Arbitrability of investment contracts involving public entities 

By Xu Zhihe, SHIAC
Arbitrability of investment contracts involving public entities, 政府招商引资合同的可仲裁性

In July 2011, an administrative committee under the authorisation of a local government (the claimant in the arbitration) signed an investment contract and a supplementary agreement with an investment company (the third party) from another province. According to the investment contract, the third party would set up a special purpose vehicle (SPV) in the industrial park managed by the claimant for the construction of a cotton spinning project by nominal quotation of the state-owned land.

The claimant, in order to support the project, would award special funds (support funds) to the SPV according to the number of acres of land offered. The supplementary agreement stipulated that the invested project would have equipment with a production scale of no less than 200,000 spindles in place by the end of 2012, and no less than 400,000 spindles by the end of 2013.

The claimant and the third party also agreed in the investment contract and the supplementary agreement that the rights and obligations of the third party under the two contracts would be inherited by its newly established company – that is the SPV – and agreed that any disputes arising out of, or relating to, the two contracts would be submitted to the Shanghai International Arbitration Centre (SHIAC) for settlement by arbitration.

After this, the SPV established by the third party (the respondent in the arbitration) successfully bid for the land use right of about 138.33mu (9.2 hectares) and paid a grant of RMB23.25 million (USD3.58 million) to the land and resource bureau. Accordingly, the claimant paid the support funds of RMB19.8 million to the respondent as agreed.

From 2014 to date, the underlying project is in a state of suspension due to the respondent’s failure of investment. After consultation with the claimant, the respondent issued a letter of commitment to the claimant on 15 April 2019, stating that it would complete all construction work by the end of December 2019. If it failed to meet the above target, unless it was caused by reasons other than the respondent, it would unconditionally refund the allocated support funds to the Claimant. However, the project was still far from completion upon the due date, and the respondent has not returned the support funds.

The claimant then filed an arbitration application to the SHIAC against the respondent, requiring a refund of the support funds, while the respondent filed an objection on jurisdiction on the grounds that the disputed investment contract is an administrative agreement, which is out of arbitrability under China’s Arbitration Law.

Arbitral tribunal’s opinion

Since the respondent’s objection involves substantive issues of the dispute, that is, how to construe the nature of the underlying contracts that should be determined by the arbitral tribunal according to the SHIAC arbitration rules, an arbitral tribunal is authorised to hear the case and make a decision on the respondent’s objection in the arbitral award. The arbitral tribunal holds that:

(1) There is no evidence showing that to include an arbitration clause in the contracts is contrary to the true intention of the parties at the time of making the contracts, or the respondent has raised any objection to the arbitration clause when it succeeded to the rights and obligations of the third party under the underlying contracts.

(2) Although the content of the investment contract and the supplementary agreement is a hybrid between civil rights and obligations and administrative functions, the dispute in this case does not involve the use of the claimant’s administrative power, but rather the disposal of the support funds agreed between the two parties, which corresponds to the respondent’s investment and construction obligations arising from a separate negotiation between the claimant and the respondent. Such negotiation reflects equality of civil subjects, rather than purely administrative nature.

(3) The commitment letter issued by the respondent to the claimant in this case is more similar to an agreement on settlement of debts in civil relations than an administrative agreement listed in the Administrative Procedure Law and its judicial interpretation. The contracts in this case were entered into before the Administrative Procedure Law came into force, and the situation in this case does not exactly match the situation stipulated in the law and the judicial interpretation.

Based on the above-mentioned opinion, the arbitration tribunal considers that the dispute is still one concerned with property rights among citizens, legal persons and other organisations of equal status, which is of arbitrability under the Arbitration Law and of admissibility to the arbitral tribunal constituted under the arbitration clause.

In the event that the respondent fails to prove that it has made investment and construction in accordance with the contracts, it should return the support funds to the claimant to fulfil its obligation under the contracts, and its commitment to the claimant.

Some takeaways

The issue of how to identify administrative agreements and their arbitrability has been a hot topic among Chinese arbitration practitioners since the legal concept of administrative agreements were explicitly provided for in the Administrative Procedure Law, in 2015. The Provisions of the Supreme People’s Court on Several Issues of Hearing Administrative Agreement Cases, implemented in 2019, further enumerated the types of administrative agreements, and explicitly regulated that arbitration clauses agreed in administrative agreements are invalid, which has triggered extensive discussion.

Many of the contracts concluded between administrative bodies and civil subjects, such as public-private partnership (PPP) contracts, government investment agreements, etc., are often intertwined with multiple legal relationships. These are difficult to be recognised as administrative agreements or not without legal analysis on the contents of the contract, such as: Whether the contract in question is for profit; whether the content of the contract reflects the consensus of the parties on an equal footing; or whether specific content of the dispute involves the exercise of administrative authority or allocation of civil rights and responsibilities.

Therefore, enterprises engaged in government-related projects, as well as government departments involved in market-based projects, should bear in mind that to rely on administrative litigation is not the only appropriate way to resolve disputes, since sufficient attention shall also be paid to civil and commercial disputes involving market-based and commercial aspects. It is accordingly important for those parties to properly select appropriate civil and commercial dispute resolution mechanisms.

Another insight from this case is that when the parties are of dispute on whether a contract containing an arbitration clause is an administrative agreement, based on the principle of prima facie on the determination by the arbitration institution on the acceptance of the arbitration case, and competence-competence on the determination by the arbitral tribunal on the admissibility of arbitral claims under the Arbitration Law, it is an efficient and professional way to deal with this issue by referring it to the arbitral tribunal for a substantive review.

Xu Zhihe is the deputy head of the research and information department at the SHIAC