On 14 December 2018, Beijing 4th Intermediate Court (the “Court”) upheld the validity of a pathological arbitration agreement which does not provide a seat of arbitration nor does the arbitration institution thereunder actually exist in Chinalight International Trade Co. Ltd. v Tata International Metals (Asia) Ltd. (“Chinalight v. Tata”).1 The case followed the internationally-recognized principle of upholding the validity of arbitration agreement. Also, it reflected the Chinese court’s tendency of promoting the arbitration-friendly judicial environment.
I. Background Facts
In March 2015, Tata International Metals (Asia) Ltd. (“Tata”) entered into five sales contracts with Chinalight Tri-Union International Trade Company Ltd. (“Chinalight”). The arbitration clause under the five sales contracts are identical, which stipulates:
“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 settled 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, disputes arose between the parties. Tata initiated arbitration in the Singapore International Arbitration Centre (“SIAC”) against Chinalight in August 2016. SIAC accepted the case in September 2016 and Chinalight subsequently raise jurisdictional challenge before the SIAC, arguing that the arbitration agreement is invalid. In May 2017, while the SIAC arbitral tribunal was hearing the jurisdictional challenge, Chinalight filed litigation before the Court in Beijing, seeking the Court’s declaratory ruling that the underlying arbitration agreement is invalid.
The arbitration agreement here is a typical pathological arbitration agreement. The agreed arbitration institution “Singapore International Economic and Trade Arbitration Commission” does not actually exist. Neither does the arbitration agreement provide a seat of arbitration. In the past, Chinese courts deem such arbitration agreement as invalid, evidenced by the ruling of the Supreme People’s Court of China (“SPC”). But, this time it turned different.
II. Analysis
The core issue in this case is, what law would the Court find as the law that governs the arbitration agreement’s validity (“lex arbitri”)? Because whether the arbitration agreement is valid may diverge under different laws.
1. If the Court finds the lex arbitri is Singaporean law, the arbitration agreement would be held as valid. Because Singaporean law allows ad hoc arbitration and it does not require a chosen arbitration institution stipulated under the arbitration agreement. Therefore, the mistakenly stated “Singapore International Economic and Trade Arbitration Commission” would not prejudice the arbitration agreement’s validity.
2. If the Court finds Chinese law as the default lex arbitri, which is a final solution stipulated under Chinese statutes for the situation where the Court cannot find the lex arbitri by looking into evidence, then the Court is highly likely to hold the arbitration agreement as invalid. Because under Chinese law, except Free Trade Zone-related arbitration which is not the case here, ad hoc arbitration is not allowed and in the arbitration agreement the parties must chose a specific arbitration institution that is existing. In the event that an arbitration agreement wrongfully stated the arbitration institution’s name, the Court will possibly rule that there is no chosen arbitration institution hence the arbitration agreement is invalid, if according to the erroneous name the Court cannot find it actually directs to one existing arbitration institution instead of any other arbitration institutions.
For Chinese courts, the legal test for determining the lex arbitri is stipulated under:
1. The Law of the People's Republic of China on Choice of Law for Foreign-related Civil Relationships (2011),
“Article 18 The parties may choose the law that governs the arbitration agreement by their agreement, in absence of such agreement, the law at the place of the arbitration institution or the arbitration seat shall apply.”;
and
2. The Supreme People’s Court’s Interpretation I on Application of the Law of the People's Republic of China on Choice of Law for Foreign-related Civil Relationships (2012),
“Article 14 Where the parties did not agree on the law that governs the arbitration agreement, nor did they agree on an arbitration institution or a seat of arbitration or such agreements are unclear, the court may apply the law of the People’s Republic of China to determine the arbitration agreement’s validity.”
and
3. The Supreme People’s Court’s Provisions on Certain Issues Related to the Conduct of Judicial Review of Arbitration Cases (2018)
“Article 14 Where, in absence of the parties’ choice of the governing law of the arbitration agreement, a court is to ascertain the law governing the validity of a foreign-related arbitration agreement in accordance with Article 18 of the Law of the People’s Republic of China on the Law Applicable to Foreign-related Civil Relationships, and application of the law of the place of the arbitration institution or the law of the seat of arbitration will bring about different results in respect of the validity of the arbitration agreement, then the court shall apply the law that renders the arbitration agreement valid.”
Here in this case, the Parties did not agree on a lex arbitri. The arbitration agreement does not specially provide an agreed seat of arbitration. The arbitration institution agreed thereunder is a non-existent entity by itself. Hence it will be controversial to assert that “Singapore International Economic and Trade Arbitration Commission” is an arbitration institution located in Singapore. Could the Court find that the seat of arbitration or the location of the agreed arbitration institution is Singapore then apply Singaporean law to determine the arbitration agreement’s validity? Or, would the Court determine that the Parties’ agreements on the seat of arbitration and arbitration institution are unclear, and consequently apply Chinese law to determine the arbitration agreement’s validity?
The Court finally found Singapore is the seat of arbitration and further determined the arbitration agreement’s validity shall be governed by Singaporean law. The Court gave its reasoning that,
“Although Singapore International Economic and Trade Arbitration Commission is not the clear and specific name of any arbitration institution in Singapore, hence due to the mistake in name it renders the Court unable to clearly identify an arbitration institution, however based on the content of the parties’ agreement it can be found that the parties clearly expressed their intention to arbitrate, and it can be inferred that the parties agreed to have arbitration under Singaporean legal system. According to Law of the People's Republic of China on Choice of Law for Foreign-related Civil Relationships, relevant judicial interpretations, and the content agreed by the parties under the arbitration agreement, this Court holds that the seat of arbitration shall be found as Singapore. Therefore, the applicable law governing the validity of the arbitration agreements shall be Singaporean law.”
Consequently, the Court held in the Ruling that according to the Singaporean law found by the Court the underlying arbitration agreement is valid.
The Court further held in the Ruling, “[s]ince the arbitration agreement is valid, the issues pertaining to how to conduct the arbitration as well as how to interpret and determine the choice of the arbitral institution, fall outside of the Court's scope of review.”
III. Observations
Chinalight v. Tata is similar to Mashan v. Sungdong decided by the Supreme People’s Court in 2008, a case also about an arbitration agreement which provides a non-existent arbitration institution, nor did it provide a seat of arbitration.2 But, in Mashan v. Sungdong, the SPC held that the arbitration agreement was invalid, which provides,
“British International Trade Arbitration Committee shall finally settle all dispute through arbitration in accordance with the English Agreement in case there still remains any unsolved dispute after negotiation.”
Apparently “British International Trade Arbitration Committee” is not an arbitration institution actually exists. In that case the SPC found the parties had no agreement on the law governing the arbitration agreement nor the agreement on the seat of arbitration. By applying Article 16 of the Supreme People’s Court’s Interpretation on Certain Issues on Applying the Law of Arbitration of the People’s Republic of China, the SPC held the law governing the arbitration agreement shall be Chinese law. The arbitration agreement was consequently declared as invalid because the parties did not agree on a specific arbitration institution, which is the statutory requirement mandated by the Chinese law.
Ten years later, with Chinalight v. Tata the Chinese court’s attitude changed greatly to favoring international arbitration and the principle of upholding validity of arbitration agreement is the prevailing notion in China. Notably, in Chinalight v. Tata the Court wrote in its Ruling,
“The principle of maximumly validating an arbitration agreement is reflected in the New York Convention of 1958 and the judicial interpretation of the Supreme People’s Court, including the newly promulgated the Supreme People’s Court’s Provisions on Certain Issues Related to the Conduct of Judicial Review of Arbitration Cases, whose Article 14 stipulates, ‘where, in absence of the parties’ choice of the governing law of the arbitration agreement, a court is to ascertain the law governing the validity of a foreign-related arbitration agreement in accordance with Article 18 of the Law of the People’s Republic of China on the Law Applicable to Foreign-related Civil Relationships, and application of the law of the place of the arbitration institution or the law of the seat of arbitration will bring about different results in respect of the validity of the arbitration agreement, then the court shall apply the law that renders the arbitration agreement valid.’ The provisions reflect the principle of validating the arbitration agreement. From the analysis of the contents of New York Convention, the trend of international commercial arbitration and the judicial interpretations in China, easing the requirement to the validity of arbitration agreement and validating arbitration agreement to the greatest extent not only respects the real intention of the parties, but also promotes the development of arbitration and creates a sound legal environment for international commercial arbitration.”
With Chinalight v. Tata, we can foresee that the Chinese court will continue to follow the principle of upholding the validity of arbitration agreement and leave more room for the validity of pathological arbitration agreement. Chinese court is more and more willing to be open to follow the best practice of international arbitration.
1 Docket Number: (2017) Jing 04 Min Te No 23, (2017) Jing 04 Min Te No 24, (2017) Jing 04 Min Te No 25, (2017) Jing 04 Min Te No 26, (2017) Jing 04 Min Te No 27. The case involves five Sales Contract which contain the identical arbitration clause. Chinalight consequently filed five litigations against Tata before Beijing 4th Intermediate Court.
2 (2008) Min Si Ta Zi No 26. 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 Sungdong Shipbuilding Ocean Co., Ltd. and Rongcheng Sungdong Shipbuilding Ocean Co., Ltd.
Xiao (Arthur) Dong
Email: dongxiao@anjielaw.com
Website: http://www.anjielaw.com
Anjie Law Firm
19/F, Tower D1, Liangmaqiao Diplomatic Office Building,
No. 19 Dongfangdonglu, Chaoyang District,
Beijing, 100600, China
Arthur has worked as a PRC lawyer for more than 20 years. He focuses on complex international commercial arbitration and litigation. His expertise covers a wide spectrum, including: international trade and investment, M&A, cross-border technology transfer, distribution and franchise disputes, etc.
Alex Yuan
Email: yuanyuheng@anjielaw.com
Website: http://www.anjielaw.com
Anjie Law Firm
19/F, Tower D1, Liangmaqiao Diplomatic Office Building,
No. 19 Dongfangdonglu, Chaoyang District,
Beijing, 100600, China
Mr. Yuan began his career in international trade, cross-border investment and relevant dispute resolution in his college years. Before becoming a licensed lawyer, he had been working in an international trade company for years and practiced in diverse sectors in export and import business.
