Mar 4, 2023

Ad Hoc Arbitration and Expedited Arbitration: In Harmony in China?

Among the latest batch of China’s Guiding Cases[1] was a ruling that, in enforcing a foreign arbitral award, likely reflects a pro-enforcement view among the PRC judiciary.

The case, Svensk Honungsförädling AB v. Nanjing Changli Bees Product Company Limited, was adjudicated by the Nanjing Intermediate People’s Court (“Court”), with the relevant ruling issued on 15 July 2019. The Supreme People’s Court (“SPC”) selected the case as Guiding Case No. 200 on 27 December 2022.

The core of the case is in the determination of the relationship between expedited arbitration and ad hoc arbitration. Ultimately, the Court held that the award in this case, rendered by an ad hoc arbitration tribunal, should be recognized and enforced, even if the arbitration agreement only specified expedited arbitration (and did not specify an arbitral institution).

Factual and Procedural Background

On 17 May 2013, Nanjing Changli Bees Product Company Limited (“Changli Co.”), incorporated in Nanjing, Jiangsu Province, China, and Svensk Honungsförädling AB (“Svensk AB”), incorporated in Sweden, entered into an English-language sales contract for honey (“Contract”). The Contract’s dispute resolution clause provided that “in case of disputes governed by Swedish law and that [sic] disputes should be settled by Expedited Arbitration in Sweden”, but no arbitral institution or other terms were specified.

On 23 February 2015, after a dispute arose between Changli Co. and Svensk AB because of the quality of the honey, Svensk AB applied for arbitration at the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”). A tribunal under the SCC rendered an arbitral award, dated 18 December 2015, finding that it lacked jurisdiction and dismissing Svensk AB’s application.[2]

On 22 March 2016, Svensk AB submitted the dispute to ad hoc arbitration in Sweden. The tribunal rendered an arbitral award, dated 9 June 2018, finding that Changli Co. breached the Contract and ordering it to pay USD 286,230.00 plus interest as compensation, SEK 781,614.00 in legal fees, and HKD 1,021,718.45 in arbitration costs (“Award”).

On 22 November 2018, Svensk AB, as applicant, requested the Court to recognize and enforce the Award.

Issues

To recognize and enforce an arbitral award in mainland China, the competent PRC court must be satisfied that, inter alia, the arbitration procedure complied with what was provided for in the arbitration clause agreed upon by the parties.[3] In this case, Changli Co., as respondent, argued that the Award should not be recognized or enforced because it was rendered via a procedure, namely, ad hoc arbitration, that was not provided for in the arbitration clause (nor otherwise agreed to by the parties).[4]

The main issue before the Court in this case was whether Svensk AB had the right to submit the dispute to ad hoc arbitration in light of the wording of the arbitration clause, “settled by Expedited Arbitration in Sweden”.

Arguments

The respondent argued that expedited arbitration is a quicker and simpler dispute resolution method adopted by certain dispute resolution institutions, and is completely different from ad hoc arbitration. Moreover, the respondent pointed out, ad hoc arbitration is not recognized as a type of expedited arbitration under the Swedish Arbitration Act.

The applicant argued that Changli Co. confirmed during the ad hoc tribunal hearings that it did not object to the jurisdiction of the tribunal and that the arbitration procedure was not inconsistent with relevant provisions of the Contract. Neither the original ruling of the Court nor the Guiding Case record the applicant as directly countering the respondent’s arguments about the distinct and conflicting natures of ad hoc arbitration and expedited arbitration.

Findings and Rulings

The Court made the following key findings:

  • The parties expressly agreed to resolve the dispute through expedited arbitration, and expedited arbitration does not preclude resolution through ad hoc arbitration.
  • Expedited arbitration and ad hoc arbitration have some similar features. Expedited arbitration is more efficient, convenient, and economical than ordinary arbitration, and its core lies in simplifying arbitration procedures, shortening arbitration time, reducing arbitration costs, etc. Ad hoc arbitration is also more efficient, convenient, and economical than institutional arbitration.
  • According to the evidence submitted and the Court’s investigation, Changli Co. had clearly expressed that “the arbitration clause could refer to ad hoc arbitration or expedited arbitration […].”

Based on the above, the Court found that the ad hoc arbitration under which the Award was rendered was consistent with, and did not exceed the scope of, the Contract’s arbitration clause. Finally, after examining the other particulars of the enforcement application per PRC law, the Court ruled to enforce the Award.

Takeaways

While China has a history of taking issue both with ad hoc arbitration and with arbitration clauses that do not specify an arbitration institution (as well as, to a lesser extent, with expedited arbitrations), this ruling of the Nanjing Intermediate People’s Court reflects a favorable view of ad hoc arbitration. Of course, the Court could hardly have refused enforcement on the basis that PRC law requires arbitration clauses to specify an arbitration institution,[5] but it might have refused to enforce the award on the basis that the parties’ arbitration agreement did not specify ad hoc arbitration, or on the basis that it specified “Expedited Arbitration” and the fact that this term usually (even if not always) refers to procedures of arbitration administered by an arbitral institution.

It is impossible to determine the weight, in the Court’s decision, of the finding that the respondent apparently agreed to ad hoc arbitration and the tribunal’s jurisdiction during a hearing of the arbitration itself. However, the SPC’s selection of this case as a Guiding Case, which “courts at all levels should refer to when adjudicating similar cases”,[6] may signal a wider support of ad hoc arbitration, which already received a boost when the SPC, in 2016, officially opened the door for parties registered in free trade zones (“FTZs”) to submit disputes to ad hoc arbitration even in China.[7]

None of the above is to say that PRC courts will recognize ad hoc arbitration carried out within Mainland China (except for parties registered in FTZs), and PRC courts before this Guiding Case were already generally obliged to recognize and enforce otherwise acceptable arbitral awards from ad hoc arbitration. However, this Guiding Case reflects a current tendency of the PRC judiciary to be more flexible and possibly pro-enforcement in arbitration-related cases. Parties seeking to enforce awards in China may find more and more former technicality-like stumbling blocks cleared away, while of course conversely, parties against whom enforcement is sought may not be able to count on as many loopholes or protection from PRC courts.

As for this case specifically, companies wishing to do business in China would do well to keep it in mind when drafting contracts and agreements. The bar for drafting sufficiently clear and unambiguous arbitration agreements could also be rising, to leave less room for courts to over-generalize or otherwise too freely interpret the agreements. Specifically, by refraining from using overly complex and foreign legal concepts, the risk of PRC courts deviating from the text of the contract may be reduced. Furthermore, it may be helpful to rely on procedures that are tried-and-true and with well-established results in China.


[1] Guiding Cases are selected by the Supreme People’s Court and, according to Article 7 of the Provisions of the Supreme People’s Court Concerning Work on Case Guidance, are cases that “courts at all levels should refer to when adjudicating similar cases”, especially for lower courts. Provisions of the Supreme People’s Court Concerning Work on Case Guidance (最高人民法院印发《关于案例指导工作的规定》的通知), passed by the Adjudication Committee of the Supreme People’s Court on 15 November 2010, issued on and effective as of 26 November 2010.

[2] The Guiding Case does not explain why such an award took 11 months to be rendered.

[3] Article V.1(d) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, adopted by the United Nations on 10 June 1958, acceded to by China on 22 January 1987, effective in China as of 22 April 1987 .

[4] According to generally accepted conventions, “ad hoc arbitration” is a form of arbitration that, for the most part, does not involve administration or oversight by an arbitration institution – in contrast to “institutional arbitration” – while “expedited arbitration” refers to a variety of special procedures that are usually set out as part of arbitration rules (usually of an arbitration institution, but not always) and that aim to yield a shorter and otherwise more efficient arbitration (at least compared to the corresponding arbitration rules’ standard procedures).

[5] Article 16 of the Arbitration Law of the People's Republic of China (《中华人民共和国仲裁法》), promulgated by the Standing Committee of the National People's Congress on 1 September 2017 and effective as of 1 January 2018.

[6] Article 7 of the Provisions of the Supreme People’s Court Concerning Work on Case Guidance. The Chinese of “refer to” is “参照”, which under a more liberal translation may be “consult and follow”. Article 1 also stipulates that Guiding Cases “have guiding effect on the adjudication and enforcement work in courts throughout the country”.

[7] Article 9(3) of the Opinions of the Supreme People’s Court on Providing Judicial Guarantee for the Building of Pilot Free Trade Zone (《最高人民法院关于为自由贸易试验区建设提供司法保障的意见》), issued by the Supreme People’s Court on, and effective as of, 30 December 2016.

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