China: Legislation Updates: The Validity Of Optional Arbitration Clauses In Foreign-Related Contracts In China

I. Optional Arbitration Clauses

Optional arbitration clauses offer parties flexibility in dispute resolution — when disputes arise, parties can choose either arbitration or litigation to resolve their disputes. Here are some typical types:

1. Open for option between arbitration and litigation

Parties agree that disputes can be resolved by either arbitration or litigation. Sometimes, the option is only given to one party, called one-sided optional arbitration clauses or asymmetric arbitration clauses. This kind of dispute resolution clauses gives the party who has the option a privilege to select between arbitration and litigation in the dispute resolution period.

2. Agree that disputes can still be submitted to litigation after arbitration

This type does not give the parties the freedom to select between the two mechanisms but makes litigation as the final resort for dispute resolution. Parties agree that if they fail to refer disputes to arbitration or do not agree with the arbitration award, they could still file the claim in the court. This kind of agreements tries to override the principle that the arbitration award is final and binding.

II.  The Validity of Optional Arbitration Clauses in Mainland China[1]

Under Chinese law, some types of labor disputes are subject to mandatory pre-litigation arbitration proceedings. Only if a party does not agree with the arbitral award can it

then bring a lawsuit in the court. For more details, please refer to Labor Dispute Mediation and Arbitration Law of the People's Republic of China. This article does not deal with labor arbitration but only ordinary commercial arbitration.

As for commercial arbitration, neither scenario 1 nor 2 in the above section is valid under Chinese law:

It should be also noted that although the law expressly stipulates that an optional arbitration agreement is null and void, this does not mean that the whole dispute resolution clause is completely invalid. As confirmed by the Supreme People's Court in Jiangmen Jiangci Electrician Co., Ltd vs Yunnan Copper Co., Ltd [2013], the agreement on choice of court jurisdiction is still valid as long as the choice complies with the mandatory law. Therefore, even though the part of the arbitration agreement under the optional arbitration clause is void, the rest part is still valid and the parties are still entitled to bring a lawsuit to the agreed court.

III.  Important Legislation Updates

On 29th December, the Supreme People's Court of China promulgated a new judicial interpretation, the Provisions of the Supreme People's Court on Certain Issues related to the Conduct of Judicial Review of Arbitration Cases. [2]

Article 14 sets up a new mechanism for judicial review on the validity of a foreign-related arbitration agreement — without a choice of governing law in the arbitration agreement, the people's court shall look at both the law of the place of the arbitration institution and the law of the seat of the arbitration. As long as one of the jurisdiction admits the validity of the arbitration clause, the people's court shall uphold the validity of the arbitration clause.

The above judicial interpretation came into force on 1 January 2018. Therefore, China has now adopted a more supportive attitude towards international arbitration.

Because of this new legislation, the people's court is more inclined to admit the validity of an optional arbitration clause in a foreign-related contract. i.e. If there is no choice of the governing law of the arbitration clause, then as long as one of the legal regime (the location of the arbitration institution or the seat of the arbitration) admits the validity of the clause, Chinese court will rule as the same.

Meanwhile, it should be noted that Article 14 does not apply to pure domestic arbitration. As for the pure domestic arbitration, both the governing law of the arbitration agreement and the substantive law of the contract shall always be Chinese law. In such situation, an optional arbitration clause is always invalid.

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Previously published by Lexology on January 5 2018.

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