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On September 16, 2004, the Supreme People’s Court, in order to enhance judicial mediation, issued “the Rules for the Matters of Mediation of Civil Affairs in the People’s Courts” (Rules).64 Under Article 1 of the Rules, the people’s courts may conduct mediation after the time for filing an answer and before the judgment is made for the civil cases of either trial, appeal or retrial.65 But, upon the agreement of the parties, the mediation may be made before the time for answer expires. Article 2 of the Rules requires that the people’s courts conduct mediation in all cases for which the settlement by mediation is possible.66 The Rules restate the enforceability of the mediation agreement reached as a result of judicial mediation. However, under any of the following circumstances, the mediation agreement shall not be accepted by the people’s courts: (a) harmfulness to the national and social public interests,

(b) infringement of the third party interest, (c) violation of the true intention of a party, or (d) violation of compulsory provisions of law and administrative regulations.67

3.3. Arbitration

If, however, all efforts for mediation are futile, the disputes may have to be submitted to either an arbitration tribunal or a court for decision. As in many other countries, arbitration is also a popular device in China to resolve disputes in international contracts. As a matter of fact, a quite large number of international contracts in China contain a special clause calling for arbitration in case where the parties could not settle their disputes through negotiation and/or mediation. The major concern the lawyers have on both sides (Chinese company and its foreign counterparts), however, is the location of arbitration.68 Within China, the foreign arbitration is conducted by China International Economic and Trade Arbitration Commission (known as CIETAC). The

64The Rules was adopted by the Supreme People’s Court on August 18, 2004, and effective November 1, 2004. The full text of the Rules is available at http://www.law-lib.com.

65Retrial is the trial conducted through the process of judicial supervision after the exhaustion of the trial and appeal.

66According to the Supreme People’s Court, the civil cases that may not be mediated include the cases to which a special procedure, procedure of urging the clearance of debts, procedure of public summons for exhortation, or procedure for bankruptcy liquidation is applied, or the cases that involved determination of personal status such as marriage or paternity relation, or other cases unsuitable for mediation due to their nature. See Supreme People’s Court, Rules, art. 2, supra note, 64.

67See id., Art. 12.

68Foreign lawyers prefer and in most cases try very hard to choose their home country arbitration institution or a third country arbitration body in their contracts with Chinese companies.

354 Chinese Contract Law

CIETAC is headquartered in Beijing and has two branches that are located in Shanghai and Shenzhen respectively.69

Of importance concerning arbitration here is the nature and effect of an arbitration agreement. First of all, in China an arbitration agreement may be made in the form of a contract clause or a separate agreement, and the agreement may be reached at the time of contract or at the time for arbitration. Secondly, the arbitration agreement serves as the legal basis on which the arbitration is to be conducted because the power of an arbitration body to arbitrate the disputes must be authorized by the parties in the form of arbitration agreement. If a party applies to the CIETAC for arbitration in the absence of arbitration agreement, the application will be denied. Thirdly, a valid arbitration agreement precludes the jurisdiction of a Chinese court over the disputes in question. But if a party wishes to pursuit the litigation in a courtroom in lieu of arbitration as provided in the contract, a strategy is to challenge the validity of the arbitration agreement. A court will take the case despite the arbitration agreement if the agreement is found invalid.

A related issue is arbitral award. In China, under the Arbitration Law, there is no appeal for an arbitration award. After an arbitral award is made, if a party institutes an action in a people’s court for the same dispute, the action will be dismissed.70 If however, the arbitral award or its enforcement is set aside by a people’s court, a party may initiate an action in a people’s court, or the parties, through a new agreement, may have the disputes arbitrated again.71 Note that under the Arbitration Law, there are two types of cases that may not be arbitrated. The firs type includes disputes pertaining to marriage, adoption, guardianship, and succession. The second type consists of the disputes of administrative nature that should be handled by administration agencies as provided by law.72

Of course, the parties in an international contract that has Chinese element may by agreement seek for arbitration in a foreign arbitration body. As a practical matter, however, there may have an enforcement issue if the foreign arbitral award will need to be enforced in China. Under Article 269 of the CPL, if a foreign arbitral award needs to be recognized and enforced in China, the

69Under the Arbitration Law of China, the CIETAC is organized by China Chamber of International Commerce (CCOIC), and CCOIC is associated with the China Council for the Promotion of International Trade (CCPIT). CCPIT, though claimed as a non-government institute/organization, is a semi-government agency, and the top officials of CCPIT are all the government appointees.

70See Arbitration Law of China, art. 9, supra note 59.

71See id.

72See id., art. 3.

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party concerned shall directly apply to the intermediate people’s court of the place where the party subject to the enforcement resides or his property is located. The people’s court will handle the application according to the treaties concluded or acceded to by China or under the principle of reciprocity.

With regard to the arbitral award made by the CIETAC, in which a foreign party is involved, the party who seeks to enforce the arbitral award shall also make a request to a people’s court, and then the court will review and exam the arbitral award. If any of the following presents, the enforcement of the arbitral award will be denied: (a) lack of arbitral agreement or clause, (b) lack of proper notice or opportunity to be heard to the person against whom the arbitral award is made; (c) violation of arbitration rules with regard to the composition of arbitration tribunal or the procedures of arbitration; (d) matters for arbitration not within the jurisdiction of the arbitration body or outside the arbitration agreement; or (e) violation of social and public interests.73

Quiet often, however, the intermediate people’s courts, due to the concerns about local interest or pressures from local government, may abuse their discretionary power in reviewing the validity of the foreign arbitral award, and refuse to enforce a foreign arbitral award without justifiable reason. In order to make sure that the court’s power to deny enforcement of a foreign arbitral award will not be abused, the Supreme People’s Court in 1995 issued a notice establishing a two-layer reporting and reviewing system. Under the Supreme People’s Court notice, before making a decision of denial, the intermediate court must report the case to the high people’s court that has jurisdiction over the intermediate people’s court for review. If the high people’s court is to grant the denial, a similar report must be made to the Supreme People’s Court for opinion before the denial is granted.74

According to the Supreme Court’s notice, the two-layer reporting and reviewing system also applies to the determination of the validity of arbitration agreement requested by a party who attempts to have the arbitration agreement set aside and institute a lawsuit instead. In 1998, in another notice, the Supreme People’s Court extended the two-layer reporting and reviewing system to the request for vacating the arbitral award made by the CIETAC in response to the increasing incidents where Chinese party tried to negate the effect of an arbitral award made by the CIETAC against it.75

73See the CPL, art. 260, supra note 26.

74See Supreme People’s Court, the Notice Concerning Handling by the People’s Court of the Matters Involving Foreign Arbitration, August 28, 1995, Fafa (1995) No. 18.

75See Supreme People’s Court, the Notice Concerning the Matters To Vacate by the People’s Court the Foreign Arbitral Awards, April 23, 1998, Fa (1998) No. 40.