The question of whether a Chinese case with purely domestic elements is capable of being arbitrated in foreign forum has been pondered by many foreign and Chinese lawyers. The results have led to confusion. Recently a major International law firm posed the question before Dr. Zhan Hao, we have summarized Dr. Zhan Hao’s reply below.

In short, if parties opt to arbitrate in a foreign forum, for example, Hong Kong; and opt to use English Law or the law of another foreign jurisdiction; the likelihood of the award being enforced is strong. However, the position is unclear under Chinese law as there are no specific regulations addressing the adjudication of a purely domestic dispute by a foreign arbitral institution. We will now consider the question in further detail.

1) Separating cases with Foreign Elements from those of a Purely Domestic Nature

In clarifying a choice of law it is necessary to separate cases into two categories; foreign elements and purely domestic. The Civil Procedure Law of the People’s Republic of China (Civil Procedure Law) and the Arbitration Law of the People’s Republic of China(Arbitration Law), state a case involving a foreign element(s) allows for greater flexibility in selecting the applicable law and forum, when compared with a purely domestic dispute. Article 244 of the Civil Procedure Law states:
Parties to a dispute over a contract concluded with a foreign element or over property rights and interests involving a foreign element may, through a written agreement, choose the court of the place which has practical connections with the dispute to exercise jurisdiction. If a people’s court of the People’s Republic of China is chosen to exercise jurisdiction, the provisions of this Law on jurisdiction by forum level and on exclusive jurisdiction shall not be violated.

In accordance with Article 244, if the contract involves a foreign element, the parties may select a location outside China. Thus, dispute resolution could occur in a foreign court or in a foreign arbitral institution.

The term “practical connections” as stated in Article 244 is further described in Article 4 of the Agreed Minutes of the 2nd National Judicial Meeting Regarding Foreign Elements in Commercial Maritime Cases. Factors such as domicile, place of registration, contract performance and dispute subject matter may be taken into consideration by a Chinese court in determining whether the foreign forum is appropriate.

Considering the above, in China, determining the location of arbitration may be influenced by whether a case holds foreign elements or is purely domestic. Yet it a strong possibility remains for a purely domestic disputes to be arbitrated in foreign forum and the Hong Kong government is currently pressing China to specify that purely domestic disputes are capable of having a dispute recognized and enforced by a domestic Chinese court.

2) The Current Regulatory FrameworkArticle 305 of the Opinions of the Supreme Court on the Application of the Civil Procedure Law states, in regard to those cases involving foreign elements which are under the exclusive jurisdiction of Chinese courts,

“the parties shall not select a foreign court for jurisdiction by a written agreement; unless they stipulate to settle the dispute through arbitration”.

Note the absence of the word “arbitration”. Thus, greater freedom is made for arbitration as a mode of alternative dispute resolution even if a Chinese court has exclusive jurisdiction over litigation.

However, there are no specific regulations within the Insurance Law of the Peoples Republic of China, Arbitration Law, or Civil Procedure Law concerning cases without foreign elements being arbitrated outside of China, including Hong Kong and Macau. Based on my own experience as an arbitrator in China, the majority of purely domestic cases arbitrated in Hong Kong have been recognized and enforced by Chinese courts.

Regardless, without specific laws authorizing this practice it is better to err on the side of caution. Many Chinese lawyers believe that without regulations forbidding this practice, domestic parties may have their cases adjudicated in non-Chinese arbitral forums. My own view is, depending on the facts and case nature, the likelihood of enforcement may be over 80% for a purely domestic dispute. Nonetheless, considering the risk of a Chinese court deciding not to recognize or enforce a foreign arbitral award, I advise that the parties choose a Chinese arbitral institution such as the CIETAC