Chinese Court Decision Reinforces Need for Clear and Precise Drafting of China-Related Arbitration Agreements

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Latham & Watkins LLPShijiazhuang Intermediate People’s Court declares arbitration agreement providing for ICC Rules arbitration seated in China invalid.

In a dispute between Hebei Zhongxing Automobile Manufacturing Co., Ltd. (HZAM), a Chinese company, and Automotive Gate FZCO (FZCO), a UAE company, the Shijiazhuang Intermediate People’s Court declared invalid two related arbitration agreements that provided for arbitration in accordance with the Arbitration Rules of the International Chamber of Commerce (ICC) and to be held “in China”.

Background

HZAM and FZCO entered into an agency agreement and a technical cooperation agreement in 2007. The agency agreement expressly provided for Chinese law as the governing law of the contract, while the technical cooperation agreement was silent on the matter. Each agreement contained a clause providing that disputes shall be submitted to arbitration in accordance with the ICC Arbitration Rules “in China”.

A dispute arose between the parties and FZCO commenced arbitration against HZAM by submitting the dispute to the Hong Kong Secretariat of the ICC. FZCO contended that the parties’ selection of “China” as the place of arbitration included Hong Kong, and that Hong Kong should be designated as the seat of the arbitration. HZAM argued that the parties’ selection of “China” referred to Mainland China and did not include Hong Kong in the context of the selection of an arbitral seat. Pursuant to Article 14(1) of the ICC Arbitration Rules (1998), as applicable at the time, the Secretariat of the ICC notified the parties that the ICC Court had fixed Hong Kong as the place of arbitration.

Following this designation, the ICC Court appointed a sole arbitrator upon the recommendation of the Australian National Committee of the ICC. The terms of reference included whether the tribunal had jurisdiction to deal with the issues in dispute in the arbitration. In a partial award, the sole arbitrator determined that the matter of jurisdiction was to be determined as a matter of Hong Kong law and upheld the tribunal’s jurisdiction to determine the dispute.

HZAM applied to the Hong Kong courts pursuant to Section 34 of the Hong Kong Arbitration Ordinance and Article 16 of the Model Law to set aside the partial award issued by the sole arbitrator and challenged the designation of Hong Kong as the seat of the arbitration. That application was dismissed, with Mimmie Chan, J. holding that the tribunal had been properly constituted and that the sole arbitrator had jurisdiction over the dispute submitted to arbitration.[i]

In parallel to the arbitration and Hong Kong set-aside proceedings, HZAM applied to the Shijiazhuang Intermediate People’s Court, a court of the domestic jurisdiction in Mainland China in which HZAM is domiciled, for a declaration that the arbitration agreements in the agency agreement and technical cooperation agreement between HZAM and FZCO were invalid under Chinese law.

Decision of Shijiazhuang Intermediate People’s Court

In its decision, the Shijiazhuang Intermediate People’s Court found that HZAM and FZCO’s agreement to arbitration “in China” was insufficient expressly to designate a seat of arbitration.[ii] As such, in the absence of a designated seat ― and hence the absence of an applicable governing law ― the Court held that the validity of the arbitration agreements should be determined as a matter of Chinese law. Applying Chinese law, the Court held that:

  • The parties’ agreement to apply the ICC Arbitration Rules did not constitute a reference to submit the dispute to arbitration administered by the ICC.
  • The applicable version of the ICC Arbitration Rules did not provide that agreement to conduct the arbitration in accordance with those rules was sufficient to designate the ICC as the administering institution.

Accordingly, the Shijiazhuang Intermediate People’s Court held that the arbitration agreements were void for uncertainty. While that decision does not affect the validity of an award rendered by the sole arbitrator seated in Hong Kong, it does make enforcement of that award in Mainland China very difficult.

Comment

The decision of the Shijiazhuang Intermediate People’s Court highlights the need for parties to draft clear and precise arbitration agreements that concern Chinese parties, a seat in China, Chinese law, or that may require enforcement in Mainland China. Contracting parties should state expressly and unambiguously basic elements of an arbitration agreement, including the seat of arbitration, the governing law of the arbitration agreement, the arbitral rules, and the administering institution.. This is especially important because Chinese arbitration law does not follow the UNCITRAL Model Law and has certain differences that may lead to an arbitration agreement valid elsewhere to be declared invalid by a Chinese court.

For instance, whether an arbitration seated in Mainland China can lawfully be administered by a non-Chinese arbitral institution remains uncertain. As the HZAM and FZCO case demonstrates, whether a Chinese court would read a reference to the rules of an arbitral institution alone to reflect the contracting parties’ agreement to have disputes administered by that arbitral institution is also unclear.

The HZAM and FZCO case also demonstrates the need for parties to expressly distinguish between different Chinese jurisdictions. If the parties wish to have Hong Kong as the seat of arbitration, they should say so explicitly, rather than designating “China” as the place of arbitration. If an arbitration agreement contains discrepancies such as this, a Chinese court may find the agreement to be invalid and expose parties to litigation in domestic courts or the inability to enforce an arbitral award in China.

[i]           Z v A & Ors [2015] HKCFI 228.

[ii]              Hebei Zhongxing Automobile Manufacturing Co., Ltd v Automotive Gate FZCO (2011) 年石民立裁字第00002 号.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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