Parties must draft arbitration agreements with Chinese parties clearly and precisely to ensure validity and avoid unwanted litigation.
A Beijing court recently adopted a pro-arbitration approach in upholding the validity of an arbitration agreement designating a non-existent arbitral institution. While the decision reflects the increasingly pro-arbitration attitude of Chinese courts, the case also highlights the importance of drafting arbitration agreements involving Chinese parties clearly and precisely.
Background and decision
In Chinalight International Trade Co. Ltd v Tata International Metals (Asia) Ltd, the Beijing No. 4 Intermediate People’s Court was asked to determine the validity of an arbitration agreement designating a non-existent arbitral institution to administer disputes submitted to arbitration under the agreement.
The arbitration agreement between PRC-incorporated, Zhongqing Sanlian International Trade Co., Ltd and Hong Kong-incorporated, Tata International Metals (Asia) Limited provided that:
“All disputes arising out of the execution of this contract or in connection with this contract shall be settled by friendly negotiation between the parties. If it cannot be settled through negotiation, the dispute shall be submitted to the Singapore International Economic and Trade Arbitration Commission for arbitration in accordance with the US arbitration rules”.
As the Beijing court observed, there is no institution called the “Singapore International Economic and Trade Arbitration Commission”. Under PRC law, an arbitration agreement that fails to designate clearly an arbitral institution is invalid.[i] The PRC Supreme Court took this approach in 2008, in holding invalid an arbitration agreement designating the non-existent “English International Economic and Trade Arbitration Commission” as the administering institution.[ii]
However, on this occasion, the Beijing court held that the reference to the non-existent Singapore International Economic and Trade Arbitration Commission nonetheless evidenced the parties’ intention for the place of arbitration and the place of the arbitral institution to be Singapore. Under PRC law, in the absence of express choice by the parties, the law of the place of arbitration or the place of the designated arbitral institution governs the arbitration agreement.[iii] Accordingly, the Beijing court proceeded to determine the validity of the arbitration agreement in accordance with Singapore law, as opposed to PRC law, and upheld the validity of the agreement. The application of PRC law to the agreement would have reached the opposite conclusion.
The Beijing court’s decision in this case should be welcomed for its promotion of arbitration and party-autonomy. However, the decision also highlights the need for parties entering into arbitration agreements with Chinese parties to be especially mindful of the need for clarity and precision when drafting these agreements. Failure to do so — in particular, failure to designate clearly an arbitral institution — may expose parties to unwanted litigation before Chinese courts and may jeopardise the validity of the arbitration agreement. This risk is heightened in light of the PRC Supreme Court’s 2017 judicial interpretation confirming the jurisdiction of Chinese courts to determine the validity of arbitration agreements if one party to the agreement is domiciled in the PRC.[iv]
[i] Article 18 of the Arbitration Law of the People’s Republic of China.
[ii] Reply of the Supreme People’s Court to Request for Instructions Re Arbitration Clause Validity in the Agency Contract Dispute in the Case of Mashan Group Co., Ltd. v. Korea Chengdong Shipbuilding Ocean Co., Ltd. and Rongcheng Chengdong Shipbuilding Ocean Co., Ltd (30 October 2008).
[iii] Article 18 of the Law of The People’s Republic of China on the Laws Applicable to Foreign-related Civil Relations.
[iv] Article 2 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Trial of Judicial Review of Arbitration Cases (2017), entered into force on 1 January 2018.