Validity of arbitration clauses and scope of court discretion

Arbitration, as a commonly used dispute resolution in international commercial disputes, is being accepted or selected by an increasing number of Chinese enterprises due to its broad and effective international enforcement mechanisms. Complementary to this is the increasingly open and supportive attitude of Chinese judicial practice towards international commercial arbitration in China.

In Anhui Longlide Packing and Printing v Respondent BP Agnati, a case involving an application for confirmation of the validity of an arbitration agreement, the Supreme Court ruled that the arbitration agreement selecting the International Court of Arbitration of the International Chamber of Commerce for arbitration and Shanghai as the jurisdiction was valid. In Siemens v Shanghai Golden Landmark, a case involving an application for recognition of a foreign arbitration award, the First Intermediate People’s Court of Shanghai municipality shattered the restraints on the recognition of foreign-related elements.

However, judicial openness and support do not signify that courts can abuse their discretion in adjudicating the validity of arbitration clauses to get around the express provisions of laws or the precedents of higher-level courts. The abuse of discretion would undermine the predictability and legitimacy that laws provide. In a recent case, the Guangdong Provincial Higher People’s Court’s recognition of the validity of an arbitration clause that only specifies the seat of arbitration, rather than the arbitration institution, is an instance of such abuse of discretion.

On 1 September 2015, Rui Fu Ship Management claimed in the Guangzhou Maritime Court that the fixture note executed by it and Shandong Zhenhong Energy specified that Rui Fu was to provide the vessel Rui Fu Fa to carry 65,000 tonnes of Zhenhong’s coal for which it would charge Zhenhong freight. When the Rui Fu Fa reached the loading port as agreed, Zhenhong failed to provide the coal, resulting in Rui Fu incurring a loss.

Following its examination, the Guangzhou Maritime Court held that the dispute between Rui Fu and Zhenhong was a charter party dispute and that the parties had expressly provided in article 23 of the fixture note that disputes were to be arbitrated in Xiamen, in Fujian province, China, and governed by UK law. Furthermore, pursuant to article 271 of the Civil Procedure Law, when parties provide for arbitration in a contract, they may not institute a legal action in a People’s Court. Accordingly, the Guangzhou Maritime Court ruled not to accept Rui Fu’s complaint. Dissatisfied with that court’s civil ruling to dismiss its complaint, Rui Fu filed an appeal with the Guangdong Provincial Higher People’s Court requesting confirmation that the arbitration clause in the fixture note was invalid.

The Guangdong Provincial Higher People’s Court held that where parties failed to expressly specify the governing law applicable to examine the validity of the arbitration clause in their contract, the law of the seat of arbitration (i.e. Chinese law) should be applied in determining the validity of the arbitration clause. The court held that, pursuant to article 6 of the Interpretations of the Supreme People’s Court of Several Issues Concerning the Application of the PRC Arbitration Law, where an arbitration agreement specifies that arbitration is to be conducted by an arbitration institution of a certain place and such place has only one arbitration institution, such arbitration institution is deemed the arbitration institution specified by parties. As Xiamen has only one arbitration institution, the Xiamen Arbitration Commission, it follows that it should be deemed the arbitration institution specified by the parties.

SCOPE OF DISCRETION

However, article 16 of China’s Arbitration Law provides that an arbitration agreement is required to specify an arbitration commission, otherwise it is invalid. In other words, an arbitration clause that specifies only the location of arbitration instead of the arbitration institution is invalid. With a view to making the adjudication rules for the judicial examination of arbitration clauses clearer, the Supreme People’s Court (SPC) provided greater detail on the location specified in arbitration clauses in the form of judicial interpretations and an official reply.

The interpretations provide that where the parties specify in their clause that arbitration is to be conducted by an arbitration institution of a certain place, and such place has only one arbitration institution, such arbitration institution is deemed the specified arbitration institution, and the arbitration clause is valid. In contrast, where the parties only specify the seat of arbitration, the SPC expressly pointed out in Tangshan Boao Coal Industry and Summit Equities v Qingdao Xinyongan Industrial, a sale and purchase contract dispute, that an arbitration clause that only specifies the seat of arbitration without specifying the specific arbitration institution is invalid. It can be seen that, in determining the validity of an arbitration clause, the SPC has consciously differentiated seat of arbitration from the place where an arbitration institution is located.

In the case under consideration, the arbitration clause between Rui Fu and Zhenhong only specifies that the seat of arbitration of disputes is Xiamen, Fujian, China, without specifying that disputes are to be referred to an arbitration institution in Xiamen, Fujian for arbitration. What the parties specified is the seat of arbitration, not the place where the arbitration institution is located. The Guangdong Provincial Higher People’s Court twisted the understanding of the seat of arbitration specified by the parties into the place where the arbitration institution is located. By confusing, in its determination of the validity of the arbitration clause, the place where the arbitration institution is located and the seat of arbitration, the Guangdong Provincial Higher People’s Court not only ran counter to the instructions and precedent of the SPC, but even overstepped the express provisions of the judicial interpretations.

In the situation currently existing in China where arbitration-related laws and regulations are relatively sketchy and behind the times, the discretion of the courts is of great importance to the progress of judicial practice on arbitration. However, this does not signify that the discretion of courts is without limits. Guided by the principle of striving to cause arbitration clauses to be valid, courts are nonetheless required to ground themselves in the express provisions of laws and take into consideration the precedents of higher-level courts, render interpretations of laws that are in keeping with logic and avoid over-interpretation of laws, which could undermine the predictability and legitimacy provided by such laws.

Chloe Lin is an associate of Martin Hu & Partners