Chinese Court Narrowly Construes Scope of Arbitration Agreement
By Patrick Zheng | Charles Qin
The scope of the arbitration agreement denotes which disputes fall within the contemplation of the parties to refer to arbitration. It is closely related to the question of whether the tribunal in rendering its award has excessed its competence or jurisdiction. The generally held view is that any review by the court over the scope of the arbitration agreement in the stage of enforcement or set aside of an arbitral award shall not lead to re-examination of the merits of the award, but rather be limited to whether the arbitral tribunal has properly construed the scope of the arbitration agreement.
The construction of the arbitration agreement must be pursuant to the principles of interpretation of contract under the applicable law. In construing the parties’ mutual intention, there is a considerable authority in support of a presumption in favor of a liberal or broad approach, giving effect to so-called “one-stop adjudication”, particularly after the approach was fully endorsed by the House of Lords in Fiona Trust & Holdings Prvalov. [1]
In a recent Chinese case,[2] Changsha Intermediate People's Court of Hunan Province (the “Court”) set aside an arbitral award on the ground that the matters decided in the award happened after the expiry of the term of the main contract, so were beyond the scope of the arbitration agreement, albeit the arbitration agreement’s use of all-encompassing wording, “any dispute arising out of or in connection with the contract”. This case illustrates the Chinese court’s strict or narrow approach in interpreting the scope of the arbitration agreement and the sometimes reopening the merits of the tribunal’s decision in deciding whether the tribunal has properly construed the scope of the arbitration agreement.
Background
Hunan Grand Hyatt Global Development Co., Ltd.(the “Applicant”), entered into a Business Consulting and Investment Agency Contract (the “Contract”) with Changsha Rococo Business Information Consulting Co., Ltd (the “Respondent”), with a term of the contract for one year. The Respondent was obliged to provide investment recommendations as an agent to the Applicant, a principal, under this Contract. This Contract contained a valid arbitration clause to arbitrate any future dispute in the Changsha Arbitration Commission.
After the term of the Contract expired, the Respondent continued to provide agency service allegedly under the Contract. The Applicant refused to pay for it, so the Respondent brought the case to the arbitral tribunal of the Changsha Arbitration Commission and claimed for late payment fee for the agency service provided.
The arbitral tribunal held, in essence, that the parties continued to perform the Contract and the Applicant’s failure to raise objections with respect to the term of the Contract should be deemed to have accepted the extension of the contract term. The arbitral tribunal thus rendered an award ruling that the Applicant should pay the agency service fee to the Respondent.
Annulment
The Applicant challenged the award before the Court under the ground of Article 58(1)(ii) of the PRC Arbitration Law which reads:
“…
(ii) The matters arbitrated are not within the scope of the arbitration agreement or the arbitral tribunal has no jurisdiction.
…”
The Supreme People’s Court further clarified in a recent judicial interpretation that matters arbitrated in the award outside the scope of the arbitration agreement shall mean:
(1) The matters of the award exceed the scope stipulated in the arbitration agreement;
(2) The matters of the award are non-arbitrable matters stipulated by the law or the arbitration rules chosen by the parties;
(3) The content of the award exceeds the scope of the party's reference to arbitration; or
(4) The award is made by the arbitration institution that is not agreed by the arbitration agreement. [3]
The Applicant’s view, in short, was that the term of the main contract expired and became terminated, so any deal made after that did not fall within the ambit of the Contract, and the arbitration agreement, so the tribunal had no jurisdiction to hear any dispute arising out of matters after the expiry of the one year term of the Contract.
The Respondent refuted that by performing the contract after the one year term without objection, the term of the Contract had been extended by the parties implicitly or by conduct, so the dispute arising from the agency service provided after the expiry of the one year term of the Contract shall be within the power of tribunal’s ruling.
The Court set aside the arbitral award on the ground under Article 58(1)(ii) of the PRC Arbitration Law for the following reasons. First, the Contract had been expired and no extension was made either implicitly or by conduct. Second, the service provided by the Respondent was by nature different from that provided in the Contract the Court reviewed. Therefore, the dispute arbitrated did not fall within the ambit contemplated by the arbitration agreement and the arbitral award was beyond the scope of the arbitration agreement between the two parties.
Comment
The issue before the Court was whether any dispute which happened after the expiry of the term of the Contract falls within the ambit of the arbitration agreement. On the face of the arbitration agreement which contains all-encompassing wording, the scope of the agreement is arguably wide enough to include whether the Contract has been validly terminated by the time prescribed in the Contract or whether the parties had agreed to extend the term by conduct or implication. It seems that the Court restrictively interpreted the arbitration agreement by delving into the merits of the case and temporally limiting the scope of arbitration to the time antecedent to the expiry of the term of the Contract. Therefore it is advisable that when drafting an arbitration agreement with China as the seat, parties shall include in their arbitration agreement even more “clear and unmistakable” wording to give effect to their intended scope of arbitration.
【Endnote】
[1] Fiona Trust & Holding Corp v. Privalov, [2007] UKHL 40.
[2] Hunan Grand Hyatt Global Development Co., Ltd v Changsha Rococo Business Information Consulting Co., Ltd, Changsha Intermediate People's Court of Hunan Province,（2017）湘01民特71号.
[3] Article 13, Provisions of the Supreme People's Court on Several Issues Concerning the Implementation of Cases of Arbitration Awards by the People's Courts (2018).
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