Intermediate Court Set Aside Defense Mechanics under Chinese Law
Intermediate court set aside defenses require strict enforcement of arbitral waiver rules and immediate parallel asset preservation in enforcement courts.
Double Track Arbitral Supervision
Meaning
Judicial review of arbitral awards in China is divided into two separate paths depending on whether the dispute involves a foreign party or is purely domestic. Double track arbitral supervision refers to this dual-layered system of court oversight established by the Arbitration Law and civil procedure rules. Under this system, domestic awards are subject to a more intense scrutiny that can include a review of the substantive merits of the case, such as the sufficiency of evidence and the application of law.
In contrast, foreign-related awards are subject to a much narrower review that is limited to procedural issues and public interest grounds. This distinction is designed to provide a more favorable and internationally aligned environment for cross-border transactions.
Judicial Divergence
The operation of the double track arbitral supervision system results in different levels of risk for domestic and international businesses. For domestic awards, the losing party has a wider range of options for challenging the award in court, which can lead to prolonged litigation. This is because Chinese courts have historically maintained a paternalistic role in domestic disputes, seeking to ensure that justice is done on the merits.
For foreign-related awards, however, the courts are prohibited from reviewing the substantive correctness of the tribunal’s decision. This limit is designed to respect the autonomy of the parties and the finality of international arbitration. This procedural protection is a significant advantage for foreign companies, as it ensures that their awards are highly resistant to being overturned on technical or substantive grounds.
Supervisory Reform
In recent years, there has been a trend towards narrowing the gap between the two tracks of supervision, with courts applying more consistent procedural standards to both. The Supreme People’s Court has issued several judicial interpretations aimed at restricting the grounds on which domestic awards can be set aside, bringing them closer to the foreign-related standard. This reform is intended to enhance the credibility of Chinese arbitration overall and to encourage its use by both domestic and foreign businesses.
However, the dual-track structure remains a fundamental feature of the legal landscape, and parties must be aware of which track applies to their dispute. This requires careful drafting of the arbitration clause to ensure that the foreign-related nature of the contract is clearly established if that is the desired path.
Contractual Implications
For companies drafting contracts for transactions in China, the choice of arbitration clause must take the double track supervision system into account. If the contract involves a foreign parent company or an offshore transaction, it is usually possible to qualify the dispute as foreign-related, thereby securing the narrower track of judicial supervision. This provides greater certainty that any eventual award will be final and enforceable.
If the dispute is purely domestic, the parties must be prepared for the possibility of a more extensive court review. This underscores the need to build a strong, evidence-backed case during the arbitration itself, as there are more opportunities for the losing party to challenge the outcome in court.