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China – PRC Arbitration By A Foreign Arbitral Tribunal In China: A Case Summary On Longlide Packaging Co. Ltd V BP Agnati SRL SPC 2013 Min Ta Zi No.13

7 November 2014

 

Legal News & Analysis – Asia Pacific – China –  Dispute Resolution

 

In March 2013, the PRC Supreme People’s Court (“SPC”) in Longlide Packaging Co Ltd v BP Agnati SRL (“Longlide”) dismissed a challenge against the validity of a China-seated ICC arbitration clause. The Longlide decision has been predictably hailed in some quarters as a landmark decision evidencing not only the viability of foreign arbitral institutions administering an arbitration on the Mainland but also the increasingly pro-arbitration approach of the Chinese courts. However, on the flip side, vital questions concerning whether a future SPC considering the same issue would rule in thesame way and issues concerning enforcement of any arbitral award eventually rendered thereunder ultimately remain unresolved.

 
Facts

 
In 2010, Anhui Longlide Package Printing Co. Ltd (“Anhui Longlide”), a Chinese company and BP Agnati S.R.L., an Italian company entered into a sales contract (the “Contract”). The Contract contained the following arbitration clause (the “Arbitration Clause”):


“All disputes arising out of or in connection with the present contract shall be submitted to the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. Place of jurisdiction shall be Shanghai, China. The arbitration shall be in English.”

 
A dispute subsequently arose between the parties as to the validity of the Arbitration Clause. Anhui Longlide applied to the Hefei Intermediate People’s Court (the “Hefei Court”) to declare the Arbitration Clause invalid. Before the Hefei Court, Anhui Longlide argued that the ICC International Court of Arbitration is not a recognized arbitral commission under the PRC Arbitration Law.

 
The Hefei Court accepted Anhui Longlide’s argument and declared the Arbitration Clause invalid. It reasoned that according to Article 16 of the Interpretation of the Supreme People’s Court on Certain Issues Concerning the Application of the Arbitration Law (the “SPC Interpretation”), the law of the place of arbitration (i.e. PRC Arbitration Law) shall apply to the Arbitration Clause as the parties have not specified the governing law of their arbitration agreement. The Hefei Court further opined that while the PRC Arbitration Law does not address the issue of whether a foreign arbitration commission could conduct arbitration in China, arbitration is a professional service that can only be provided with the authority granted by the relevant judicial administrative organs as set out in Article 10 of the PRC Arbitration Law, which provides that “the establishment of an arbitration commission shall be registered with the judicial administrative departments of provinces, autonomous regions, and municipalities”. Accordingly, the Hefei Court determined that the ICC International Court of Arbitration cannot administer arbitrations in Mainland China and held the Arbitration Clause invalid under PRC law.

 
However, the matter did not end there. Pursuant to the reporting system of the Chinese courts which requires a Chinese Intermediate People’s Court to report a foreign-related or international arbitration case to a High People’s court before it can issue a ruling to invalidate a foreign-related or international arbitration clause, the Hefei Court’s opinion was submitted to the Anhui High People’s Court (the “Anhui Court”) for approval. The Anhui Court was split in its opinion. While the minority agreed with the Hefei Court, the majority concluded that the Hefei Court had wrongly ruled the Arbitration Clause to be invalid.

 
Article 16 of the PRC Arbitration Law provides that:

 

“…An arbitration agreement shall contain the following particulars:

(1) an expression of intention to apply for arbitration;

(2) matters for arbitration; and

(3) a designated arbitration commission.”

 
The majority opined that the Arbitration Clause was valid as it contained all 3 elements set out in Article 16. However, the minority disagreed with the majority opinion; as the PRC government had not opened the arbitration market to foreign arbitral institutions, the minority concluded that the ICC International Court of Arbitration – being a foreign arbitral institution from a Chinese perspective – has no authority to conduct arbitration in China.

 
As a result of the difference in opinion, the Anhui Court further referred the matter to the SPC. In reply, the SPC stated that as the parties had not made an express choice regarding the governing law of the Arbitration Clause, Article 16 of the SPC Interpretationrequires the application of PRC law to determine the validity of the Arbitration Clause as the Arbitration Clause had provided for the seat of the arbitration to be in Shanghai. Accordingly, PRC Arbitration Law shall determine the validity of the Arbitration Clause. Applying Article 16 of the PRC Arbitration Law, the SPC agreed with the majority opinion of the Anhui Court that all the elements set out in Article 16 of the PRC Arbitration Law were satisfied and therefore found the Arbitration Clause to be valid .

 

Analysis And Conclusion

 
Notwithstanding the SPC’s ruling, certain key questions regarding the viability of a Mainland China-seated ICC arbitration remain unanswered.
(a) While the SPC considered the validity of the Arbitration Clause under Article 16 of the PRC Arbitration Law, it failed to consider whether the Arbitration Clause complied with Article 10 of the Arbitration Law, and, specifically, whether the ICC International Court of Arbitration (or any other foreign arbitral institution for the matter) had been “registered with the judicial administrative departments of provinces, autonomous regions, and municipalities”. It evidently has not been so registered. As the SPC’s Reply in Longlide is not binding on the SPC, it is questionable whether an SPC hearing a subsequent case would also arrive at the same conclusion.

 
(b) The question of how a Mainland China-seated ICC arbitral award can be enforced in Mainland China remains an elephant in the room. In 2008, the Ningbo Intermediate People’s Court had recognized and enforced an award made by an ICC tribunal seated in Beijing in the case of Duferco S.A. v Ningbo Art & Craft Import & Export Co. Ltd (2008) Yong Zhong Jian Zi No. 4 (“Duferco”) pursuant to the New York Convention (“Convention”) as a nondomestic award. However, commentators had cast doubts on Duferco’s approach of enforcing a Mainland China-seated ICC award pursuant to the Convention which was in any event not an SPC decision. The SPC’s reply in Longlide failed to resolve such doubts and the question remains unanswered. China has declared, under Article I(3) of the Convention, that the Convention shall only be applied to the recognition and enforcement of awards made in the territory of another contracting state. If, as held by the SPC in Longlide, the Arbitration Clause provided for the seat of the arbitration to be in Mainland China, any subsequent arbitral award should be classified as a domestic award and therefore subject to enforcement pursuant to PRC’s Civil Procedure Law and Arbitration Law rather than under the Convention. In circumstances where the ICC Court of International Arbitration falls outside the meaning of an “arbitration commission” as defined in Article 10 of PRC Arbitration Law, there is considerable doubt whether and how any such arbitral award could be subsequently enforced under PRC law.

 
Until these questions have been answered by way of an interpretation from the SPC, end-users are advised to avoid entering into any agreement providing for a Mainland China-seated arbitration administered by a foreign arbitral institution.

 

This article was supplied by Desmond Ang and Dennis Wu, O’Melveny & Myers

 

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