitration with a high volume of cases. In addition, the jurisdiction of CIETAC (see Articles 59–66 of the CIETAC Arbitration Rules) and CMAC has been extended to cover domestic disputes, if so agreed by the parties.

Arbitration before CIETAC is governed by the CIETAC Arbitration Rules. Over the years these rules have been amended several times. The latest revision in May 2005 introduced further amendments to modernise the CIETAC Arbitration Rules. One of the innovations is that, according to Article 4 of the CIETAC Arbitration Rules, the parties are not only entitled to agree on other arbitration rules, e.g. the UNCITRAL Rules, but also on modifications to the CIETAC Arbitration Rules.

The members of the arbitral tribunal are generally selected by the parties from the panel of CIETAC arbitrators. Currently, CIETAC’s panel of arbitrators consists of 969 arbitrators, including 274 foreign nationals from 33 countries. In international and foreign-related disputes, foreigners can be appointed as arbitrators. As a result of the 2005 revision of the CIETAC Arbitration Rules, the parties are also entitled to appoint arbitrators who are not listed on CIETAC’s panel of arbitrators. However, any such appointment must be confirmed by the Chairman of CIETAC (Article 21 of the CIETAC Arbitration Rules).

Article 20 of the CIETAC Arbitration Rules provides that the arbitral tribunal shall be composed of one or three arbitrators. Unless otherwise agreed by the parties, the arbitration tribunal shall be composed of three arbitrators.

In practice, the majority of the arbitrators, including the chairman of the arbitral tribunal, are usually Chinese nationals. This is due to the fact that CIETAC tends to appoint Chinese nationals as arbitrators when called upon to appoint an arbitrator (i.e. if it is acting as the appointing authority or if the parties cannot agree upon the appointment of an arbitrator).

Although, as a matter of principle, proceedings before CIETAC are reliable and conform to western standards, it cannot be excluded that Chinese arbitrators might favour a PRC party. It is therefore advisable for a foreign party to provide in the arbitration agreement that each party shall appoint one arbitrator and the third arbitrator, who shall act as the presiding arbitrator, shall be appointed by the two party-appointed arbitrators or, if they cannot agree, by the Chairman of CIETAC, but shall not be of the same nationality as either of the parties. In practice, CIETAC will accept and implement such an arbitration agreement.

As a matter of principle, the arbitration proceedings shall be conducted in Chinese. However, according to Article 67 of the CIETAC Arbitration Rules, the parties can agree to conduct the arbitration proceedings in a foreign language.

According to Article 16 Item 2 of the CIETAC Arbitration Rules, a party can authorise Chinese as well as foreign nationals to represent its interests in the arbitration proceedings.

Article 42 of the CIETAC Arbitration Rules provides that the arbitration award in international and foreign-related disputes shall be issued within six months from the date on which the arbitral tribunal is constituted. The above time period can be extended by the Chairman of CIETAC upon the request of the arbitral tribunal.

Domestic arbitration institutions
Pursuant to Article 10 of the PRC Arbitration Law, domestic arbitration institutions may be set up by provincial governments and the local Chamber of Commerce in provincial capitals and, if necessary, in other cities.

To date, more than 200 such domestic arbitration institutions have been established in the PRC, including the Beijing Arbitration Commission, the Shanghai Arbitration Commission, the Guangzhou Arbitration Commission, the Shenzhen Arbitration Commission and the Wuhan Arbitration Commission.

Since the promulgation of a PRC State Council notice in 1996 (which was implemented in Chapter VII of the PRC Arbitration Law) these arbitration institutions are also entitled to administer international and foreign-related disputes, if so agreed by the parties. In light of the fact that, as mentioned above, CIETAC and CMAC have extended their sphere of competence so as to encompass domestic as well as international and foreign-related disputes, the traditional distinction between the so-called domestic arbitration institutions and the so-called foreign-related arbitration institutions has diminished. A positive consequence is the increase in competition between foreign-related and certain domestic arbitration institutions, which should serve to improve further the quality of institutional arbitration services in China.

Awards rendered under the auspices of PRC arbitration institutions are enforced in the PRC according to the provisions of the PRC Arbitration Law and the PRC Civil Procedure Law.

Arbitration awards rendered by a PRC arbitration institution will be enforced by the competent People’s Court. Due to the fact that in the past the Local People’s Courts (which are responsible for enforcing judicial decisions) did not always enforce arbitral awards impartially and expeditiously, Article 29 of the Interpretations provides that an application for the enforcement of arbitral awards shall now be filed with the Intermediate People’s Courts.

In the case of arbitration awards rendered by a PRC arbitration institution relating to an international or foreign-related dispute, the Intermediate People’s Court will limit its review to whether or not certain procedural requirements have been fulfilled. The Intermediate People’s Court does not re-examine the merits of the dispute. According to Article 71 of the PRC Arbitration Law, in connection with Article 258 of the PRC Civil Procedure Law, the grounds for refusing enforcement are identical to those for setting aside such an award.

The Opinions discussed above in the context of the enforcement of awards rendered under the auspices of foreign arbitration institutions apply accordingly to the enforcement of awards rendered under the auspices of a PRC arbitration institution. If, therefore, the competent Intermediate People’s Court refuses to enforce the award, this shall be reported to the Higher People’s Court, which must seek the approval of the PRC Supreme People’s Court if it intends to declare the award to be unenforceable.

As regards the enforcement of awards rendered by PRC arbitration institutions in domestic disputes, enforcement of such awards can be refused by the enforcing court only in accordance with the provisions of Article 63 of the PRC Arbitration Law (in connection with Article 213 of the PRC Civil Procedure Law). The grounds for refusing enforcement are similar to those discussed above in the context of international or foreign-related disputes.

To avoid the risk of contradictory decisions concerning the setting aside and non-enforcement of an award in the same case, Article 26 of the above-mentioned Interpretations provides that if an application to set aside an arbitration award is rejected by the competent court, the enforcing court cannot refuse enforcement on the same ground(s).

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