Failure to specify seat may cause problems

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In a recent PRC case, the Taizhou Intermediate People’s Court refused enforcement of an ICC award on grounds of public policy because the court had previously held that the arbitration clause was invalid. This outcome could have been avoided if the parties had specified a suitable arbitral seat in the arbitration clause.

Anthony Poon
Anthony Poon

The seat is an important legal concept, as its law provides the supporting legal framework for the arbitration and its courts supervise the arbitration. The seat also usually determines the nationality of the award that is relevant to enforcement. The seat can therefore have a material impact on the course and outcome of the arbitration, and is not to be confused with the factual venue where arbitration meetings and
hearings are conducted.

Absent of any agreement to the contrary, the law of the seat, which is often not the same as the substantive law of the contract, usually also governs the arbitration clause. It is important to understand that the substantive law of the contract may not extend to the arbitration clause because the arbitration clause exists independently and is separable from the other contract terms.

Matters governed by the law of the arbitration clause include the formation, validity and interpretation of the arbitration clause. For example, unlike under Hong Kong law, an arbitration clause is not valid under PRC law if it does not designate an arbitral institution or provide for arbitral rules through which the institution can be determined.

THE TAIZHOU CASE

The parties entered into a Sino-foreign joint venture agreement (JVA) governed by PRC law with an arbitration clause that left the determination of the arbitral seat open.

Simon Hui
Simon Hui

In July 2011, the Chinese party (P) sued the foreign party (D) in the Taizhou Intermediate People’s Court for breaching the non-compete clause in the JVA, seeking various remedies. D invoked the arbitration clause claiming that the court had no jurisdiction to hear the dispute.

The court applied PRC law in determining the validity of the arbitration clause, as the parties had not agreed on any law governing the arbitration clause, or an arbitral seat that would have allowed the court to apply a different, less restrictive law (e.g., Hong Kong law). In December 2012, the court held that the arbitration clause was invalid and that it had jurisdiction to hear the dispute because the clause neither designated an arbitral institution, nor could the court determine the institution through the relevant arbitration rules as required under PRC law. This ruling was upheld by the Supreme People’s Court (SPC) in March 2012.

While the court proceedings were pending, D commenced ICC arbitration proceedings against P in Hong Kong. Since P did not exercise its right to choose the arbitral seat, the ICC Court of Arbitration fixed Hong Kong as the seat. Two ICC awards were rendered, one in July 2014, the other in November 2014. On 9 December 2014, D applied to the Taizhou Intermediate People’s Court to enforce the awards. On 2 June 2016, the Taizhou court held that enforcement of the awards would be in breach of PRC public policy because the awards were in conflict with the Taizhou court’s ruling.

ACTIONS TO CONSIDER

We recommend that parties should always designate a seat in the arbitration clause and expressly adopt the law of the seat as the law of the arbitration clause. Parties must check whether any restrictions under the national arbitration law of the seat may apply. Where the parties have not agreed on a seat, the arbitral rules will usually provide how the seat is to be determined. However, arbitral rules may differ significantly in this regard.

In circumstances where the parties have failed to designate a seat in the arbitration clause and there is no default seat under the arbitration rules, there will be uncertainty as to which law governs the proceedings and which courts supervise the arbitration.

The period of uncertainty may be relatively short where the institution determines the seat, but could last three months or more where the seat will be determined some time after the formation of the tribunal.

Unless the parties have specified the law of the arbitration clause, which is often not the case, such uncertainty will also extend to matters governed by the law of the arbitration clause, such as its validity. We therefore also recommend that parties expressly adopt the law of the seat as the law of the arbitration clause.

Parties should avoid giving the respondent a unilateral right to choose the seat, as was the case in the Taizhou case, because unless the parties have agreed on the law governing the arbitration clause, this approach will not only result in uncertainties but also give a recalcitrant respondent an opportunity to try to frustrate the arbitration by choosing a seat under the law of which the arbitration clause is not valid.

ANTHONY POON and SIMON HUI are partners at Baker & McKenzie in Hong Kong and Shanghai, respectively.