China's Highest Court Supports Cancellation of Arbitration Award
By Maarten Roos
Background
A creditor of a Chinese joint venture (JV) initiated arbitration against the JV's shareholders, arguing that it had not been properly informed of the company's liquidation and that the shareholders should be held jointly liable for the JV's debts. The arbitration tribunal accepted this claim and issued an award holding the shareholders liable for nearly CNY 15 million.
Court Proceedings
The award was challenged in court on the grounds that the arbitration clause did not bind all shareholders, since not all parties had agreed to arbitration. The argument centered on the principle of party autonomy—a fundamental concept under Chinese law that parties cannot be forced into arbitration without their consent.
The case eventually reached the Supreme People's Court, which reviewed the matter and determined that the arbitration award should be cancelled. This decision terminated any further enforcement proceedings, including attempts abroad.
Some Key Issues
- Scope of Arbitration Clauses
The case underscores that arbitration clauses only bind those who expressly consent. Extending such clauses beyond their scope risks undermining party autonomy, which China's highest court reaffirmed as a core legal principle.
- Judicial Oversight of Arbitration
While arbitration awards are generally final and not subject to appeal, Chinese law does provide limited grounds for cancellation, including when an award conflicts with legal principles or exceeds the agreed scope of arbitration. While cancellation is rare, this case illustrates that it is not impossible, provided strong legal grounds are established.
- Corporate Liquidation Risks
The dispute also highlights potential liabilities linked to liquidation processes. Creditors may attempt to hold shareholders responsible if they allege irregularities. Proper oversight of liquidation committees and transparent communication with creditors remain essential risk-control measures.
Significance
The judgment demonstrates that Chinese courts—up to the Supreme People's Court—will uphold core legal principles such as party autonomy, even in cases with significant financial stakes. For foreign investors, it provides reassurance that arbitration awards in China are subject to judicial scrutiny under clear legal standards.
Conclusion
This case contributes to the growing body of jurisprudence clarifying the boundaries of arbitration in China. It shows that while arbitration is favored for dispute resolution, parties cannot be compelled to arbitrate without consent, and that judicial remedies exist where arbitration awards exceed their legal basis.
Special congratulations to our colleagues Yalin Zhang and Linda Ji of our litigation team for bring home this "win". If you are facing difficulties with Chinese suppliers, customers, distributors or other business partners, please email your trusted contact at R&P or write to [email protected], and we will find a way to support you.