Comparing head office and branches on arbitration agreement validity

0
64

Autonomy of will is the core logic of commercial arbitration. In other words, a valid arbitration agreement is a necessary prerequisite for arbitration institutions to have jurisdiction over property disputes between specific parties.

Although some specific circumstances of “the expansion of the validity of an arbitration agreement” have been recognised in theory and judicial practice abroad, only those in the Interpretation of the Supreme People’s Court concerning Some Issues on Application of the Arbitration Law are currently recognised in China at institutional level, and expansion between head office and branch company does not fall within the scope of the interpretation.

Therefore, in arbitration agreements with only one valid signature or seal of the head office or branch, if the opposite party wanted to include the other non-signatory to the agreement as an arbitral party participant in proceedings, there would undoubtedly be insufficient evidence to support the party’s claim.

However, in practice, claimants initiating arbitration often wish to list the head office or branch, without a valid signature and seal on the contract, as respondent to carry out its claim in arbitration. This article analyses whether such an arbitration strategy is valid in terms of contract relativity.

LEGAL PRINCIPLES

Conceptually, as a subset of contracts, an arbitration agreement is of a “relativity” nature. According to article 465(2) of the Civil Code, a contract legally formed shall be legally binding only on the parties.

The theoretical basis of privity of contract comes from autonomy of private law. According to Werner Flume’s classic definition, autonomy of private law is “the principle that each person can form legal relations on his or her own volition”. In an agreement signed by two parties as an act of a contract, which is an important part of the conduct of private law, extending reach to directly bind a third party is no different from dissimilating the equal claim to a public act of command and obedience.

Parties who hope to expand the validity of an arbitration agreement between head office and branches tend to believe that such an expansion will not violate the relativity of a contract. In other words, branches do not have independent legal personalities, and the head office and branches are in fact the same civil entity. However, there is an implied premise in this view. Parties to a contract are parties in substantive law, not parties in procedural law.

However, if this premise is reversed, the conclusion may be completely the opposite. In procedural law, the branches have independent civil litigation capacity and can be independent parties to civil litigation.

CHANGE OF PERSPECTIVE

The reason why different premises will lead to completely opposite conclusions is because the legal status of branches differs in substantive law and procedural law.

In substantive law, in accordance with article 74 of the Civil Code and article 14 of the Company Law, although a branch does not have the status of a legal person, it may engage in civil activities in its own name, and any liabilities arising may be borne by the property managed by the branch itself, or directly by the legal person.

According to article 102 of the Civil Code, the branch of a corporation is mentioned in the first section (General Rules) of chapter III (Legal Persons) in terms of structure and is not included in the list of unincorporated organisations. In other words, the code does not explicitly recognise the civil entity status of branches. Instead, it clarifies liability assumed by branches and head offices in the general rules on “legal persons”.

But in procedural law, article 51 of the Civil Procedure Law provides that citizens, legal persons and other organisations may be parties to civil proceedings. Article 52 of the Interpretation of the Supreme People’s Court concerning Some Issues on Application of the Civil Procedure Law stipulates: “For the purpose of article 51 of the Civil Procedure Law, other organisations shall refer to duly established organisations that have certain organisational structures and some assets, but are not qualified as legal persons, including … (5) Branches of duly established legal persons for which business licences have been collected pursuant to the law.”

Therefore, from the perspective of procedural law, a branch of a company can be a party to a civil action when certain conditions are met.

CONCLUSION

The author is of the opinion that in arbitration, an understanding of contract relativity from a procedural law perspective is more in line with the essence of the principle. That is, the head office and its branches are independent litigation subjects, and one party’s declaration of intent to arbitration does not necessarily bind the other party.

The reasons for this are, firstly, although a branch does not have an independent legal person status, it may have an independent declaration of intent. It is common to see branches with independent operations, self-accounting, and the claims of such branches are not necessarily the same in specific business transactions as those of head office. Therefore, it is unreasonable to make a subject of independent declaration of intent to be bound by that of another.

Secondly, although the head office and its branches are closely related to each other from the aspect of civil liability, civil liability and civil status are two different aspects and should not be confused.

Finally, arbitration is different from litigation. In litigation, there are cases where a party enters into a contract with its branch, the party files a lawsuit against the branch, and the court adds the head office as a co-defendant ex officio.

However, such a situation is not common, even in litigation. Article 124 of the former edition of the Interpretation of the Supreme People’s Court concerning Some Issues on Application of the Guarantee Law, and relevant replies from the People’s Bank of China, expressly state that the head office of a commercial bank or insurance company shall not be listed as a defendant in a dispute concerning a branch. Also, the listing of parties to arbitration depends on agreement by signatories of the arbitration agreement, not on the power of the arbitral tribunal.


Liang Enze is a case manager at the BAC/BIAC