PRC Supreme Court Rules on Multi-tiered Arbitration Clause

By Patrick Zheng | Charles Qin

Multi-tiered dispute resolution clauses[1] are widely adopted in China today. In the arbitration context, these clauses generally provide that, in the event a dispute arises parties must exhaust some pre-arbitral dispute resolution steps such as friendly negotiation, mediation or conciliation before initiating formal arbitral proceedings.[2]

These sorts of dispute resolution clauses, however, raise an important question: what happens if a party commences arbitral proceedings before each of the steps in the multi-tiered dispute resolution clause has been exhausted or tried?

There are two conflicting schools of thought in this regard:

·  According to the first school of thought (the so-called “jurisdiction theory”), a failure to exhaust all of the steps set out in the multi-tiered dispute resolution clause before commencing an arbitration prevents the arbitration from continuing as the arbitral tribunal would have no jurisdiction.

· According to the second school of thought (the so-called “admissibility theory”), however, a failure to exhaust all of the steps in the clause has no bearing on the arbitral tribunal’s jurisdiction. The arbitration can continue but the tribunal may need to reject the claim as not being admissible. The “admissibility theory” has found favor in France and Germany.

Similar to Switzerland[3] and England and Wales[4], the “jurisdiction theory” has found its strong judicial support in China,[5] and compliance with a multi-tiered dispute resolution clause is considered a pre-requisite to arbitral jurisdiction.

This follows that a decision rendered by a China-seated arbitral tribunal under the doctrine of Kompetenz-Kompetenz that it does have jurisdiction (after having reviewed whether the parties have undergone the requisite steps in the multi-tiered dispute resolution clause) can be considered by the Chinese courts in the same way as other jurisdictional challenges and could be subject to judicial review.[6]  

This position is different from that of France and Germany, where an alleged failure to comply with a multi-tiered dispute resolution clause is not a matter of jurisdiction, and thus cannot be invoked to challenge an arbitral award or resist its enforcement.

The case below is an interesting example of how these sorts of issues are addressed by the Chinese courts.[7]

Background

Mawan Electricity (Shenzhen) Co., Ltd. (“Mawan”) and Runhe Development Co., Ltd. (“Runhe”) entered into a share transfer agreement (“Agreement”), in which the multi-tiered dispute resolution agreement provided:

“Any dispute arising out of the performance of the Agreement shall be resolved through friendly negotiation. Failing that, the dispute shall be referred to CIETAC (Shenzhen) for arbitration.”

Soon after a dispute arose, Mawan commenced CIETAC arbitration in Shenzhen. Mawan won the arbitration and the arbitral award found for it. Runhe, however, sought to resist enforcement of the award. Runhe argued, inter alia, that the parties had not undertaken the negotiation process provided for in the multi-tiered dispute resolution agreement. Runhe therefore submitted that the precondition to arbitration had not been fulfilled, and the arbitral tribunal therefore had no jurisdiction to hear the dispute.

Finding

The Changsha Intermediate People’s Court (“Intermediate Court”), the competent court for enforcing the award, held that Mawan had failed to submit evidence showing that the parties had followed the negotiation procedure before the commencement of arbitration. It held on this basis that the arbitral tribunal did not have jurisdiction.

Following the internal reporting mechanism,[8]  the case was referred to the Hunan High People’s Court (“High Court”). The High Court reached the same conclusion as the Intermediate Court. The High Court concluded that CIETAC should have dismissed the request for arbitration.

The case was then referred to the Supreme People’s Court (“Supreme Court”). The Supreme Court reversed the decisions of the lower courts, holding that:

“The parties agreed in general terms in the arbitration agreement without specifying the time limit of negotiation, resulting in confusion when enforcing such terms. In light of the intention of the parties when concluding the arbitration agreement, there are two conditions, i.e. ‘friendly negotiation’ and ‘failure of negotiation’. The former is viewed as the means to be complied and the latter is viewed as the consequence to be satisfied. By commencing the arbitration, it is clear that the negotiation has failed, satisfying the second condition. Therefore, even if ‘friendly negotiation’ is too vague to be enforced, the second condition has been satisfied, making the case admissible before the arbitral tribunal. Accordingly, this court is not of the view with the High Court that the timing of commencing the arbitration was not ripe.”

The Supreme Court held that the award was valid and could be enforced.

Observation

Under the doctrine of Kompetenz-Kompetenz, an arbitral tribunal can decide on jurisdiction in the first instance. An arbitral tribunal’s finding that it has jurisdiction can, however, be reviewed by the courts. This power to review jurisdictional findings includes jurisdictional issues relating to the existence, validity or scope of the arbitration agreement (in unique American terms, “substantive arbitrability”).

The Chinese court’s power to review such jurisdiction findings cannot be excluded by the parties even if the parties include in their agreement “clear and unmistakable evidence” (again using American terms) that they intend the above issues to be decided by arbitral tribunal.

Issues going to the admissibility of claims, on the other hand such as time bar, notice requirement, waiver, estoppel (which are referred to as “procedural arbitrability” issues in the United States), however, are presumptively for the arbitral tribunal to decide.[9]  In other words, arbitrators are presumed to be the principal decision maker and the enforcing courts should give deference to the prior decision of the arbitrator and should not use them as grounds of setting aside or non-enforcement.

In the present case, although the Supreme Court concluded, on the facts of this case, that the arbitral tribunal did have jurisdiction, the Supreme Court did so by applying the “jurisdictional theory”.

This means that if the Supreme Court had concluded that there had been a failure to comply with the multi-tiered dispute resolution agreement, the award would have been set aside on the ground that the arbitration was premature and that the tribunal had no jurisdiction.

The decision made by the Supreme Court in the Mawan case reconfirms that Chinese judiciary follows the jurisdiction theory and regards compliance with a multi-tiered dispute resolution agreement as a jurisdictional issue.

Therefore, anyone arbitrating in China should be mindful that there is a clear risk of an arbitral award being set aside if the claimant commences arbitration before going through the prior steps set out in such an agreement.

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