Challenges to jurisdictions

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resolved through arbitration needs to bring its objection and submit the arbitration agreement before the first hearing in a court proceeding. Otherwise, it should be deemed have waived its right to arbitrate, and the court may continue to hear the case. Article 14 of the SPC 2006 Interpretation further clarifies that the "first hearing" in this context should be understood as the first court hearing of a case conducted by the court after the expiration of the time limit for defense, excluding activities carried out in a pre-trial process.

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were made to both, the court should not accept the case if the arbitration institution had already accepted the request and decided the issue. However, if the request was accepted by the institution, but it has not yet decided the matter, the court should decide it. It also should ask the arbitration institution to suspend the arbitration proceeding until it reaches its decision.²⁹⁸

Article 20(2) of the CAL provides that if a party seeks to object to the validity of an arbitration agreement, it can do so before the first arbitration hearing. Otherwise, it is considered to have waived the objection. Moreover, as prescribed by Art. 13 of the SPC 2006 Interpretation, if a party failed to object to the validity of an arbitration agreement prior to the first arbitration hearing, and subsequently, it applies to the court seeking to invalidate the agreement, the court will dismiss such an application. Further, it is provided that where the arbitration institution had already made its decision on the validity of an arbitration agreement, and a party subsequently applies to the court seeking to invalidate it, the court will reject this application. In addition, according to Art. 27 of the 2006 SPC Interpretation, if a party has not raised the objection to the validity during the arbitration proceeding, but it subsequently pursues to set-aside an award, or object to its enforcement based on the ground that the arbitration agreement was invalid, the court will reject such a request.

Article 12 of the SPC 2006 Interpretation assigns which courts should have the authority to hear the challenges to jurisdiction and it designates the intermediate level court for both domestic cases and those involving foreign elements (foreign-related cases). This is a positive step, because judges at higher level courts in China are believed to be equipped with higher qualifications and more experience than judges from district courts. Furthermore, this shift of power can help to reduce local influences.²⁹⁹ In addition, Art. 15 of the SPC 2006 Interpretation provides that in order to decide the validity of an arbitration agreement, the court of an intermediate level must form a collegiate panel. This is also a positive development, because it potentially increases the likelihood that the arbitration agreement will be upheld.

Prior Reporting System

Power to decide jurisdictional claims shifts in another important way in China. If the court denies the validity of an arbitration agreement under Art. 20 CAL, the case will be directed onto the track of the

298 Reply of the Supreme People’s Court on Several Questions Regarding the Determination of the Validity of Arbitration Agreements , Fa Shi [1998] No. 27, issued on 26 October 1998, effective from 5 November 1998;

[《最高人民法院关于确认仲裁协议效力几个问题的批复》法释(1998)27号; 颁布时间: 1998年10月21, 实施时间: 1998年11月5].

299 See Gu, "Judicial Review over Arbitration in China: Assessing the Extent of the Latest Pro-Arbitration Move by the Supreme People’s Court in the People’s Republic of China," 235.; Fan, Arbitration in China, A Legal and Cultural Analysis, 113.

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Prior Reporting System (“PRS”). As mentioned in Chapter 2, the PRS, which is a unique mechanism of the Chinese arbitration system, was originally designed to help protect the arbitration agreements and arbitral awards involving foreign elements by introducing a special system of reporting decisions against such agreements and awards to courts of a higher level for approval.³⁰⁰ As of today, concerning foreign-related cases, that means that if a court of an intermediate level decides: (1) not to enforce an arbitration agreement; (2) not to enforce an arbitral award; or (3) decides to set aside an award, it has to report its decision to a higher level court for approval. If a higher level court subsequently agrees with a lower level court – it has to report to the SPC for a final determination of the matter.

It should be noted that a source produced by the SPC in 2017 (“SPC 2017 Provisions no. 21”)³⁰¹ brought significant changes to the functioning of the PRS mechanism. One of the changes is to extend the application of the PRS mechanism to domestic cases.³⁰² In the past, the PRS mechanism only targeted foreign-related cases. This was pointed as problematic by, among others, the respondents to the China Arbitration Survey.³⁰³ The application of the PRS mechanism embraces now also domestic cases and as such, for example, a Sino-foreign joint venture or a WFOEs involved in a dispute will now enjoy the benefits of the PRS mechanism – even if a particular case is classified as a domestic one under the Chinese law. Yet, for domestic cases, a higher level court (High People’s Courts), and not the SPC, will have a final say.

It is noteworthy that if a decision of a court is to endorse the validity of an arbitration agreement (or enforce an award), it does not require any further reporting. Also, once the court affirms the validity of an arbitration agreement, the argument of the invalidity cannot be subsequently asserted by a party seeking to set aside or resisting the enforcement of the award based on such an agreement.

b. Arbitration institution v. arbitral tribunal

As introduced above, according to the provisions of the CAL, the competence to decide jurisdictional objections is shared by the state court and the arbitration institution in China. The role of the arbitral

300 See Chapter 2 p. 30. See also Weidong Zhu, "Determining the Validity of Arbitration Agreements in China:

Towards a New Approach," Asian International Arbitration Journal 6, no. 1 (2010), 50.

301 See Provisions of the Supreme People’s Court on the Number of Issues Pertaining to the Judicial Reporting in the Supervision of Arbitration, Fa Fa [2017] no. 21 issued on 26 December 2017, effective from 1 January 2018;

[最高人民法院关于仲裁司法审查案件报核问题的有关规定, 法释〔2017〕21号, 发布时间：2017年12

月26日, 实施时间: 2018年1月1日].

302 See Art. 2 of the SPC 2017 Provisions no. 21.

303 See Chapter 9 on the China Arbitration Survey p. 197-198, as well as Appendix 1 to this thesis p. 283-284.

See also Gu, "Judicial Review over Arbitration in China: Assessing the Extent of the Latest Pro-Arbitration Move by the Supreme People’s Court in the People’s Republic of China," 240.

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tribunal in this regard is not even mentioned in the CAL. To the best of knowledge of the author of this thesis, China is the only country in the world, where once the arbitral tribunal was constituted, the power to decide jurisdictional objections is given to the arbitration institution, rather than to the tribunal.³⁰⁴

Regarding the timing for deciding the objection when the arbitration institution is designated to do that, there is no time limit prescribed under the CAL and the arbitration rules. In case of CIETAC, the objection is typically raised at the beginning of the arbitration proceeding, and it is often decided by CIETAC within a month.³⁰⁵ As to who specifically deals with the objection once the arbitration institution is put in charge, a clear answer cannot be found either in the CAL or in arbitration rules. By way of example, as to the BAC’s practice, according to Chen, it is a case-handling secretary.³⁰⁶

It should be noted that if the objection was decided by the arbitration institution and the validity of an arbitration agreement was affirmed, a party disagreeing with the decision of the institution does not have immediate recourse to the court. However, like in case of virtually all jurisdictions, recourse to the court is available after the award is rendered. This can happen when a dissatisfied party seeks to set aside the award or when it resists its enforcement.³⁰⁷

Developments of the leading arbitration institutions

Over the last years, China has been more and more exposed to the practice of international commercial arbitration. Not only foreign parties, arbitrators, and counsels take part in the arbitration proceedings in China, but also more and more international arbitration institutions, such as the HKIAC, the SIAC, and the ICC, have appeared on the Chinese arbitration stage offering their help and assistance in further improving the arbitration environment of China.³⁰⁸ The leading arbitration institutions in China seem to be aware of the shortcomings of the Chinese system. Hence, they try to innovate in order to bring China’s practice closer to internationally recognized standards, and also – to become more

304 See also Gu, Arbitration in China: Regulation of Arbitration Agreements and Practical Issues, 96 note 38.

305 Yuen, McDonald, and Dong, 215.

306 Chen, "Striving for Independence, Competence, and Fairness: A Case Study of Beijing Arbitration Commission," 336.

307 For China, see Art. 58(1)(1) and (2) and 63 of the CAL read together with Art. 237(1) and (2) of the CCPL. Also Art. V (1)(a) and (c) of the NYC will be relevant for the enforcement of foreign arbitral awards. For the

UNCITRAL Model Law, see Art. 34 and Art. 36; for Hong Kong see, Sections 81, 86, and 89 of the HK Arbitration Ordinance; and for Singapore, see Art. 34 and 36 of the UNCITRAL Model Law read together with Section 3(1) of the SIAA.

308 See more Chapter 8. p. 187-188.

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competitive as service providers. This can be observed, for example, in the area of allocating the power to decide objections to jurisdiction.

The BAC was the first arbitration institution in China that officially introduced a mechanism of delegating the power to decide jurisdictional objections from the arbitration institution to the tribunal in 2004.³⁰⁹ Article 6(4) of the 2004 BAC Rules provided that the BAC or the tribunal, if authorized by the BAC, shall have the power to rule on the objections to the validity of an arbitration agreement. It was provided that the tribunal’s decision could take a form of an interim or final award. This is carried forward into the most recent version of the 2015 BAC Arbitration Rules.³¹⁰

CIETAC officially introduced this delegation mechanism in its arbitration rules from 2005. However, Gu argues that the delegation of the competence was already present in the CIETAC’s practice even before the amendment of the arbitration rules in 2005. A case from 2002 illustrates these joint efforts of both the tribunal and CIETAC in deciding jurisdictional matters. Gu terms this the “underground” practice.³¹¹ The case from 2002 involved a contract concluded between a Hong Kong and a Chinese company with an arbitration clause providing for the CIETAC arbitration. After a dispute arose, on 19 February 2002, a respondent objected to the tribunal’s jurisdiction claiming the non-existence of a clause naming CIETAC. A few months later, on 24 June 2002, before the arbitral tribunal was established, CIETAC carried out a preliminary examination. Based on a prima facie review, it concluded that the arbitration clause existed and hence, the dispute should be arbitrated. On 2 July 2002, the respondent again challenged the jurisdiction of the tribunal claiming that the clause had not been signed and therefore, should be deemed invalid. In response, CIETAC informed the respondent that the issue of the existence and validity of the signature would be determined by the tribunal. As a final result, on 20 January 2003, the tribunal confirmed the existence and validity of the signature and as such, upheld the initial affirmative decision made by the institution. After the findings by the tribunal, CIETAC reaffirmed its decision as to the jurisdiction on 27 June 2003.

As mentioned, an official endorsement of this practice by CIETAC took place in its arbitration rules from 2005. This move was welcomed in Chinese arbitration circles, and is referred to as the CIETAC’s

309 The 2004 BAC Rules were effective as of 1 March 2004.

310 Art. 6(4) of the 2015 BAC Rules: “The BAC, or the Arbitral Tribunal as authorised by the BAC, may determine an objection as to jurisdiction. The Arbitral Tribunal may make its decision on jurisdiction either during the arbitral proceedings or in the arbitral award”.

311 Gu, Arbitration in China: Regulation of Arbitration Agreements and Practical Issues, 110-111.

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determination in advancing the principle of competence-competence in China.³¹² Article 6 of the 2005 CIETAC Rules provided the following:

“(1) CIETAC has the power to determine the existence and validity of an arbitration agreement and its jurisdiction over an arbitration case. CIETAC may, where necessary, delegate such power to the arbitral tribunal.

(2) Where CIETAC is satisfied by prima facie evidence that a valid arbitration agreement exists, it may make a decision based on such evidence that it has jurisdiction over the arbitration case. Such a decision shall not prevent CIETAC from making a new decision on jurisdiction based on facts and/or evidence found by the arbitral tribunal during the arbitral proceedings that are inconsistent with the prima facie evidence.”

What needs to be noted is the fact that Art. 6(2) of the 2005 CIETAC Rules (as well as its subsequently amended versions) provide that CIETAC first employs a prima facie standard to decide on the validity of an arbitration agreement. This, generally, is in line with international practice, whereby the arbitration institution receiving the case will decide on a prima facie basis whether it accepts it or not.³¹³ Yet, that which is different from international practice is a possibility that CIETAC will subsequently make a new decision on jurisdiction, based on the facts and/or evidence found by the tribunal during the arbitration proceeding. That kind of practice is absent in arbitration laws and arbitration rules of the leading international arbitration institutions, where any subsequent jurisdictional decisions can be made by the arbitral tribunal only.³¹⁴

The wording of the CIETAC’s provision can be read as a careful construction made due to the restrictions in Art. 20 of the CAL, which explicitly grants the power to the arbitration institution, and not to the tribunal. CIETAC kept this concept of delegation of power in its subsequent versions of arbitration rules in a nearly identical language.³¹⁵

Although these actions of the leading arbitration institutions should be seen as positive developments, one theoretical question relates to their effectiveness. In China, like elsewhere, arbitration rules need to comply with existing national laws. Hence, there is a theoretical problem of the compatibility of the arbitration rules’ innovations with Art. 20 of the CAL. Nevertheless, it occurs to be a common practice in arbitration in China that in face of constantly changing needs of arbitration users, the leading

312 See ibid., 112.

313 See, for example, Art. 19(5) of the 2018 HKIAC Rules and Art. 28(1) of the 2016 SIAC Rules.

314 Compare with Art. 19(5) of the 2018 HKIAC Rules, Art. 28(1)(2) of the 2016 SIAC Rules, and also with Art. 16 of the UNCITRAL Model Law.

315 See Art. 6 of the 2015 CIETAC Rules.

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arbitration institutions tackle problems before legislation is able to address them. In case the improvements made by the institutions do not interfere with views of the authorities, they are permitted in practice. Additionally, this might be also an indication that the authorities recognize the need for change. A positive aspect of this practice is the fact that innovations can first be tested, before official reforms take place.³¹⁶

4.2.3. Criticism of the Chinese law and practice