Beijing to open to foreign arbitral institutions

On 7 September 2020, the State Council of China published a policy paper on opening up the services sector in Beijing (“Work Plan for Deepening Comprehensive Pilot and New Round of Opening-Up of Services Sectors in Beijing and Building Comprehensive Demonstrative Area of Opening-up of State Services Sectors” or《深化北京市新一轮服务业扩大开放综合试点建设国家服务业扩大开放综合示范区工作方案》). The paper announces  that foreign arbitral institutions will be allowed to set up “business organisations in designated area(s) in Beijing”, to “provide arbitration services in relation to civil and commercial disputes arising in the areas of international commerce and investments” and to “support and secure the application and enforcement of interim measures … before and during the arbitration proceedings, such as asset preservation, evidence preservation and action preservation” (emphasis added).

For these purposes, a “foreign arbitral institution” is one that is established outside Mainland China, including in Hong Kong, Macao or Taiwan.

The paper does not explain  the exact scope of activities that business organisations will be entitled to carry out in Beijing.  They might be permitted, for example, to organise arbitration hearings in venues in Beijing, or even to provide case administration services from Beijing.  This is one step further from an earlier policy under a 2017 State Council policy paper (“Reply of the State Council in relation to Deepening Reform and Further Opening-up of Services Sectors in Beijing as Comprehensive Pilot” or 《国务院关于深化改革推进北京市服务业扩大开放综合试点工作方案的批复》), which allowed foreign arbitral institutions to “establish representative offices in Beijing” (emphasis added). No foreign arbitral institution has set up offices in Beijing following the 2017 policy.

The State Council of China previously released similar policies in Shanghai’s free trade zone. In 2015, a State Council policy paper allowed foreign arbitral institutions to open representative offices in Shanghai’s free trade zone.  Subsequently, HKIAC, SIAC and ICC have opened representative offices in Shanghai. These offices, however, have been limited to liaison activities and have not been permitted to provide case administration services in Mainland China.

In August 2019, a further State Council policy paper stated that foreign arbitral institutions may be permitted to set up business organisations in Shanghai’s extended free trade zone to “conduct arbitration businesses in relation to civil and commercial disputes arising in the areas of international commerce, maritime affairs, investment, etc.” (emphasis added) (see here). It has been reported that several foreign arbitral institutions are in the process of setting up branches in the extended free trade zone under the August 2019 policy paper, although it remains to be seen which types of “arbitration businesses” those branches will be permitted to conduct.

It is worth noting that both the August 2019 Shanghai policy paper and the September 2020 Beijing policy paper mention that foreign arbitral institutions’ branches will be allowed “to support the application and enforcement of interim measures” in Mainland China. Under current Chinese law, parties to arbitration cases must apply to Chinese courts for interim measures; Mainland China-seated arbitral tribunals are not allowed to grant interim relief. However, Chinese courts generally do not accept interim relief applications from parties to arbitrations administered by foreign arbitral institutions (except for cases administered by designated Hong Kong arbitration institutions and seated in Hong Kong, see here), as there is currently no legal ground supporting this. The two policy papers appear to have allowed this possibility, but it remains unclear whether this is the correct interpretation and, if so, how it will be implemented in practice.

The latest Beijing policy paper, following the path of previous policy papers, signals further liberalisation and opening up of commercial arbitration practice in Mainland China. However, under the current Chinese Arbitration Law, foreign arbitral institutions are still not expressly permitted to administer arbitration cases seated in Mainland China.

For this reason, we continue to recommend against providing for arbitration of foreign-related disputes seated in Mainland China administered by an foreign arbitral institution (see here).

If you have questions or would like discuss any aspect of this post, please contact Helen Tang or Briana Young of Herbert Smith Freehills, Weina Ye of Kewei Law Firm, or your usual Herbert Smith Freehills contact.

Helen Tang
Helen Tang
Partner, Shanghai
+86 21 2322 2160
Weina Ye
Weina Ye
International Partner, Kewei
+86 21 2322 2132
Briana Young
Briana Young
Professional Support Consultant, Hong Kong
+852 2101 4214

BEIJING COURT UPHOLDS ARBITRATION IN DOMESTIC CONTRACT WHERE DISPUTE PROVISIONS CONFLICT

On 17 January 2020, by its ruling numbered (2019) Jing 04 Min Te 135 (Ruling), the Beijing Fourth Intermediate People’s Court (Beijing Court) upheld the validity of an arbitration agreement in a prospectus for a short-term financing bond which also contains conflicting litigation clauses.

In the Ruling, the Beijing Court followed the opinion of the Supreme People’s Court of China (SPC), reversing the lower court’s initial conclusion.  The SPC opined that, where a contract contains different dispute resolution clauses in different sections, the parties’ “last expression of intent” prevails.

Background

In October 2017, Beijing Huaye Capital Holdings Co., Ltd. issued a prospectus for its RMB500 million short-term financing bond.  The term of the bond is 365 days.  On 2 August 2018, Guangzhou Securities Co., Ltd. purchased the bond at par value for RMB50 million according to the terms of the Prospectus.

Chapter 11 of the prospectus  (under the heading “Investors Protections”) contains a number of inconsistent dispute resolution clauses:

  • Article 2, paragraph 1 (under the heading “Liability of Default”) provides that the investors “may commence litigation in accordance with the law” if the issuer fails to redeem the bond and pay interest on the maturity date;
  • Article 7, paragraph 2(3) (under the heading “Change of Control”) provides, in summary, that the investor “may commence litigation or arbitration” against the issuer for breach of contract if there is a change of control of the issuer;
  • The last paragraph of Article 7, which is also the last paragraph of the prospectus, provides: “The issuer, in issuing this debt financing instrument, the lead underwriter, in underwriting this debt financing instrument, and the holders, in subscription and purchasing this debt financing instrument, shall be deemed to have agreed to the agreement above. If the issuer breaches the agreement above, the investor shall have the right to apply to China International Economic and Trade Arbitration Commission (CIETAC) for arbitration in Beijing which shall be conducted in accordance with the CIETAC’s arbitration rules in effect at the time. [……]”. (Arbitration Agreement) (emphasis added)

In November 2018, Guangzhou Securities filed a request for arbitration against Huaye Capital with CIETAC, relying on the Arbitration Agreement.  It claimed that Huaye Capital had breached the terms of the prospectus by failing to redeem the bond or to pay interest.

In response, Huaye Capital challenged the jurisdiction of CIETAC in early 2019 on two main grounds.  First, it argued that the Arbitration Agreement applies only to disputes arising from the change of control of the issuer under Article 7, Chapter 11 of the prospectus.  Since Guangzhou Securities’ claims were based on Huaye Capital’s default in repaying the principal and interest, the Arbitration Agreement does not apply.  Second, it argued that the prospectus provided for both litigation and arbitration and was therefore invalid under Chinese law.

The Beijing Court’s initial conclusion

The Beijing Court initially concluded that the Arbitration Agreement was invalid.  It found that the language “the agreement above” in the Arbitration Agreement referred to the full prospectus, instead of Chapter 11 only.  However, the Beijing Court also noted that the prospectus “refers to the expressions like ‘commence litigation’ in several places; which means that the Prospectus provides for both litigation and arbitration as dispute resolution mechanisms without particular distinctions.”  It therefore considered that the Arbitration Agreement was invalid under the “Interpretation of the Supreme People’s Court on Certain Issues relating to Application of the Arbitration Law of the People’s Republic of China”, (SPC Interpretation on Arbitration Law), Article 7 of which provides that an arbitration agreement is invalid if “the parties agreed that the dispute can be either referred to an arbitral institution for arbitration or to a court for litigation”.

Minded to invalidate the Arbitration Agreement, the Beijing Court reported the case to the higher courts pursuant to article 2(2) of the Provisions of the Supreme People’s Court on Issues relating to the Reporting and Review of Cases Involving Judicial Review of Arbitration” (Reporting Provisions) (further explanation here).  The case was ultimately reported to the SPC for review.

SPC’s review opinion

The Beijing Court’s Ruling contains the SPC’s opinion.  While the SPC agreed with the Beijing Court that the term “the agreement above” in the Arbitration Agreement refers to all matters under the prospectus, it found that “[t]he Prospectus provides for different dispute resolution methods in its earlier and later parts, the parties’ last expression of intent shall prevail”.  The SPC accordingly reversed the Beijing Court’s decision and confirmed that the Arbitration Agreement is valid.

Comment

Two points are worth noting.

First, it has been trite law in China that a “hybrid arbitration clause”, i.e., an arbitration clause which provides that the parties can submit their disputes to either arbitration or litigation, is invalid.  This was reinforced after the SPC Interpretation on Arbitration Law came into effect in 2006.  The Beijing Court Ruling may indicate that the SPC is now adopting a more flexible and pro-arbitration approach to this issue.  Based on the limited SPC remarks in the Ruling, we think the language of the Arbitration Agreement, which refers to arbitration only and specifically covers “the agreement above”, and the fact that the Arbitration Agreement is the last paragraph of the prospectus, both influenced the SPC’s decision.  Although the Ruling should not be seen as a blanket removal of the restrictions imposed by Article 7 of the SPC Interpretation on Arbitration, it does suggest that the SPC may now consider this issue on a case by case basis.

Second, before the SPC issued its latest Reporting Provisions in December 2017, the “reporting system” applied only to foreign-related arbitrations.  Had the current case taken place before 2018, the Beijing Court would have delivered its ruling against the Arbitration Agreement without having to report to the SPC.  After the Reporting Provisions came into force in January 2018, the SPC has taken control of all cases – both foreign-related and domestic – in which a lower court is minded to hold an arbitration agreement invalid.  The Ruling is another example of the SPC supporting arbitration within the current legal regime.

Helen Tang
Helen Tang
Partner, Mainland China
+86 21 2322 2160
Stella Hu
Stella Hu
Senior Consultant, Hong Kong
+852 2101 4248
Tianyu Ma
Tianyu Ma
Associate, Mainland China
+86 10 6535 5040