Jessica Fei, Joanna Du and Shaowen Huang look at complexities around who should decide whether steps to settle a dispute before stepping into a tribunal or court were properly followed. In Hong Kong it is handled by arbitrators, but in China there is uncertainty. Following the agreed steps closely can help to avoid issues – read on for more!
Multi-tiered dispute resolution clauses are common in contracts. They essentially say that when a dispute arises, parties must undertake certain steps prior to commencing arbitration, in an attempt to amicably settle the dispute. While there are a number of benefits to such clauses, in practice, procedural disputes often arise over whether the conditions precedent for arbitration have been met before a party commences arbitration. Uncertainty exists as to the effect of such clauses, whether they constitute jurisdictional conditions precedent to the commencement of arbitrations, and what the consequences of failure to comply are.
Hong Kong courts confirmed in C v D that disputes about compliance with pre-conditions to arbitration are for the arbitral tribunal to hear, which go to the admissibility of the claim, instead of the tribunal’s jurisdiction to hear the dispute (read our blog post on the decision here). By adopting the distinction between “jurisdiction” and “admissibility”, the Hong Kong Court of Final Appeal confirmed that the issue of satisfaction of pre-conditions to arbitrate will presumptively not be reviewable by the Courts when determining whether to set aside an arbitral award.
In mainland China, however, this is still an unsettled area. It remains unclear whether this issue is subject to judicial review by the Chinese courts or is within the scope of the arbitral tribunal’s mandate.
Reviewable by Chinese courts or not?
Under the arbitration legal framework in China, two grounds are frequently relied on by the respondent in arbitration or the award debtor to attack the counterparty’s failure to satisfy the pre-arbitration conditions. Some challenge the validity of the arbitration agreement, arguing that the pre-arbitration procedure are conditions precedent to the validity/effectiveness of the arbitration agreement. Others seek to argue that the failure to meet the conditions precedent to the arbitration constituted procedural irregularity, a statutory ground for setting aside under the Arbitration Law.[1] Chinese courts have consistently turned down such applications:
- In Li Jun v. Luo Annuo,[2] Li argued that pre-arbitration consultation requirement serves as a condition precedent for the effectiveness of the arbitration clause, and failure to adhere to the pre-condition rendered the arbitration clause ineffective. Such argument did not win the Beijing 4th Intermediate People’s Court’s support (Beijing 4th IPC). The Beijing 4th IPC ruled that, “[w]hether the Parties have carried out the amicable consultation prior to commencement of arbitration does not fall within the circumstances that render the arbitration agreement invalid. The agreement on consultation does not affect the validity of the arbitration clause.”
- In Chen Ya v. Yan Bowen,[3] the parties agreed that “any disputes arising from the performance of this agreement shall be settled by amicable consultation between the parties, failing which the parties may submit to Beijing Arbitration Commission for arbitration”. The award debtor applied to set aside the award on the ground that there is no proof of the completion or failure of the parties’ consultation, which constituted a procedural irregularity under Article 58(3) Arbitration Law. Such argument, again, did not win the support of the Beijing 4th According to the court, the commencement of arbitration can be seen as an indication that failure to resolve disputes by amicable resolution have occurred. As the condition precedent was met, the tribunal had the authority to hear the case.
- In Jiang Qinfeng v. Li Zhenyu,[4] the parties agreed a 30-day pre-arbitration consultation period. The Beijing 4th IPC ruled that: (1) the “specific agreement on arbitral procedure” under the arbitration rules refer to the parties’ specific agreement on procedural matters during the arbitration procedure, and does not cover the parties’ agreement on the pre-arbitration procedures; (2) the notice of dispute had been couriered to the applicant, and thus the pre-arbitration consultation requirement had been met.
The above rulings, combined with the detailed reasoning, appear to suggest that the Chinese courts consider that the issue of non-compliance of conditions precedent to arbitration are reviewable by court under the Arbitration Law. However, we also see a ruling handed down by the Beijing 4th IPC in 2023 suggesting that the compliance with pre-arbitration conditions goes to admissibility of claim, instead of the tribunal’s jurisdiction.
In Qi Yaheng v. Beijing Lian Chuang Ju Xing Technology Co., Ltd.,[5] the parties agreed a multi-tiered dispute resolution clause: “Any disputes among Party A, Party B and Party C under this contract should first be resolved by amicable consultation, failing which the Parties agree to submit to the Beijing Arbitration Commission for arbitration under its arbitration rules.” Qi, the award debtor, sought to set aside the arbitral award before the court based on, among others, lack of jurisdiction. Qi alleged that there is no amicable consultation between the parties before the counterparty commenced the arbitration.
The Beijing 4th IPC did not support Qi’s argument. The court said:
- The arbitration clause is valid, because it contains the three statutory requirements under the Arbitration Law,[6] and Qi failed to prove the existence of any of the circumstances rendering the arbitration agreement invalid under the Arbitration Law.[7]
- The pre-arbitration procedure, e. the parties may commence arbitration should the consultation fail, will not fundamentally affect the tribunal’s jurisdiction.
Although not clear, it seems that the court was suggesting that the compliance with pre-arbitration conditions is not an issue of tribunal’s jurisdiction. However, the court did not go into further analysis on whether this should goes to the admissibility of the claims, and whether this should be within the mandate of the tribunal, not reviewable by the court.
Blurred boundaries: New rule brings hope, but caution needed
The above court cases show a pattern that, the Chinese courts have consistently held that (1) the multi-tiered dispute resolution clauses are valid, and (2) the pre-arbitration procedures are not matters of arbitration procedure thus challenge against any non-compliance based on procedural irregularity cannot stand. Despite so, it remains in doubt whether the issue of non-compliance with pre-arbitration conditions are reviewable by the courts. The boundary between the mandate of the court and the tribunal blurs.
Before a line is clearly drawn at legislative or judicial level, the unhappy arbitration respondent or award debtor will keep filing applications to courts to complain about the counter party’s failure to satisfy the condition precedent to arbitration. This does not help reduce caseloads of the hectic courts, and will undoubtedly increase the legal costs of the parties for being involved in court proceedings.
We have seen arbitration institution seeking to address the uncertainty. The 2024 Rules of CIETAC, a leading international arbitration institution based in China, clearly provide that a failure to follow the pre-arbitration negotiation/mediation shall not prevent the claimant from commencing arbitration or prevent CIETAC from accepting the case.[8] This new rule is seeking to address disputes as to non-compliance with pre-arbitration conditions in CIETAC arbitrations.
That said, given the uncertainty at the legislative and judicial level, it is recommended to follow the pre-arbitration procedures as agreed in the contract to minimize the risks of later objections. The party wishing to commence arbitration should carefully perform necessary steps required prior to commencement of arbitration, and document the commencement, performance and completion of all pre-arbitral steps if possible.
The authors would like to thank Chenwei Song for helping with the legal research.
[1] Article 58 (3) Arbitration Law provides that: “Where the parties concerned can provide evidence disproving the arbitration award in any of the following circumstances, they may request a cancellation of the arbitration award by an intermediate People’s Court at the place where the arbitration commission is located: […] (3) the composition of the arbitral tribunal or the arbitration procedure is in contrary to the legal procedure; […]”.
[2] (2023) Jing 04 Min Te No. 334.
[3] (2021) Jing 04 Min Te No. 186.
[4] (2019) Jing 04 Min Te No. 310.
[5] (2023) Jing 04 Min Te No. 168.
[6] Article 16 Arbitration Law provides that an arbitration agreement shall contain the following particulars: (1) an expression of intention to apply for arbitration, (2) matters for arbitration, and (3) a designated arbitration commission.
[7] Articles 17 and 18 Arbitration Law.
[8] Article 12 CIETAC Arbitration Rules 2024.