PRC Court Rules on Arbitrator’s Failure to Clarify Legal Issues

By Patrick Zheng | Charles Qin

Under the inquisitorial legal tradition of Chinese litigation, judges in China often take initiatives in helping the parties to identify and clarify factual and legal issues that are material to the determination of the proceedings. Chinese judges are not constrained by the pleadings submitted by the parties, which is fundamentally different from the common law adversarial tradition in which it is for the parties to identify their own factual and legal issues, and for the tribunal to determine the proceedings on the basis of the case presented and argued by the parties.[1]

It is generally held that Chinese judges are obliged to take steps to “enquire” or “clarify” such issues as the standing of the parties, cause of action, fact relied upon, relief sought, admissibility of claim, jurisdiction, burden of proof, evidence, applicable law etc. This is referred to as the “Power of Clarification” (shi ming quan, 释明权) although it is, more properly, an enforceable obligation than a discretionary power.

The “Power of Clarification” is also closely associated with the notion of iura novit curia (the court knows the law), which, although not expressly provided in the PRC Civil Procedure Law, is equally well entrenched in Chinese jurisprudence.

A live question arises as to whether arbitrators in China-seated arbitrations bear the same responsibility to make enquiries and to clarify legal issues as Chinese judges do. This is because, although some institutional arbitration rules contain express provisions addressing the matter,[2] the PRC Arbitration Law is silent on this issue.[3]

The current position under Chinese law seems to be that:
· the principle of iura novit curia applies as a principle in arbitrations by analogy; and
· an arbitrator in a China-seated arbitration is entitled to exercise the “Power of Clarification”.

It is, however, less clear whether an arbitrator is obligated to exercise the “Power of Clarification” (as a judge would be) or whether it is simply a power that the arbitrator can – but need not – exercise.

This uncertainty creates a potential risk for enforcement of arbitral awards rendered in China-seated arbitrations as illustrated by a recent case discussed below.

Background

Yanghui Liu and Yueyang Shengfa Real Estate Development Co., Ltd. (“Shengfa”) entered into a Commodity Housing Presale Contract (“Contract”). It was a term of the Contract that, in the event of a breach of contract, the defaulting party was to pay liquidated damages to the non-breaching party.

Yanghui Liu commenced arbitration before the Yueyang Arbitration Commission, claiming that Shengfa had failed to perform the Contract, and seeking an award requiring Shengfa 1) to perform the Contract, and 2) to pay liquidated damages for the existing breach.

The arbitral tribunal ordered Shengfa to pay the whole amount of liquidated damages claimed.

Shengfa did not raise any legal argument in the arbitration on the tribunal’s power, in certain circumstances, to adjust the amount of liquidated damages payable. In addition, the arbitral tribunal did not take the initiative to explain this right to Shengfa.

Shengfa challenged the award before the Yueyang Intermediate People’s Court (“Court”). Shengfa contended that the arbitral tribunal’s failure to take initiative to consider whether there should be an adjustment of liquidated damages violated due process and the award should be set aside.

Finding

The Court held that, pursuant to the judicial interpretation,[4] the arbitral tribunal, having found that Shengfa was in breach the contract, was obliged then to take the initiative and investigate whether Shengfa had a legitimate right under the PRC Contract Law to ask the tribunal to adjust the amount of liquidated damages.

The Court considered that a failure to do so would constitute a violation of the due process requirement in Article 237 of the PRC Civil Procedure Law.

The Court rejected Yanghui Liu’s argument that the PRC Arbitration Law did not provide for arbitrator’s “Power of Clarification” so that there was no violation of due process when the tribunal failed to take the initiative in relation to the adjustment of liquidated damages.

The Court further held that the tribunal’s administration of the arbitral proceeding did not conform to “a fair and reasonable manner” provided under the PRC Arbitration Law.[5]

On the basis of the above, the Court refused to enforce the award.

Observation

It is a common practice for arbitrators in Chinese arbitration to consider, at an early stage, what legal issues arise in the arbitration and what the relevant law is. The question is how far should this approach be taken?

Despite the Court’s recent decision, it remains questionable as to whether arbitrators should help one of the parties to advance its legal argument by pointing out which law should apply or that a party has a right that it is not claiming. It is also highly questionable as to whether the lacuna in the PRC Arbitration Law on the “Power of Clarification” should be filled by arbitral tribunals’ simply following the approach in civil procedures.

It is also doubtful whether the tribunal’s failure to “clarify” legal issues properly constitutes a violation of the due administration of the arbitral proceeding. Among the exhaustive grounds for non-enforcement of domestic awards, violation of arbitral procedure is limited to the circumstances in which “the composition of the arbitration tribunal or the arbitral proceeding violates the statutory procedures”. [6]This does not seem to include the arbitrator’s failure to clarify legal issues.

It remains to be seen whether the approach in the case above will be applied more generally. It is respectfully hoped that it will not, until there is further clarity. It is thus advisable for parties arbitrating in China to pay enough attention to the principles of iura novit curia and the Power of Clarification.

Authors:

长按下图识别二维码关注我们

© 通力律师事务所

本微信所刊登的文章仅代表作者本人观点, 不代表通力律师事务所的法律意见或建议。我们明示不对任何依赖该等文章的任何内容而采取或不采取行动所导致的后果承担责任。如需转载或引用该等文章的任何内容, 请注明出处。

点击“阅读原文”，直达通力官网了解更多资讯！