Chinese Court Upholds Pathological Singapore Arbitration Clause
By Patrick Zheng | Charles Qin
China joined the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) in 1987, under which it has assumed international treaty obligations to enforce arbitration agreement with a foreign seat (“foreign arbitration agreement”) in China,[1] subject to commercial and reciprocity reservations.[2]
Unlike the United States Federal Arbitration Act which has a specific chapter to deal with the New York Convention and non-domestic arbitration agreements,[3] the PRC Arbitration Law is silent on the enforcement of foreign arbitration agreements. The party challenging the validity of foreign arbitration agreements had relied on judicial interpretations addressing “foreign-related” arbitration agreement,[4] although foreign-related arbitration, somewhat similar to non-domestic arbitration under the US arbitration regime, falls within the ambit of domestic arbitration under Chinese law and is not governed by the New York Convention.
The Judicial Interpretation concerning judicial review of arbitration matters issued by the PRC Supreme Court (“2018 Judicial Interpretation”) no longer distinguishes between foreign-related, purely domestic and foreign arbitration agreements in respect of judicial review.[5] Four competent courts are conferred jurisdictions to hear disputes over the validity of arbitration agreements, namely the intermediate people’s court at the place: (1) where the agreed arbitration institution is located, or (2) where the arbitration agreement is concluded, or where (3) the claimant or (4) the respondent is domiciled.[6]
Moreover, the applicable law to the arbitration agreement shall be the one agreed by the parties, or failing that, the law at the place of the arbitration institution or the lex arbitri.[7]
In a recent decision,[8] the Beijing No. 4 Intermediate Court upheld the validity of a pathological Singapore-seated arbitration agreement. This case is a good illustration of how Chinese courts deal with obligations of enforcing foreign arbitration agreements in China under the New York Convention.
Introduction
This case concerns a “pathological arbitration agreement”, which denotes a defect or defects in an arbitration agreement making it “null, void, inoperative or incapable of being performed”.[9] A large number of challenges on pathological arbitration agreements in the context of domestic Chinese arbitration mainly revolve around the identity of the arbitration institution,[10] due to the idiosyncratic requirement of the PRC Arbitration Law for a valid arbitration agreement to have a designated arbitration institution and ad hoc arbitration agreement is not enforceable in China.[11]
This case is unique in that it deals with a pathological arbitration agreement with a foreign seat.
Background
Chinalight International Trade Co. Ltd. (“Chinalight”) and Tata International Metals (Asia) Ltd. (“Tata”) concluded a Sales Contract containing an arbitration agreement, which read:
“All disputes arising from the execution of or in connection with the present contract shall be settled through friendly consultation between both parties. In case no agreement can be reached, the dispute shall be submitted to Singapore International Economic and Trade Arbitration Commission in USA law apply. The disagreement should be settle[d] on the basis of the underlying contract and applied law. The decision of arbitration court will be binding and final for both parties.” (Emphasis added)
Later, dispute arose and Tata initiated the arbitration before the Singapore International Arbitration Centre. In a parallel proceeding, Chinalight applied to the Beijing No. 4 Intermediate Court (“Court”), the court at the place where Chinalight is domiciled, for a declaration that the disputed arbitration agreement was invalid.
Chinalight argued that the arbitration agreement was invalid, because, inter alia, Singapore International Economic and Trade Arbitration Commission does not exist. Under Chinese law, an arbitration agreement is invalid by the lack of definite choice of arbitration institution.[12] The Court did not accept such argument, and upheld the validity of the arbitration agreement.
Reasoning
As a point of departure, the Court held that although the name and the existence of the arbitration institution were disputed, the intent of the parties to refer their dispute to arbitration was sufficiently clear in light of the wording of the arbitration agreement. In this regard, it could be inferred that the parties wanted to resolve dispute in Singapore, so the seat of arbitration was Singapore.
Where no applicable law governing the arbitration agreement is expressly chosen, the law at the place of the arbitration institution or that of the seat of arbitration shall apply.[13] Therefore, the Court held that Singaporean law shall govern the validity of the arbitration agreement.
The Court went on and found that such arbitration agreement under Singaporean law was assumed to be valid notwithstanding its ambiguity. The Court accepted Tata’s presentation of Singaporean law and in light of the presumption in favor of arbitration, thus upheld the validity of the arbitration agreement.
Comment
The case law in China on pathological foreign arbitration agreements has been split and constantly evolving. The PRC Supreme Court, for example, in 2008 invalidated an arbitration agreement which provided for English International Economic and Trade Arbitration Commission, on the ground that the arbitration institution does not exist.[14] Moreover, in a widely publicized case in 2006, an ICC arbitral award was denied of recognition and enforcement,[15] on the ground that the arbitration agreement had been invalidated by the competent Chinese court before the award was made.
This case illustrates that, after years of evolution, the notion of seat of arbitration has been firmly entrenched in the Chinese arbitration regime and plays a pivotal role in deciding issues including the validity of arbitration agreements and applicable laws. This case also casts light on the pro-arbitration policy adopted by Chinese courts that ambiguities as to the validity of the arbitration agreement shall be resolved in favor of giving effect to, rather than nullifying it.
Having said that, the 2018 Judicial Interpretation, in essence, confers Chinese courts jurisdiction to conduct judicial review on foreign arbitration agreements if one of the parties is Chinese domiciled, or the arbitration agreement is executed in China, even the seat of arbitration is outside China. This may appear to arrive at the unintended conclusion that every foreign arbitration agreement entered into by a Chinese party or executed in China is susceptible to judicial review by a Chinese court, if so requested by any party. This may not be in line with the spirit of the New York Convention and shall be taken into account when entering into a foreign arbitration agreement with Chinese parties.
【Endnote】
[1] Article II(3), New York Convention (1958).
[2] Notice of the Supreme People’s Court on Implementation of the Convention on the Recognition and Enforcement of Foreign Arbitration Awards Acceded to by China, Fa(Jing) Fa [1987] No. 5.
[3] Federal Arbitration Act, 9 U.S.C. §§ 201-208.
[4] Articles 12, 16, Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of the Arbitration Law of the People’s Republic of China, Fa Shi [2006] No. 7.
[5] Note that distinctions are drawn between domestic, foreign-related and foreign arbitral award. However, such contemplation was not seen in terms of arbitration agreement.
Foreign-related arbitral award refers to an award rendered by a domestic arbitration institution which deals with a case involving a foreign element within the meaning of Article 1 of the Fa Shi [2012] No.24 (Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of the Law of the People’s Republic of China on the Application of Laws to Foreign-Related Civil Relations (I)).
[6] Article 2, Provisions of the Supreme People’s Court on Several Issues Concerning Trial of Cases Involving Judicial Review of Arbitration, Fa Shi [2017] No. 22.
[7] Article 18, Law of the People’s Republic of China on Application of Laws to Foreign-Related Civil Relations (2010); Article 14, Provisions of the Supreme People’s Court on Several Issues Concerning Trial of Cases Involving Judicial Review of Arbitration, Fa Shi [2017] No. 22.
[8] Chinalight International Trade Co. Ltd. v Tata International Metals (Asia) Ltd., Beijing No. 4 Intermediate People’s Court, (2017)京04民特23号、24号、25号、26号、27号.
[9] Supra note 1.
[10] Note that “arbitration commission” is the favored term in the arbitration legislation in China.
[11] Although ad hoc arbitration agreement is enforceable in Pilot Free Trade Zones, it remains to be seen how cases will develop in practice. See Article 9, Opinions of the Supreme People’s Court on the Provision of Judicial Protection for the Establishment of Pilot Free Trade Zones, Fa Fa [2016] No. 34.
[12] Articles 16, 18, Arbitration Law of the People’s Republic of China (2017 Amendment).
[13] Supra note 7.
[14] Reply of the Supreme People’s Court to the Validity of the Arbitration Agreement between Mashan Group Co. Ltd., and Korean Chengdong Shipbuilding Ocean Co. Ltd., [2008]民四他字第26号.
[15] Züblin International GmbH (Germany) v Wuxi Woke General Engineering Rubber Co. Ltd., Wuxi Intermediate People’s Court, (2004)锡民三仲字第1号.
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