Apr 7, 2023

Sports Arbitration in China: When Local Courts Exercise Jurisdiction

Sports arbitration is a special type of arbitration that covers everything from sponsorship to doping, and may take place both in typical arbitral tribunals and internal dispute resolution bodies of international sports organizations. A recent guiding case released by the Supreme People’s Court addresses the effect of a decision issued by an internal dispute resolution body of an international football organization as well as the validity and enforcement of the underlying arbitration clause.

In Dragan Kokotovic vs Shanghai Enwo Catering Management Co., Ltd. and Lü En ((2020) 沪01民终3346号, No.201), a dispute arose after a Shanghai football team fired its coach without paying compensation. In its ruling, the Shanghai First Intermediate People’s Court (“Intermediate Court”) determined that a lower court had jurisdiction over a labor dispute that had already been settled by the FIFA Players’ Status Committee (“PSC”), an internal dispute resolution body of FIFA.

In this case, the Intermediate Court clarified that the conditions for the formation and validity of an arbitration clause are separate and distinct from the enforcement of the arbitration clause itself, and also determined the difference between self-governing, industry-level dispute resolution bodies and arbitral tribunals recognized under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Although the football team no longer exists, the effects of the case may echo for years to come.

Factual and Procedural Background

On 23 January 2017, Shanghai Ju Sports Football Club Co., Ltd. (“Ju Sports FC”), incorporated in Shanghai’s Xuhui district, and their former coach, Dragan Kokotovic (“Kokotovic”), entered into a Professional Coaching Work Contract (“Coaching Contract”). The Coaching Contract provided that Kokotovic would provide labor services as a professional coach for Ju Sports FC, a now-defunct team in China League Two, the third-highest tier in the Chinese Football Association.

The relationship was short lived. On 1 July 2017, the parties entered into a Contract of Rescission (“Rescission Contract”) to terminate the Coaching Contract and agree that Ju Sports FC would pay Kokotovic his remaining salary and other payments. This did not happen.

Article 5.1 of the Rescission Contract provides that “any dispute or litigation relating to, or arising out of the Rescission Contract shall be subject to the administration of the PSC or any other FIFA-authorized institution.” Article 5.2 of the Rescission Contract states that “[i]f FIFA does not have jurisdiction over any dispute, the parties shall submit it to the Court of Arbitration for Sport (“CAS”), pursuant to the Code of Sports-related Arbitration. The relevant arbitration proceedings shall be held in Lausanne, Switzerland.”[1]

On 5 June 2018, as Ju Sports FC had not made the payments as agreed, Kokotovic submitted a dispute to the PSC. The Single Judge of the PSC issued a decision (“PSC Decision”) requiring Ju Sports FC to pay Kokotovic his remaining salary and other payments. The PSC Decision further stated that it would become final and binding, unless the parties disagreed and appealed to the CAS. Neither party did so.

Subsequently, Ju Sports FC became Shanghai Enwo Catering Management Co., Ltd. (“Enwo Catering”), with Lü En as its sole shareholder and legal representative. On 14 January 2020, as Enwo Catering failed to make payments in accordance with the PSC Decision, Kokotovic filed a lawsuit with the Xuhui District People’s Court of Shanghai (“Xuhui Court”), requesting the court: 1) to order Enwo Catering to pay Kokotovic the remaining salary and other payments, and 2) to find Lü En jointly and severally liable for such amounts. In response, Enwo Catering and Lü En argued that the dispute should be submitted to the CAS according to Article 5.2 of the Rescission Contract, and that the Xuhui Court had no jurisdiction.

On 21 January 2020, the Xuhui Court issued a civil ruling dismissing Kokotovic’s lawsuit. Kokotovic then appealed to the Intermediate Court.

Issues

The case before the Intermediate Court dealt with two main issues: 1) whether the PSC Decision constituted a foreign arbitral award under the New York Convention, and 2) whether the arbitration clause in the Rescission Contract excluded the jurisdiction of PRC courts.

Findings and Rulings

The Intermediate Court made the following key findings:

1) The PSC Decision is not a foreign arbitral award under the New York Convention, and the decision proceedings of the PSC are not arbitration proceedings, but rather internal proceedings of an industry-level self-governing dispute resolution body. The Intermediate Court reasoned that:

(a) First, the PSC is an autonomous dispute resolution institution within an international sports federation and is not an independent arbitral institution.

(b) Second, the PSC Decision is an internal decision of an international sports federation, which does not have universal and strict binding force. It is not an arbitral award.

(c) Third, according to Article 22 and Paragraph 4 of Article 23 of the FIFA Regulations on the Status and Transfer of Players, the PSC Decision is not final and does not exclude the right of the parties to seek other judicial remedies.

2) Because the arbitration clause (i.e. Article 5.2 of the Rescission Contract) did not expressly state the applicable law, the validity of the arbitration clause should be determined under Swiss law, in accordance with Article 18 of the Law of the PRC on Choice of Law for Foreign-related Civil Relationships (《中华人民共和国涉外民事关系法律适用法》) [2]. The Intermediate Court found that the validity of arbitration agreements under Swiss law is regulated by Article 178 of the Federal Act on Private International Law[3], which Article 5.2 of the Rescission Contract complied with. The arbitration clause in the Rescission Contract was therefore legally valid.

3) However, the case did not satisfy the requirement for submitting a dispute to the CAS set out in the arbitration clause. This is because the arbitration clause provided that a dispute should only be submitted to CAS “[i]f FIFA does not have jurisdiction”. However, because the PSC heard the dispute and issued the PSC Decision, FIFA was found to have jurisdiction, making it inappropriate to submit the dispute to the CAS.

Based on the above, the Intermediate Court found that the arbitration clause in the Rescission Contract was not applicable to this case and did not exclude the jurisdiction of the Xuhui Court. After reporting to the Shanghai High People’s Court and the Supreme People’s Court for review, the Intermediate Court subsequently revoked the ruling rendered by the Xuhui Court and directed the Xuhui Court to hear the case.

Takeaways

1) Case Significance

First, the decision clarifies the factors courts should consider when deciding whether a decision in a sports dispute made by a single sports federation constitutes an arbitral award, such as the nature of the institution, the scope of the dispute resolution, the means of enforcement, and the finality of the decision.

More importantly, the court clarified that the conditions for the formation and validity of an arbitration clause are separate and distinct from the enforcement of the arbitration clause itself.

Specifically, the Intermediate Court first confirmed the validity of the arbitration clause, and then identified the conditions for its enforcement according to its terms. Based on the terms of the arbitration clause, the Intermediate Court found that the dispute did not need to be referred to the CAS and the Xuhui Court’s jurisdiction was not excluded.

The Intermediate court here reaffirmed what lawyers know instinctively: the wording of your arbitration clauses matters greatly. In this case, the parties ended up with a perfectly valid arbitration clause, but not one that kept their dispute out of local courts or that allowed them to appeal to an arbitral tribunal that could render a decision that’s directly enforceable in the PRC. The lesson therefore is clear: ensure that your arbitration clauses are drafted in clear and unambiguous terms that provide for the submission of all disputes to arbitration and avoid any wording that may be deemed conditional.

2) Sports Arbitration Under China’s New Sports Law

This ruling was rendered around the time when the Standing Committee of the National People’s Congress was considering and adopting the new Sports Law of the PRC (《中华人民共和国体育法》) (“Sports Law”), which was amended in 2022 for the first time since 2016. One highlight of the amendment is the new chapter on “Sports Arbitration”, which provides comprehensive and detailed regulations on the sports arbitration system for the first time.

Notably, the amended Sports Law clarifies that disputes subject to arbitration under the Arbitration Law of the PRC and labor disputes subject to arbitration under the Labor Dispute Mediation and Arbitration Law of the PRC do not fall within the scope of sports arbitration[4]. Moreover, the Sports Law establishes a division of labor between sports arbitration and the internal dispute resolution mechanisms of sports federations, which will undoubtedly provide clearer and more explicit guidelines for the proper handling of related disputes.[5] However, whether an award made by a sports arbitration tribunal under the Sports Law is an arbitration award recognized by the New York Convention has yet to be clarified by judicial practice. We will continue watching similar cases and monitoring the decisions of courts and sports arbitration tribunals.


[1] These clauses are English translations of the Chinese translated text found in the opinion. The exact wording may therefore differ from the original text of the Rescission Contract.

[2] Article 18 provides that “[t]he parties concerned may choose the laws applicable to an arbitral agreement by agreement. If the parties do not choose, the laws at the locality of the arbitral authority or of the arbitration shall apply.”

[3] Federal Act on Private International Law, Article 178: “As regards its form, an arbitration agreement is valid if made in writing, by telegram, telex, telecopier or any other means of communication which permits it to be evidenced by a text. As regards its substance, the arbitration agreement shall be valid if it conforms either to the law chosen by the parties, or to the law governing the subject-matter of the dispute, in particular the law governing the main contract, or if it conforms to Swiss law.”

[4] Sports Law, Article 92.

[5] Sports Law, Article 95.

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