In a recent case in mainland China, the Taizhou Intermediate People’s Court refused to enforce an ICC award on the 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.
ARBITRAL SEAT
The seat is an important legal concept, as its law provides the supporting legal framework for the arbitration, and its courts supervise the arbitration. Furthermore, the seat 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. The seat is not to be confused with the factual venue where arbitration meetings and hearings are conducted.Absent 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.
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It is important to understand that the substantive law of the contract does not normally 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.
Taizhou court case. The parties in this case had entered into a Sino-foreign joint venture (JV) agreement governed by PRC law with an arbitration clause that left the determination of the arbitral seat open.
The relevant part of the arbitration clause is provided:
“… The arbitration will be conducted under the Conciliation and Arbitration Rules of the ICC. If one party commences arbitration, the seat of arbitration shall be chosen by the other party. The language of the arbitration shall be English …” (translation from Chinese original).
In July 2011, the Chinese party sued the foreign party (D) in the Taizhou Intermediate People’s Court for breaching the non-compete clause in the JV agreement, seeking various remedies. But the foreign party invoked the arbitration clause claiming that the Taizhou 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, such as 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 had previously been pre-approved by the Supreme People’s Court (SPC) in March 2012.
While the court proceedings were pending, the foreign party commenced ICC arbitration proceedings against the Chinese party back in Hong Kong. Since the Chinese party 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 and the other in November of 2014. On 9 December 2014, the foreign party applied to the court to enforce the awards. On 2 June 2016, the court held that enforcement of the awards would be in breach of PRC public policy because the awards were in conflict with the ruling.
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Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker & McKenzie by e-mailing Danian Zhang (Shanghai) at: danian.zhang@bakermckenzie.com
