By Dr Tietie “Frank” Zhang, The City Law School
In an article recently published in the Hong Kong Law Journal, Dr Tietie “Frank” Zhang discusses the appropriate approach that the Supreme People’s Court of China (SPC) should adopt when interpreting the scope of an arbitration agreement.
Arbitration is the preferred method to resolve international commercial disputes in today’s world. The scope of an arbitration agreement is a key issue in the theories and practice of international arbitration, because it directly decides an arbitrator’s jurisdiction. If a dispute falls outside the scope of an arbitration agreement concluded between the two parties, the arbitrator will not have authority to decide the case. This therefore makes scope a crucial factor in the arbitration process.
Courts in many jurisdictions and particularly those that are pro-arbitration, or friendly towards arbitration, have adopted a presumptive rule when determining scope issues. Under this rule, courts interpret the scope of an arbitration agreement broadly to cover all disputes related to the contract between the parties, except for those they have explicitly excluded. As a result, disputes broadly related to a contract, including those arising out of a supplemental agreement or a settlement agreement, are usually deemed as falling within the scope of the arbitration clause in the original contract.
This presumptive rule is pro-arbitration for at least two reasons. First, it enables a judge to focus on and respect parties’ intention to arbitrate. Once the parties have chosen arbitration in their contract, courts would assume that they wanted to arbitrate all the related disputes. This would likely reflect the true intention of the parties and increase the efficiency of their dispute resolution process. Second, scope issues can often be quite complicated in practice. In order to determine scope, judges usually need to investigate questions such as, who the parties to the contract are, what the natures of their transactions are, how the disputes relate to the contract, and so on. These inquires may sometimes require a detailed merits review. Judges, however, often prefer not to do so and would rather send the entire dispute to arbitrators for the reason that, after all, parties choose arbitration precisely because they do not want their dispute decided in a court. As a result, a broad interpretation of scope ensures that arbitrators’ jurisdictions will be adequately supported, and that parties’ intentions will be fully respected. This will further warrant the smooth operation of international arbitration and promote international trade and investment.
China is an important player on the stage of international arbitration. Due to its economic power, the world has seen, and will continue to see, a large number of arbitration cases related to China. Consequently, the ways Chinese law and Chinese courts treat international arbitration have a significant impact on the international dispute resolution system as well as the world’s economy more broadly speaking. Fortunately, China has taken an overall pro-arbitration stance in the recent decades. In particular, the SPC has adopted many measures to make sure that Chinese courts remain friendly towards arbitration.
Surprisingly, however, the SPC’s position on scope runs against the international trend and the otherwise pro-arbitration stance of its own. Contrary to the presumptive rule adopted by courts in pro-arbitration countries, the SPC has consistently interpreted the scope of an arbitration agreement narrowly and has conducted excessively intrusive merits review in that process. In recent years, the SPC has held that an agreement to arbitrate reached between the parties in a section of a contract did not cover all disputes arising out of the very same contract, and that disputes arising from a supplemental agreement or a settlement agreement fell outside the scope of the arbitration clause in the original contract. These decisions were extremely perplexing, because there was no obvious reason why the SPC should adopt this harsh and bizarre approach.
The SPC’s position on scope issues has significant consequences for arbitration practice in the world. When dealing with a Chinese party or having transactions otherwise related to China, business entities outside China will need to pay special attention and ensure that their arbitration agreement is written in a way that satisfies the Chinese supreme court’s requirements. Failure to do so may frustrate their future attempt to resolve their disputes successfully by arbitration. In addition to the added transaction cost, this narrow understanding and interpretation of scope will harm Chinese law’s pro-arbitration reputation. It may undesirably damage the international community’s confidence in the Chinese arbitration legal framework, which could create barriers for international trade and investment between China and the rest of the world.
This article first identifies the SPC’s problematic approach, which has so far remained absent in academic discussions. It then urges the SPC to change course regarding how it interprets an arbitration agreement’s scope. It argues that the Chinese supreme court should reflect on the nature of arbitration and adopt the pro-arbitration presumptive rule under which scope is interpreted broadly. The SPC should also refrain from conducting excessive merits review when deciding scope issues. This will bring Chinese law in line with the international practice shared by arbitration friendly jurisdictions. It will further consolidate the positive pro-arbitration reputation that the SPC has painstakingly tried to maintain. Given the key role of arbitration, doing so will facilitate smooth resolution of international commercial disputes between China and the world, and safeguard mutual economic cooperation and development.
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