Introduction
Arbitration is one of the most popular methods to resolve international commercial disputes in today’s world.Footnote 1 Due to its many noticeable advantages, including neutrality of forum, finality and universal enforceability of awards, flexibility and efficiency of proceedings, and so on, arbitration is often the preferred choice for corporate parties in cross-border disputes.Footnote 2 It therefore plays a pivotal role in the successful and effective resolution of international commercial disputes.Footnote 3 As a result, the smooth operation of the international arbitration system reduces transaction costs for business entities across the world, and facilitates transnational business dealings on the whole.Footnote 4 In a world where international trade and investment have become the dominant factors for promoting development and prosperity, arbitration is making a significant contribution to the global economy and consequently the entire human society.Footnote 5
Arbitration obviously cannot exist in a vacuum. The legal framework based upon the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) has provided an extremely solid foundation to support the proper functioning of the international arbitration system.Footnote 6 With more than 170 contracting states, the New York Convention is one of the most successful treaties in the world, particularly in the area of international commercial law.Footnote 7 This arbitration legal framework, however, is by no means simple. Instead, it is rich in theories and never short of complications and intricacies.Footnote 8 Most importantly, it relies on the support of national laws as well as judiciaries who interpret and enforce those laws.Footnote 9 Luckily in recent history, the world has seen an increase in national legal systems that strive to promote and support arbitration.Footnote 10 Enactment of pro-arbitration legislation, together with judicial decisions favouring arbitration, have created an ecosystem where arbitration has thrived as a legal mechanism.Footnote 11 Today, in many pro-arbitration jurisdictions around the world, such as France, Switzerland, the United Kingdom (UK), the United States (US), Singapore, and Hong Kong, arbitration has become a flourishing industry.Footnote 12
At the heart of the arbitration system, one of the most crucial issues is how courts enforce an arbitration agreement, which often takes the form of a clause in the contract between the parties.Footnote 13 Due to arbitration’s consensual nature, arbitrators only have authority to decide a certain case if the parties have validly agreed for them to do so.Footnote 14 This means when a party wants to challenge jurisdiction, it can argue that the arbitration agreement in the case is defective, either before the arbitrators themselves or a judge.Footnote 15 This matter’s importance cannot be overemphasised because even when the arbitrators decide that they enjoy good jurisdiction over the case and issue a final award, a court can ultimately refuse to enforce the award if it concludes that the arbitration agreement in the case is indeed defective.Footnote 16 There are many issues over which a court may review an arbitration agreement, although the most important and commonly seen ones relate to its existence, validity, and scope.Footnote 17 The scope of an arbitration agreement is therefore a key issue in the theory and practice of international arbitration.Footnote 18 Put simply, it focuses on the question of whether a certain dispute can be covered by an arbitration agreement between the parties.Footnote 19 If so, the arbitrators will have the jurisdiction to hear the dispute. If not, the parties will need to resolve it via other methods, such as litigation. As a result, an arbitration agreement’s scope directly determines an arbitrator’s authority.
The scope of an arbitration agreement is seldom provided for specifically in international treaties or national arbitration legislation.Footnote 20 Instead, it is often a subject of how an arbitration agreement is interpreted.Footnote 21 Therefore, courts and judges are the principal actors in this matter. Luckily for arbitration and the parties involved, courts around the world, especially those in pro-arbitration jurisdictions, have been very supportive when it comes to the scope of an arbitration agreement.Footnote 22 They usually adopt a liberal approach when construing the meaning of an arbitration agreement, and interpret its scope broadly to cover all disputes related to the contract between the parties.Footnote 23 This means arbitrators will enjoy the authority to hear all issues submitted by parties in relation to their contract. It will also enable parties to use arbitration as an effective and efficient ‘one-stop’ mechanism to resolve all their disputes, rather than having to split them between different forums such as arbitration and litigation, which would obviously be time-consuming and costly.Footnote 24 This will, in turn, ensure the smooth operation of the international arbitration system and the global economy.
As the world’s second largest economy, China is undoubtedly a prominent actor on the stage of international trade and investment.Footnote 25 Correspondingly, China has also been playing an increasingly important role in the international arbitration system. As an example, the China International Economic and Trade Arbitration Commission (CIETAC), China’s flagship arbitration institution, has in recent years consistently administered more cases than any other arbitration institution in the world.Footnote 26 It is therefore paramount for the world to understand how the Chinese arbitration legal framework functions, so that disputes involving a Chinese party or occurring in China may be smoothly resolved. Although China has a very long history of alternative dispute resolution that dates back thousands of years, its modern arbitration legal system is relatively young. Promulgated in 1994, the Arbitration Law of the People’s Republic of China (PRC Arbitration Law) is the main source of Chinese law that regulates arbitration.Footnote 27 While it largely conforms to internationally accepted principles, the statute is by no means perfect. It contains various peculiar rules and doctrines that non-Chinese parties should be aware of, if they want to avoid pitfalls when dealing with arbitration in China.Footnote 28 Similar to many of its counterparts, the PRC Arbitration Law is silent on how courts and judges should interpret the scope of an arbitration agreement. As a result, one needs to turn to the Chinese judiciary for guidance on this specific issue.
Since China’s accession to the New York Convention in 1987, the Supreme People’s Court of the People’s Republic of China (SPC) has made significant efforts to establish and maintain a pro-arbitration stance towards international arbitration.Footnote 29 Most notably, the SPC has been keen on ensuring that Chinese courts adopt a uniform front in treating international arbitration favourably, which has particular importance for China, a very large country with immense disparities across regions. For this purpose, the most important and effective measure taken by the SPC is perhaps the creation of a reporting system among all Chinese courts regarding international arbitration. Under this system, if a Chinese court decides to strike down an international arbitration agreement, set aside an international arbitration award made in China, or refuse to recognise and enforce a foreign award under the New York Convention, it must report its proposed decision to its upper level court, which shall, in turn, report further up to the SPC if it agrees with the proposal.Footnote 30 The lower-level courts cannot proceed with the proposed decision unless and until the SPC approves it. This system has been later expanded to cover cases involving parties residing in different provinces within China or a request to set aside a Chinese domestic award on the ground of alleged public policy violations.Footnote 31 As a result of the reporting system, the SPC is able to control and supervise directly all cases before Chinese courts that may lead to an unfavourable result against international arbitration. This has ensured that Chinese courts can make uniform and pro-arbitration decisions. For example, the SPC has consistently interpreted the New York Convention in similar ways as courts in pro-arbitration jurisdictions have, and often instructed lower-level Chinese courts to recognise and enforce awards notwithstanding the lower courts’ proposals to reject them.Footnote 32 Combined with cases in which lower-level Chinese courts would decide to enforce a foreign award and thus not report to the SPC, the vast majority of foreign awards submitted before Chinese courts in the past few decades have been recognised and enforced in accordance with the New York Convention.Footnote 33
Despite the SPC’s overall pro-arbitration stance, its approach to the scope of an arbitration agreement is strangely not arbitration-friendly at all. Over the last two decades, the SPC has made a series of decisions regarding scope issues. These cases involved different scenarios, such as enforcement of arbitration agreements, setting aside of Chinese arbitration awards, and recognition and enforcement of foreign awards. While the SPC has applied different laws in these cases, including various articles of the PRC Arbitration Law, PRC Civil Procedure Law, and the New York Convention, the key legal questions and grounds were similar.Footnote 34 They all focused on whether the relevant disputes fell within or outside the scope of the arbitration agreements between the parties. Because the Chinese arbitration legislation, similar to most other national arbitration statutes in the world, has not specifically provided for the precise scope of an arbitration agreement, the outcome of these cases ultimately depended on how broadly the SPC interpreted scope under different circumstances. This article has chosen to discuss a number of SPC decisions that are most representative, including some of the recently decided and published ones. Footnote 35 By looking at these cases, one can have a thorough understanding of how the SPC has consistently conceptualised scope and applied the relevant doctrines in its judicial practice. Sadly, however, the SPC’s jurisprudence on this specific issue has not been satisfactory. It has constantly interpreted arbitration agreements’ scope narrowly. This position clearly runs against the trend firmly adopted in arbitration-friendly jurisdictions to interpret scope broadly and the otherwise pro-arbitration stance that the SPC has taken itself.
The SPC’s problematic position on scope has significant consequences. The scope of an arbitration agreement has a direct impact on an arbitral tribunal’s jurisdiction. By interpreting scope narrowly, the SPC has drastically restricted, and often denied, the arbitrator’s jurisdiction. This has hampered many parties’ dispute resolution processes, and has forced them to either abandon arbitration altogether or split their disputes between litigation and arbitration. It has, therefore, made it substantially more complex and difficult for parties to resolve their disputes in an efficient and effective manner. Furthermore, this may cause a chilling effect for businesses who intend to trade with a Chinese party or invest in China. These entities will have to stay cautious and alert to this bizarre rule under Chinese law in their attempts to avoid potential pitfalls. Consequently, the unnecessary transaction costs and the resulting uncertainty may damage the reputation of China’s arbitration legal framework and in turn have an adverse effect on international trade and investment activities related to China.
It is extremely difficult to comprehend the SPC’s bizarre position and the mistakes it has persistently made. They firstly cannot be the result of the SPC’s intentional choice, which would directly contradict its painstaking and otherwise consistent efforts to maintain the Chinese judiciary’s pro-arbitration image in the past few decades. There is no evidence to suggest that the SPC intends to deviate from this overall strategy. On the contrary, all information clearly indicates that it plans to continue on this path. In addition, because these cases were decided during the same period when the SPC made many other pro-arbitration decisions, it would not be sensible to assume that the SPC was trying to sabotage its own efforts. It is therefore logical to view this as an anomaly in an otherwise consistent pro-arbitration stance that the SPC has firmly adopted. As a result, one has to wonder why the SPC has taken this strange and problematic approach towards the scope of arbitration agreements.
Absent a policy reason or another reasonable alternative explanation for the SPC to take this problematic approach, the only rational understanding is that it has made a series of genuine mistakes in a consistent manner. A closer look at the cases reveals that the SPC has fundamentally misconceptualised the scope of an arbitration agreement. The SPC mistakenly equated the scope of an arbitration agreement with the boundaries of the contract that contained the arbitration clause (container contract). This has further caused the SPC to adopt two erroneous doctrines on scope. First, the SPC has developed a literal approach to interpretation that focuses on the exact meaning of an arbitration agreement’s wording. Under this approach, the SPC interpreted scope extremely narrowly to cover only those issues included in the container contracts, but not those that might extend beyond their boundaries. Second, the SPC has been confused between the existence and the scope of an arbitration agreement, two very different legal concepts, and failed to distinguish them from each other. As a result of this, the SPC has frequently refused to enforce an arbitration agreement or award by holding that the dispute fell outside the scope of the arbitration agreement, when it should have done so by finding that no arbitration agreement existed between the parties. The SPC has made this mistake consistently in cases involving a non-signatory party to the contract. This meant that the SPC has applied the New York Convention and the relevant Chinese law wrongly.
Even more shockingly, the SPC’s problematic position on the scope of arbitration agreements is almost completely unnoticed in both legal practice and academia. There is no discussion of this issue whatsoever in either Chinese or English language literature. As a consequence of this neglect, the SPC is regrettably still continuing its mistakes, which can be seen from its recently published decisions. This further reflects a knowledge deficit in the wider Chinese academia. The concept of an arbitration agreement’s scope very rarely forms a standalone subject of analysis in existing literature. Instead, relevant discussions often take place under the broader question of arbitrators exceeding their powers.Footnote 36 This latter topic, however, may involve issues that are not necessarily related to scope, and is widely recognised as unclearly defined under Chinese law.Footnote 37 Consequently, these discussions often do not focus on the scope of the arbitration agreement and sometimes even fail to mention it altogether. Footnote 38 Therefore, the scarce exposure and inadequate analysis of arbitration agreements’ scope in the literature reflects a lack of thorough understanding of this crucial issue among Chinese legal scholars and practitioners. Against this background, it is no surprise that, when it came to issues related to the scope of an arbitration agreement, the SPC was not able to grasp the relevant concepts accurately or apply the doctrines correctly in its decisions.
As a result, this article will contribute to legal academia and practice, both in China and internationally, in the following ways. Firstly, it will identify the SPC’s misconception and erroneous doctrines for the first time among all literature. It will analyse the cases that the SPC has decided in the past two decades in relation to the scope of arbitration agreements, and establish that the SPC’s misconception has led to these problematic and wrong decisions. This will make a significant contribution to the academic discussions on how the scope of arbitration agreements should be correctly conceptualised and understood under Chinese law. Secondly, by pointing out the mistakes that the SPC has been constantly making regarding scope issues, this article will guide the SPC on how to correct its misconception and rectify its errors. Doing so will not only bring the SPC’s jurisprudence on scope issues in line with the international trend but also consolidate the otherwise pro-arbitration stance that the SPC has established and maintained. Thirdly, by exposing the SPC’s misconception and the resulting problematic doctrines, this article will inform business entities around the world of this hidden issue under Chinese law. China is a key player on the stage of international arbitration due to its importance in the world economy. The Chinese arbitration legal framework is therefore vital for all businesses in the world that are, or plan on, engaging in commercial dealings with China. Consequently, before the SPC changes its positions, this article will help firms, especially international ones, avoid possible pitfalls both when drafting an arbitration clause involving a Chinese party or calling for arbitration in China, and when actually resolving disputes in such an arbitration. Fourthly, by educating legal academia and the arbitration field in China about the correct concept of an arbitration agreement’s scope, this article will raise awareness of the issue as well as its importance across China and pave the way for further improvements in China’s arbitration legal system. China has recently amended the PRC Arbitration Law. Given that national arbitration statutes usually do not specifically provide for how scope should be precisely interpreted, the updated legislation has unsurprisingly not included this exact issue.Footnote 39 Nevertheless, this article, as a part of a larger project, will have a significant impact on the future development of the entire Chinese arbitration legal framework by advancing the relevant debates and discussions that are crucial for this purpose. Fifthly, the SPC’s problematic jurisprudence offers a valuable example for courts across the world, particularly those in countries striving to build a pro-arbitration reputation. They can learn an important lesson from their Chinese counterparts’ mistakes and reflect on whether they are understanding and interpreting scope issues correctly in their own judicial practice. This will further enable them to examine how best they can interpret arbitration agreements in general. As such, this article will offer critical insights and serve as a precious resource for these countries’ legal reform attempts in the field of international arbitration. Finally, by making useful suggestions for the Chinese arbitration legal system to align more closely with international best practices, and by providing valuable experiences for other jurisdictions, this article will ultimately help advance the harmonisation of the international arbitration legal framework based upon the New York Convention. Due to arbitration’s key role in facilitating international trade and investment, this will provide important safeguards for the continuous economic growth and development across the globe.
Section II of this article will introduce the concept of an arbitration agreement’s scope. It will discuss the international trend, particularly in pro-arbitration jurisdictions, for courts to adopt a presumptive rule under which they interpret scope broadly to cover all disputes related to the contract between the parties. It will also examine the clear distinction between the existence and the scope of an arbitration agreement. Section III will analyse a series of SPC decisions made in the last two decades that focused on the scope of an arbitration agreement. It will identify the misconception held by the SPC regarding scope, and how it directly caused the SPC to adopt two faulty legal doctrines regarding the issue. Under these erroneous approaches, the SPC has made many problematic decisions, in which it has interpreted scope narrowly and wrongly applied the New York Convention and Chinese law. Section IV will argue that the SPC should correct its misconception and mistakes. Doing so will enable the SPC to interpret scope broadly while still reserving sufficient chances to review an arbitrator’s jurisdiction when needed. This will bring the SPC’s position on scope in line with the international trend adopted by courts in pro-arbitration jurisdictions, and will consolidate the SPC’s otherwise pro-arbitration stance. Section V will conclude the article.
The scope of arbitration agreements
Broad interpretation of scope
The scope of an arbitration agreement is a key issue that determines an arbitrator’s jurisdiction.Footnote 40 An arbitrator will not have authority to hear or decide a dispute unless it falls within the scope of, or can be covered by, the arbitration agreement between the parties.Footnote 41 The precise boundaries of the scope hinge on how arbitrators, and ultimately judges, interpret the arbitration agreement, and whether they do so in a broad or narrow manner.Footnote 42 Luckily, nowadays, around the world, courts usually interpret the scope of arbitration agreements broadly.Footnote 43 When one of the parties tries to cast doubt on whether the disputes between them, or certain issues involved in those disputes, can be covered by their arbitration agreement, courts usually make their determination based on an assumption that they would fall within its scope, unless there is clear evidence to the contrary.Footnote 44
This pro-arbitration presumption, however, has not always been the standard practice from a historical perspective. There was indeed a time in the past when not all courts were willing to adopt this expansive approach. In particular, courts in common law jurisdictions traditionally focused on the language used in the arbitration agreement to determine its exact scope.Footnote 45 They often paid special attention to whether the parties had used ‘broad’ or ‘narrow’ wording. For instance, US courts have held that an arbitration agreement, which referred to ‘any disputes arising under’ an agreement or contract, had a narrow scope,Footnote 46 and could therefore only cover issues ‘relating to the interpretation and performance of the contract itself’.Footnote 47 If, however, the arbitration agreement used phrases such as ‘arising out of’, ‘relating to’, or ‘in connection with the contract’, the courts would have no difficulty in finding a broad scope that covered all relevant disputes in the case.Footnote 48 English judges had once also adopted a similar approach.Footnote 49
Unfortunately, however, interpreting an arbitration agreement’s scope narrowly would quickly lead to unwelcome consequences. In Mediterranean Enterprises Inc v Ssangyong Corp for example, Mediterranean Enterprises Inc (MEI) made six claims against Ssangyong: breach of contract and breach of fiduciary duty (counts 1, 2 and 4), inducing and conspiracy to induce breach of contract (count 7), quantum meruit (count 8), and conversion of documents (count 9).Footnote 50 The US Court of Appeals for the Ninth Circuit, applying a narrow interpretation of the arbitration agreement’s scope, sent counts 1, 2, and 4 to arbitration, but not counts 7, 8, and 9.Footnote 51 The court affirmed the district court’s decision to stay the proceeding on those latter counts and wait for the arbitration to conclude first.Footnote 52 This bifurcated method was clearly not the most efficient way to resolve the entire dispute between the parties, given the intertwining nature of those relevant issues. Even the court itself recognised that arbitrators, when adjudicating on counts 1, 2, and 4, would likely need to decide issues that might affect the court’s future determination of counts 7, 8, and 9.Footnote 53 It therefore suggested that those relevant parts of the award, if clearly exceeding the scope of the arbitrators’ authority, would not be given effect by the court later on.Footnote 54 It could therefore be reasonably foreseen that the bifurcation would make the whole dispute resolution process extremely difficult and complex. It would first and foremost lengthen the time needed, thereby increasing costs for the parties. Complications might also arise if arbitrators and judges reached different or contradictory conclusions. In any event, it would be hard to imagine any parties acting in good faith, particularly those engaging in commercial activities, would welcome this situation.Footnote 55 Instead, an interpretation of the arbitration agreement that results in a ‘one-stop’ dispute resolution proceeding would be more consistent with party intention and business common sense.Footnote 56
As a result, courts around the world, at least those in pro-arbitration jurisdictions, have mostly shifted to a broad interpretation of scope in recent years. While there are still sporadic occasions where US courts continued to interpret the wording ‘arising under the contract’ narrowly,Footnote 57 the majority of them have indicated a clear opposition to the narrow approach and instead applied the pro-arbitration presumption to interpret even such language broadly.Footnote 58 The US Supreme Court has firmly, and repeatedly, held that under the US Federal Arbitration Act, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.Footnote 59 The highest court in the UK has also been clear that business common sense should lead to a broad reading of scope:
[T]he construction of an arbitration clause should start from the assumption that the parties … are likely to have intended any dispute arising out of [their contract] to be decided by the same tribunal … unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction.Footnote 60
Since then, English courts have abandoned their conventional approach and adopted this clearly pro-arbitration presumption in many later decisions.Footnote 61 In a similar fashion, Canadian, Australian, and Hong Kong courts have also deviated from focusing on the exact meaning of an arbitration agreement’s wording, but instead supported a presumptively broad interpretation of scope.Footnote 62 The rationale behind this shift is to make sure that parties may use arbitration as a ‘one-stop’ forum to resolve all the related disputes between them. This is the only commercially sensible arrangement that parties would want to make, because no reasonable businessperson would rather choose to have separate, time-consuming, costly, and possibly inconsistent parallel proceedings.Footnote 63
In comparison, courts in civil law jurisdictions generally shy away from a detailed analysis of an arbitration agreement’s wording, but focus instead on parties’ common intent when examining the jurisdiction of an arbitrator.Footnote 64 Under this approach, and similarly out of respect for business common sense, they usually interpret scope broadly.Footnote 65 For example, Swiss courts routinely read the scope of arbitration agreements in an expansive manner to meet the needs of international commerce.Footnote 66 German courts also engage in a liberal reading of scope to avoid splitting a dispute into different proceedings.Footnote 67 French courts similarly tend to interpret the scope of arbitration agreements broadly.Footnote 68 As a result, it is safe to say that nowadays in the world, particularly in those pro-arbitration jurisdictions, courts usually interpret the scope of arbitration agreements broadly to cover all disputes related to the contract between the parties.
Differences between scope and existence
Issues surrounding an arbitrator’s jurisdiction can become thorny when a dispute involves multiple contracts, between the same or different parties, that may not all contain the same arbitration clause or even an arbitration clause at all.Footnote 69 Controversies may arise when one party tries to arbitrate with another by resorting to an arbitration clause in one of those contracts. For example, a party, which has initiated arbitration based on an arbitration clause within a contract (the first contract), may have included claims related to another contract (the second contract) that does not contain such a clause. Adopting a pro-arbitration presumption, courts will interpret the scope of the arbitration clause broadly to include all disputes related to the first contract. Under these circumstances, if there is a sufficiently close relationship between the two contracts, courts may feel comfortable to hold that arbitrators have good jurisdiction to hear the entirety of the dispute, because claims under the second contract are related to the first contract and therefore would fall within the arbitration clause’s scope as expansively interpreted.Footnote 70
A difficulty, however, may arise if the contracts are concluded between different parties.Footnote 71 Arbitration’s consensual nature dictates that it can only take place between parties to an arbitration agreement, except in rare situations where courts find that a non-signatory should nonetheless be bound by the agreement in accordance with doctrines such as group of companies, agency, assumption, succession, and so on.Footnote 72 As a result, it is usually difficult for arbitrators to exercise jurisdiction over a non-signatory party to the arbitration agreement. In the above example, if the respondent in the case is found to be a party only to the second contract, but not the first one, the claimant will encounter significant difficulties in persuading the court to hold that the arbitration clause in the first contract should bind the respondent. The key issue in this situation is whether an arbitration agreement exists between the two parties.Footnote 73 The scope of the arbitration agreement is not relevant, because no matter how broad its scope is, the arbitration agreement cannot bind an entity that is not a party to it. Footnote 74
It is therefore very important to distinguish between the existence and the scope of an arbitration agreement. These are two distinct issues that are fundamentally different in nature.Footnote 75 Existence refers to the threshold question of whether there is an arbitration agreement between the parties.Footnote 76 Only when that is established, one would need to ask whether the current dispute between the parties falls within the scope of that arbitration agreement.Footnote 77 As a result of this distinction, courts treat these two issues differently. While, as mentioned above, courts around the world adopt a broad interpretation of scope that presumably covers all disputes between the parties, they are much more cautious when dealing with existence and will not assume that an arbitration agreement exists between the parties.Footnote 78 Instead, courts usually apply general contract law rules and principles to determine whether the parties have formed an arbitration agreement between them.Footnote 79 As an example, the US courts will only apply the pro-arbitration federal policy when interpreting the scope of an arbitration agreement, but not when deciding whether an arbitration agreement exists between the parties.Footnote 80
In addition, the New York Convention clearly distinguishes between these two issues. While the Convention undoubtedly recognises the importance of existence and scope by including both of them as possible grounds to reject the recognition and enforcement of an award, it provides for them separately. Article V.1.a allows a national court to refuse to recognise and enforce a foreign arbitration award if there is no arbitration agreement between the parties, while Article V.1.c authorises a court to do so if the dispute in the case falls outside the scope of the arbitration agreement.Footnote 81 In other words, Article V.1.a deals with the complete absence of an arbitrator’s jurisdiction, while Article V.1.c concerns an arbitrator’s excess of jurisdiction.Footnote 82 As a result, these provisions clearly set the two issues apart, and courts should apply them to existence and scope respectively, if needed. In any event, issues involving an arbitration agreement’s non-existence should be governed by Article V.1.a of the New York Convention, and not by Article V.1.c.
As a summary, courts in pro-arbitration jurisdictions usually adopt a presumptive rule, under which the scope of an arbitration agreement is interpreted broadly to include all disputes between the parties unless otherwise agreed. However, if the dispute relates to a non-signatory party, the courts will use caution to decide whether an arbitration agreement exists between the relevant parties. This existence issue is separate, and should be distinguished, from the scope issue. If a court finds that no arbitration agreement exists between the parties, it may refuse to recognise and enforce a foreign award under Article V.1.a, rather than Article V.1.c, of the New York Convention.
The SPC’s misconception of scope and the resulting mistakes
Equating scope with boundaries of contract
Over the past two decades, the SPC has consistently interpreted the scope of arbitration agreements narrowly. This position clearly ran against the international trend to interpret scope broadly, as well as the otherwise pro-arbitration stance that the SPC has itself taken. It was also perplexing because there was no apparent reason for the SPC to do so. A closer look at the SPC’s decisions, however, has revealed its fundamental misconception of scope. The SPC has misconceptualised the scope of arbitration agreements by mistakenly equating it with, or confining it within, the boundaries of the contract that contained the arbitration clause (container contract). As a result, the SPC has not been willing to support an arbitrator’s jurisdiction over a dispute unless that dispute only concerned the rights and obligations under the container contract itself. If a dispute involved issues outside the container contract, the SPC would likely hold that the dispute fell outside the scope of the arbitration clause. This might occur if two parties had a dispute that arose from a contract or transaction that was separate from but related to the container contract, or if the dispute involved a non-signatory party to the container contract.
Due to this misconception, the SPC has adopted two erroneous legal doctrines on scope issues in the above two scenarios. First, because the SPC assumed that the scope of an arbitration clause could not extend beyond the boundaries of the container contract, it interpreted scope extremely narrowly to cover only those issues included in the container contract, but not those related to it. For this purpose, the SPC has developed a literal approach to interpretation, under which it focused on the exact meaning of the arbitration agreement’s wording, and would not give it an expansive reading unless parties specifically used very broad language. Second, the SPC has been confused between the existence and the scope of an arbitration agreement. When it dealt with a case involving a non-signatory party, the SPC frequently rejected the enforcement of an arbitration agreement or award by finding that the relevant dispute fell outside the scope of the arbitration agreement, while in fact it should have done so by holding that no arbitration agreement existed between the parties. The following sections will discuss the SPC’s two erroneous doctrines in detail, by analysing a series of representative decisions that it has made over the past two decades.
Narrow interpretation of scope with a literal approach
By confining scope within the boundaries of the container contract, the SPC was often unwilling to allow arbitrators to decide issues that might potentially extend beyond the rights and obligations provided under the container contract. For this purpose, it has interpreted scope narrowly by developing a literal approach similar to those that the US and UK courts had adopted historically. Under this approach, the SPC has given great attention to the exact wording of the arbitration clause to determine its exact scope.
For example, in 2017, the SPC instructed courts in Guangdong Province to set aside an arbitration award made in Shenzhen after holding that parts of the award fell outside the scope of the arbitration agreement.Footnote 83 The Property Management Contract in this case contained an arbitration clause, according to which all disputes ‘arising from the performance of the contract’ should be resolved by arbitration.Footnote 84 The arbitrators later decided, among other claims, that the claimant should pay the respondent for the services rendered before the contract was concluded, presumably because the contract provided that the respondent ‘shall coordinate and deal with any historical issues related to the property’s management’.Footnote 85 The SPC, however, focused on the literal meaning of the words ‘arising from the performance of the contract’ and held that the arbitrators only enjoyed jurisdiction over disputes that occurred when the contract was being performed.Footnote 86 As a result, the SPC concluded that the relevant parts of the award concerning services rendered before the contract’s conclusion fell outside the scope of the arbitration clause, despite that these services were clearly covered under the terms of the contract.Footnote 87 This indicated that the SPC has interpreted scope in an extremely narrow way, even to an extent narrower than the boundaries of the container contract. In any event, this approach has undoubtedly demonstrated the SPC’s intention to restrict the scope of an arbitration agreement by relying on the literal meaning of its wording.
Similarly, in 2019, the SPC interpreted another arbitration agreement narrowly based on its wording’s literal meaning. In this case, two parties agreed on ‘[a]rbitration in Hong Kong and English law to apply’ in a charterparty.Footnote 88 Disputes later broke out between them, and one party applied to the Xiamen Maritime Court for seizure of vessel.Footnote 89 The other party alleged that the application to seize vessel was made wrongfully, and further claimed for damages in arbitration.Footnote 90 The two parties disagreed on whether this tort claim should be decided by the arbitrator or the court, with the key issue being the scope of the arbitration clause.Footnote 91 One party argued that the arbitration clause did not use broad wording such as ‘any disputes related to or in connection with’ so its scope should be given a narrow understanding, while the other submitted that the clause used typical language seen in charterparties and therefore should be interpreted to have the same meaning with the allegedly broader wording from the perspective of business common sense.Footnote 92 The SPC held that the clause reflected a ‘general agreement on arbitration’ between the parties, and should cover both contractual and tort claims based on ‘a usual understanding’.Footnote 93 Oddly, however, the SPC deduced a narrow scope from the clause’s wording, and held that disputes submitted to arbitration should ‘arise from the contractual rights and obligations’, and ‘relate to [their] exercising or performance’.Footnote 94 It went on to explain that ‘although the alleged tortious act did relate to the contract to a certain extent’, it was ‘not subject to the rights and obligations under the contract’ and ‘did not result from exercising the rights or performing the obligations under the contract’.Footnote 95 As a result, the SPC concluded that the dispute in this case fell outside the scope of the arbitration clause.Footnote 96
This was clearly a very narrow interpretation of scope. As the SPC acknowledged, the seizure of the vessel was clearly related to the contract, so it was quite difficult to understand how it would not fall within the scope of arbitration clause based on a ‘general agreement’ between the parties or a ‘usual understanding’ of their intention. This interpretation essentially meant that the SPC has adopted a presumption that a general agreement between the parties should have a narrow scope and only cover disputes that would arise from exercising the rights or performing the obligations under the container contract. Under this presumption of narrow scope, the SPC would only interpret scope expansively when an arbitration agreement explicitly used broad language. It has, for example, enforced an arbitration clause which provided that ‘any disputes arising out of or in connection with this contract’ shall be resolved by arbitration.Footnote 97 Although lower-level courts in the case raised doubts on the scope issue,Footnote 98 the SPC pointed to the wording of the arbitration clause and held that it was sufficiently broad to cover the disputes in the case.Footnote 99
These cases have demonstrated that the SPC has been extremely reluctant to interpret the scope of arbitration agreements broadly. It tended to restrict the arbitrator’s jurisdiction within the boundaries of the container contract. In other words, the SPC was only willing to allow an arbitrator to decide the issues regarding the parties’ rights and obligations under the container contract. For this purpose, the SPC usually focused on the literal meaning of the wording used in an arbitration agreement, and would not adopt an expansive interpretation unless parties specifically used very broad language. This stood in stark contrast to the international trend to interpret scope broadly to cover not only the issues under the container contract, but essentially all disputes between the parties that were related to it. This problematic approach has further manifested the SPC’s misconception of scope, namely it mistakenly equated the scope of an arbitration agreement with the boundaries of its container contract.
Confusion between existence and scope
Apart from focusing on the literal meaning of an arbitration agreement’s wording and interpreting it narrowly, the SPC and other Chinese courts have been extremely wary of scope issues when dealing with multi-party disputes. Under its misconception that equated the scope of an arbitration clause with the boundaries of the container contract, the SPC usually interpreted scope narrowly to the effect that the arbitration clause would not cover any disputes arising out of another contract, even when the other contract was clearly related to the container contract. Accordingly, the SPC would set aside or refuse to recognise and enforce an award if any part of that award dealt with a contract other than the container contract. In truth, the SPC’s key concern in this scenario was on the possible non-existence of an arbitration agreement between the parties in dispute. This could explain its guarded attitudes towards a non-signatory party to an arbitration agreement. Due to the misconception, however, the SPC usually framed the issue as falling outside the scope of the arbitration agreement, rather than holding that no arbitration agreement existed between the parties in dispute. Put differently, the misconception has caused the SPC’s confusion between existence and scope, two very different legal concepts.
This confusion could be found consistently in the SPC’s decisions over the past two decades. In 2003, for instance, the SPC instructed courts in Anhui Province to reject an award’s enforcement under the New York Convention after finding that it fell outside the scope of the arbitration agreement.Footnote 100 In this case, Gerald Metals Inc (GMI) requested courts in Anhui to recognise and enforce a London award against Wuhu Smelting Plant (WSP) and Wuhu Hengxin Copper Group Co., Ltd (Hengxin) according to the New York Convention.Footnote 101 The SPC agreed with the Anhui High Court’s opinion that Hengxin was not a party to the arbitration agreement, because the contract in the case was concluded only between GMI and WSP.Footnote 102 As a result, the SPC approved the Anhui High Court’s request to reject the award under the New York Convention.Footnote 103 Bizarrely, however, while this was a classic non-existence situation, namely there was no arbitration agreement between GMI and Hengxin, which should have fallen under Art V.1.a of the New York Convention, the SPC and the Anhui High Court refused the award’s recognition and enforcement on the ground of Art V.1.c and held that the dispute fell outside the scope of the arbitration agreement.Footnote 104
Similarly, in 2006, the SPC approved the Shanghai High Court’s request to set aside a CIETAC award after finding it out of scope.Footnote 105 In this case, Jiangyin Qingmaman Automobile Plastic Parts Co., Ltd (Jiangyin) and Jiehua Industrial Co., Ltd (Jiehua) entered into a sales contract of an automatic production line (Contract 96).Footnote 106 When the automatic production line later turned out to be defective, the two parties tried to salvage the deal by sourcing necessary replacement equipment, although those successive agreements were concluded between their affiliated companies rather than themselves.Footnote 107 After they subsequently submitted the dispute to arbitration, the tribunal found that all those contracts were in fact related to one another, and decided the case based on the arbitration clause in the Contract 96.Footnote 108 Upon review, however, the SPC set aside the award, holding that it has exceeded the scope of the arbitration clause because the arbitrators adjudicated on the rights of entities that were not parties to the clause.Footnote 109
Afterwards in 2013, a Chinese court in Wuxi, Jiangsu Province refused to recognise and enforce an English award under the New York Convention.Footnote 110 Although the SPC’s instructions in this case were not made public, it could be safely assumed that the SPC approved this outcome due to the reporting system and also because the SPC specifically endorsed this decision in an article that it has recently published.Footnote 111 The Wuxi court based its refusal of the award’s recognition and enforcement on the finding that one of the respondents in the case was not a party to the contract in dispute and therefore the arbitration agreement could not bind that party.Footnote 112 The court, however, framed this as a scope issue and cited Art V.1.c of the New York Convention, rather than identifying it as a non-existence issue and relying on Art V.1.a.Footnote 113 The SPC very clearly agreed with and approved of this approach.Footnote 114
Later in 2018, the SPC once again instructed the Guangdong High Court to refuse to recognise and enforce a Korean award based on Art V.1.c of the New York Convention.Footnote 115 This case involved a similar situation, in which both the Guangdong High Court and the SPC found that the party against whom the award was sought to be recognised and enforced was not a party to the contract or the arbitration clause in dispute.Footnote 116 Interestingly, the Guangdong High Court requested to reject the award under Art V.1.a of the New York Convention, which would, in fact, have been the correct decision.Footnote 117 Strangely, however, the SPC instructed the Guangdong High Court to do so under Art V.1.c.Footnote 118
The SPC has consistently applied this approach in one of its most recent decisions on scope.Footnote 119 In this case, Yili’ai New Energy Technology (Tianjin) Co., Ltd (Yili’ai) and Beijing Wanyuan Industrial Co., Ltd (Wanyuan) entered into a Purchase and Sales Contract.Footnote 120 The contract contained a series of annexes, among which Annex 7 was a Letter of Guarantee.Footnote 121 Equipaggiamenti Elettronici Industriali S.R.L (EEI),Footnote 122 the parent company of Yili’ai, signed the Letter of Guarantee, promising to guarantee the full performance of the Purchase and Sales Contract and be jointly liable together with Yili’ai.Footnote 123 Disputes later broke out between the parties, and Wanyuan initiated arbitration against Yili’ai and EEI at CIETAC.Footnote 124 After hearing the case, the arbitrators decided against the two respondents and awarded damages for Wanyuan.Footnote 125 The SPC instructed courts in Beijing to set aside the award after holding that EEI was not a party to the arbitration clause and that the award fell outside its scope.Footnote 126
It appeared that the SPC would only find an award involving a non-signatory party to be within the scope of the arbitration agreement if it was confident that the award would not impact the non-signatory. For example, it has held that the relevant parts of an award did not fall outside the scope when they ‘formed the factual basis of, and provided reasons for, the award but did not reach a finding of the third party’s legal rights and obligations, and that the award did not hold the third party liable’.Footnote 127 Similarly, it would supposedly be fine if an award touched upon a contract other than the container contract, but did not deal with this other contract by not awarding a specific remedy related to it.Footnote 128
The cases discussed above, together with other similar ones,Footnote 129 indicated that the SPC has been particularly skeptical in disputes involving non-signatory parties to the arbitration agreements, and would usually not allow arbitrators to exercise jurisdiction under the circumstances. Most bizarrely, however, the SPC routinely based its decisions upon findings that the disputes or awards fell outside the scope of the arbitration agreements, rather than relying on the correct analysis that no arbitration agreement existed between the non-signatories and the other parties. This evidently demonstrated that the SPC was confused and failed to distinguish between the existence and the scope of an arbitration agreement, two distinct legal concepts.
This wrong approach was the result of the SPC’s misconception of scope, under which it mistakenly equated the scope of an arbitration agreement with the boundaries of the container contract. Consequently, if a dispute involved a different contract, or a non-signatory party to the container contract, the SPC would view it as having extended beyond the boundaries of the container contract, and therefore would find that it has fallen outside the scope of the arbitration agreement. What the SPC failed to realise, however, was that this was a typical example of ‘non-existence’, rather than ‘out of scope’. To be more specific, the crucial issue here was whether an arbitration agreement existed between the non-signatory party and the other parties. If not, the arbitrator should not enjoy jurisdiction to hear or decide the dispute involving the non-signatory. It was, however, not a scope issue. The scope of the arbitration agreement would actually be broad enough to cover the dispute, if there was a sufficient relationship between the parties or the contracts. Due to its misconception, the SPC was confused and failed to distinguish between existence and scope. As a result, the SPC often provided the wrong reason to set aside or refuse to recognise and enforce an award. It frequently based its decisions on the disputes falling outside the scope of the arbitration agreement, rather than correctly holding that no arbitration agreement existed between the non-signatory and the other parties. In other words, the SPC has failed to identify the correct issue, and therefore applied the wrong law.
In addition, the above cases showed that the SPC’s confusion existed consistently in different scenarios related to scope, including when they decided whether to enforce an arbitration agreement, set aside an award made in China, or recognise and enforce a foreign award under the New York Convention.
The SPC should correct its misconception and mistakes
The SPC should distinguish scope from boundaries of contract
As demonstrated above, the SPC has fundamentally misconceptualised the scope of an arbitration agreement by equating it with the boundaries of the container contract. This has further given rise to two erroneous doctrines, under which the SPC routinely interpreted scope narrowly with a literal approach and was confused between the existence and the scope of an arbitration agreement. The SPC must correct its misconception and mistakes to make sound decisions on scope and maintain its otherwise pro-arbitration stance.
The SPC must first understand that the scope of an arbitration agreement is not equivalent with the boundaries of its container contract. These are two different concepts. The scope of an arbitration agreement refers to what disputes it may cover, namely what disputes the parties have authorised an arbitrator to hear and decide.Footnote 130 Modern day commercial disputes are often complex and frequently involve various issues that are intricately related. It is therefore hugely beneficial and important that parties have a ‘one-stop’ forum to resolve all their disputes. Business common sense should therefore lead to the assumption that parties would want to submit all their disputes to arbitration altogether. Footnote 131 As a result, the scope of an arbitration agreement should be reasonably understood to cover not only disputes under the container contract itself, but also those under a different contract or legal relationship that are nonetheless related to the container contract. This consequently means that the scope of an arbitration agreement naturally extends beyond the boundaries of its container contract.
As a result, the SPC should not equate scope with the boundaries of the container contract, but should instead clearly distinguish between the two concepts. In future cases, the SPC should assume that parties would want to resolve all their related disputes in the same forum, and therefore interpret the scope of an arbitration agreement broadly. This means the SPC should find that an arbitration clause’s scope could exceed the boundaries of its container contract and cover disputes arising from the other related contracts.
The SPC should interpret scope broadly
Having distinguished the scope of an arbitration agreement from the boundaries of its container contract, the SPC needs to interpret scope broadly. Again, business common sense decides that parties should be reasonably expected to choose a single forum to resolve all their disputes. The SPC, therefore, needs to interpret scope broadly, so that arbitrators can have the authority to complete their task given by the parties. In fact, this is the reason why courts in pro-arbitration jurisdictions adopt a pro-arbitration presumptive rule, under which the scope of an arbitration agreement is read expansively to cover all disputes between the parties.Footnote 132 The Chinese courts’ current method of separating different issues within a single case based on a narrow interpretation of scope has created unnecessary hurdles for parties in practice.Footnote 133 While the Chinese courts were not the only ones in history to do this, courts in many pro-arbitration countries have changed course and supported the ‘one-stop’ approach.Footnote 134 The SPC should follow suit.
In order to interpret scope broadly, the SPC needs to abandon its overly strict literal approach. The Chinese legal system is based on civil law tradition.Footnote 135 Different from their counterparts in common law jurisdictions, Chinese law and Chinese courts are usually more liberal on the issue of contract interpretation and may not overly concentrate on a term’s exact meaning.Footnote 136 Consequently, the SPC’s literal reading of arbitration agreements is not a result of its conventional approach. Instead, it is a product of the SPC’s misconception. While the SPC has tried hard to establish and maintain a pro-arbitration stance over the past few decades, it appears that the SPC has unfortunately overlooked its problematic approach to interpret arbitration agreements’ scope. It is therefore crucial that this issue is brought to the SPC’s attention. Moreover, even US and UK courts, which have traditionally adopted a similar literal approach, have abandoned it in recent years and switched to a more expansive interpretation of scope.Footnote 137 This is consistent with the international trend to interpret scope broadly. There is no reason why Chinese courts should deviate from this trend.
As a result, the SPC should interpret the scope of arbitration agreements broadly in its future cases. For this purpose, the SPC should abandon its overly strict literal interpretive approach that focuses on the exact meaning of the wording used in arbitration agreements. It should instead establish a presumptive rule, under which it will interpret an arbitration agreement’s scope broadly to cover all related disputes between the parties, unless they have specifically agreed otherwise.
The SPC should distinguish scope from existence
Scope issues in multi-contract scenarios are often complex. It can become controversial whether a dispute arising out of one contract may be covered by the arbitration clause in another contract.Footnote 138 The fact that the two contracts do not share the exact same parties does not necessarily mean that the dispute will fall outside the scope of the arbitration clause.Footnote 139 To the contrary, if the two contracts are sufficiently related to each other, the dispute may well fall within scope, particularly in accordance with a broad interpretation of scope often supported by court decisions around the world.Footnote 140 Over the past two decades, however, the SPC has often interpreted scope extremely narrowly and would not allow it to cover a dispute that was ‘related to’ the container contract.Footnote 141 This was a result of the SPC’s misconception of equating the scope of an arbitration clause with the boundaries of its container contract.
The misconception has caused the SPC to refuse the enforcement of an arbitration agreement or an award after finding that the issue fell outside the scope of the arbitration agreement, whereas the correct reason for it to do so should have been that no arbitration agreement existed between the parties. This has indicated the SPC’s confusion between the existence and the scope of an arbitration agreement, which are two fundamentally different legal concepts. As previously discussed, the existence issue refers to whether there is an arbitration agreement between the parties, while the scope issue deals with whether the existent arbitration agreement can cover a certain dispute between the parties.Footnote 142 The New York Convention has also provided for the two issues separately.Footnote 143 As analysed above, the SPC’s confusion between out-of-scope and non-existence scenarios has caused it to apply the New York Convention and the relevant Chinese law wrongly.Footnote 144 Therefore, the SPC will for sure need to distinguish clearly between existence and scope. Doing so will enable the SPC to identify the precise issue, provide accurate analysis, apply the correct law, and make sound decisions in cases related to scope and therefore maintain its pro-arbitration stance.
In addition, the SPC should have the confidence to interpret scope broadly to cover all disputes between the parties that relate to the container contract, without being overly concerned about losing the ability or opportunity to review the arbitrator’s jurisdiction when the dispute involves a non-signatory party. This is because there are still ample chances for the SPC to reject the enforcement of an arbitration agreement or an award when it has genuine doubts about whether a non-signatory party can be bound by an arbitration agreement. The key issue, however, should be the possible non-existence of an arbitration agreement between the parties, rather than whether the dispute falls outside its scope.
As a result, the SPC should clearly distinguish between existence and scope issues. When it decides not to enforce an arbitration agreement or award after finding that no arbitration agreement exists between the parties, it needs to refer to this ‘non-existence’ issue clearly and rely on the correct statutory provisions, such as Article V.1.a of the New York Convention. It should not refer to this as an ‘out-of-scope’ scenario or base its decision on the wrong legal ground, such as by citing Article V.1.c of the New York Convention. Choosing the correct reason for its decisions would reduce uncertainty in the SPC jurisprudence and avoid causing confusion for the parties.
In summary, the SPC needs to correct its misconception of an arbitration agreement’s scope as well as the erroneous legal doctrines that it has adopted. First, it should assume that the scope of an arbitration agreement naturally extends beyond the boundaries of its container contract, and therefore stop equating the two different concepts. Second, the SPC should interpret scope broadly. This will enable arbitrators to have the authority to hear and decide disputes arising from not only the container contract but also those related to it. The SPC should therefore abandon its literal interpretive approach that focuses on the wording of an arbitration agreement and instead adopt a pro-arbitration presumptive rule under which scope is interpreted broadly. This is consistent with parties’ presumed intention to have all their disputes resolved efficiently at one single forum and the international trend to read scope expansively. Third, the SPC should clearly distinguish between the existence and the scope of an arbitration agreement. When the SPC comes to the conclusion that an arbitration agreement cannot bind a non-signatory party, it should make this decision based on the reason that no arbitration agreement exists between the non-signatory and the other parties, rather than that the dispute falls outside the scope of the arbitration agreement. Doing so will not only make sure that the SPC accurately applies the law, including the relevant provisions under Chinese law and the New York Convention, but will also allow the SPC to interpret the scope of an arbitration agreement broadly with confidence, without fearing that it will not have sufficient opportunities to review the arbitrators’ jurisdiction. All the above will, in turn, enable the SPC to consolidate its otherwise pro-arbitration stance.
Conclusion
As one of the most popular methods to resolve international commercial disputes, arbitration plays an essential role in promoting global economic development and prosperity. The scope of an arbitration agreement is a key issue in international arbitration theory and practice, because it directly determines the arbitrator’s jurisdiction. This will, in turn, decide whether an arbitration proceeding can advance smoothly and whether the ensuing award is enforceable by courts. At its heart, the scope issue focuses on whether an arbitration agreement can cover a certain dispute between the parties. Its exact breadth is often a matter of interpretation by arbitrators and judges because international treaties and national arbitration statutes seldom provide for the issue specifically. Nowadays in the world, at least in pro-arbitration jurisdictions, courts usually interpret the scope of an arbitration agreement broadly to cover all disputes related to the contract between the parties. This approach ensures that arbitration may function as an effective and efficient ‘one-stop’ forum for the parties, and is consistent with business common sense as well as parties’ intention when they choose arbitration as their dispute resolution mechanism. This broad interpretation is also in line with the general pro-arbitration stance firmly supported by courts in many jurisdictions. This position encourages business entities to choose these jurisdictions as their seat of arbitration, which would help promote the local legal service industry. In addition, having a legal system that reliably supports arbitration provides certainty and trust for business entities to choose this effective method of dispute resolution, which would help reduce transaction costs and increase efficiency for international trade and investment. All these would undoubtedly contribute to the economic growth of the relevant regions and the entire world.
Given China’s economic might, it is paramount for the world to learn about how Chinese law and Chinese courts treat international arbitration. Luckily, China has adopted a relatively modern arbitration statute that largely conforms to internationally accepted principles. In addition, the SPC has painstakingly tried to maintain an overall pro-arbitration stance ever since China’s accession into the New York Convention in 1987. These attempts have definitely provided important safeguards for the country’s economic rise in the past few decades. Unfortunately, however, the SPC has taken some odd and problematic approaches on issues related to the scope of an arbitration agreement. It has routinely interpreted scope very narrowly, and has frequently found a dispute to be outside the scope of the arbitration agreement when it involved a non-signatory party to the container contract. These flawed decisions by the SPC will lead to grave consequences. They have undoubtedly created difficulties for the parties involved in those cases, by hampering their abilities to use arbitration as a convenient and efficient mechanism to resolve their disputes and by increasing their financial and time costs. Even more importantly, these decisions will likely damage the reputation of the Chinese arbitration legal framework and reduce business entities’ trust in China as an arbitration-friendly jurisdiction. If this is not corrected, businesses might shy away from arbitrating in China or with a Chinese party, and, in a more extreme situation, even reconsider whether they would continue doing business in China altogether. This will no doubt hurt both the Chinese and the world economy on the whole. As a result, the significance of this issue cannot be neglected.
From a different perspective, and even more intriguingly, the approaches adopted by the SPC are extremely puzzling. They stand in stark contrast to the international trend which interprets scope broadly and the SPC’s otherwise pro-arbitration stance. What is more perplexing is that there is no obvious or sensible reason for the SPC to take these positions. On the contrary, the SPC has been keen on maintaining its pro-arbitration stance, and the decisions it has made during the same period, except for those related to scope, are consistently arbitration-friendly. At the same time, there is no apparent policy reason for the SPC to single out scope issues either. In other words, there is no obvious reason for the SPC to adopt these baffling approaches to the scope issue, and no relevant research in the existing literature has offered an explanation. Given that there is no sensible alternative explanation for the SPC’s bizarre positions on scope, and that it forms possibly the only exception in the SPC’s otherwise consistent pro-arbitration strategy, it is safe to assume that the SPC has genuinely misunderstood the concept of scope and the legal doctrines related to it.
After studying scores of decisions made by the SPC over the past two decades regarding the scope of arbitration agreements, this article has, for the first time ever among all literature in both Chinese and English, identified the SPC’s misconception of scope, namely that the SPC has mistakenly equated the scope of an arbitration agreement with the boundaries of its container contract. Under this misconception, the SPC has often been reluctant to allow arbitrators to decide issues that could potentially extend beyond the rights and obligations provided under the container contract. This misconception has further caused the SPC to adopt two erroneous doctrines. First, the SPC has developed a literal approach to interpretation which focused on the exact wording of an arbitration agreement. Under this approach, the SPC has frequently interpreted scope extremely narrowly. Second, the SPC has been confused, and failed to distinguish clearly, between the existence and the scope of an arbitration agreement, two inherently distinct legal concepts. The SPC has been extremely cautious when dealing with a dispute that involved a non-signatory party to the container contract, and has routinely found the dispute to be outside the scope of the arbitration agreement, when the correct analysis should have been that no arbitration agreement existed between the parties. This means that the SPC has wrongly applied the New York Convention and the relevant Chinese law. These mistakes made by the SPC have fundamentally undermined its own efforts to establish and maintain China’s image as a pro-arbitration jurisdiction. As an issue that directly decides an arbitral tribunal’s jurisdiction, the scope of an arbitration agreement is a key question at the centre of an arbitration legal framework. It also closely reflects a judiciary’s attitude towards arbitration in general. As a result, this is a serious shortcoming in the SPC’s jurisprudence.
Moving forward, this article argues that the SPC should correct its misconception of scope and the erroneous doctrines that resulted from it. The SPC should first abandon its literal interpretive approach and instead adopt a presumptive rule so that it would interpret scope broadly. It should also clearly distinguish between the existence and the scope of an arbitration agreement, and stop relying on scope issues when dealing with non-existence of arbitration agreements between the parties in dispute. Making these corrections will ensure that the SPC can apply the relevant international and domestic law correctly. It will also bring the SPC’s jurisprudence in line with the international trend to interpret scope broadly and will consolidate its otherwise pro-arbitration stance. Only by doing so can the SPC make sure that business entities all around the world will see China as an arbitration-friendly jurisdiction.
Furthermore, a direct cause for the SPC’s misconception is likely the lack of knowledge within the whole Chinese arbitration field in general. The scope of an arbitration agreement is not a concept widely understood in Chinese academia or among legal practitioners. Against this background, it is not surprising that the SPC has been unable to grasp the concept and apply the legal doctrines correctly. By identifying the misconception and proposing solutions to correct it, this article has filled the gap in the current literature and provided valuable insights for the entire Chinese legal academia and arbitration field regarding how to understand and conceptualise the scope of an arbitration agreement correctly. This will raise awareness of this crucial issue across China and hopefully educate the Chinese judiciary as well as the arbitration practitioners more generally, so that Chinese courts will be able to correct their mistakes and properly decide cases involving scope issues in the future. It is also hoped that this article will inspire further discussions regarding the deeper level reasons why this knowledge deficit exists in the first place and how best to address it. These debates will for sure contribute significantly to the improvement of the Chinese arbitration legal framework in general. This article forms part of a bigger research project that aims at calling for change in the Chinese arbitration legal system and aligning it more closely with the international framework based upon the New York Convention. Doing so will certainly facilitate commercial activities between China and the rest of the world.
With those in mind, before the SPC corrects its misconception of scope and the entire Chinese arbitration legal framework can improve, this article will bring this hidden issue to the attention of business entities around the world. They need to remain alert to this peculiar problem in their business dealings with China so that they can avoid possible pitfalls. Accordingly, future improvement to the Chinese arbitration law regarding scope issues, as called for in this article, will for sure benefit firms worldwide by reducing unnecessary risks and transaction costs. In addition, the SPC’s mistakes have provided a valuable example for courts in many jurisdictions around the globe, especially those that intend to build a pro-arbitration reputation. This article has offered critical insights on how they should best interpret scope and arbitration agreements in general. Altogether, this article will help both China and other countries liberalise their arbitration laws by aligning them with international best practices. This will in turn advance the harmonisation process of the international arbitration legal framework based on the New York Convention. Due to arbitration’s essential role in international trade and investment, the advancement will make sure that it could continue to promote and safeguard the economic prosperity of the entire world.
Acknowledgements
The author would like to thank Professor John J. Barceló III, William Nelson Cromwell Professor of International and Comparative Law, Emeritus at Cornell Law School, for providing extremely insightful discussions that inspired this article.
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