Jurisdiction - China
News
China – Yisheng V Invista.

23 July, 2014

 

 

Introduction


The Ningbo Intermediate People’s Court in the People’s Republic of China (Ningbo Court) has ruled that a “hybrid” clause providing for arbitration at China International Economic and Trade Arbitration Commission (CIETAC) under United NationsCommission on International Trade Law Arbitration Rules (UNCITRAL Rules) is valid.


Facts


Before the Ningbo Court, the claimant, a Chinese petrochemical company Zhejiang Yisheng (Yisheng) had entered into two technology licensing agreements with the respondent, INVISTA Technologies S.à.r.l. (Invista), a European technology licensor. Under the agreements, the parties agreed that “The arbitration shall take place at China International Economic Trade Arbitration Centre (CIETAC), Beijing, P.R. China and shall be settled according to the UNCITRAL Arbitration Rules as at present in force”


When a dispute occurred between the parties, Invista commenced arbitration in July 2012, and Yisheng subsequently applied to the Ningbo Court asking it to declare the arbitration clause invalid. 


Key Points And Reasoning


Yisheng argued that the arbitration clause is invalid for three reasons. Firstly, the arbitration clause did not specify a selected arbitration institution, as required under PRC Arbitration Law. Secondly, the adoption of the UNCITRAL Rules suggested that the arbitration was an ad hoc arbitration, which is not allowed under PRC law. Thirdly, the arbitration proceeding has been arranged in a manner similar to ad hoc arbitration. As such, Yisheng argued that the arbitration clause, given its ad hoc arbitration nature,
should be struck down.


Invista disagreed for three reasons. Firstly, the arbitration clause referred to the term “CIETAC” which is a specific arbitration institution in China and therefore indicated the parties’ intention to resolve their dispute through institutional arbitration. Had this not been the case, the parties would not have named the arbitration institution’s name. Secondly, the UNCITRAL Rules are not a unique set of rules only adopted for ad hoc arbitration and it has been selected by arbitration institutions all over the world. Thirdly, the arbitration proceeding is consistent with institutional arbitration. 


The Ningbo Court initially upheld Yisheng’s challenge on the arbitration clause and declared it invalid. The decision was then referred upwards to the Zhejiang High People’s Court and the Supreme People’s Court (SPC) in accordance with the internal Chinese reporting system applicable to court rulings on the validity of foreign-related arbitration agreements.
Accordingly, on the basis of the SPC’s guidance, the Ningbo Court overturned its original decision and upheld the arbitration clause.

 

While the agreement did not expressly specify the governing law of the arbitration clause, the parties had chosen to use PRC law in the court proceedings. Such consent on the governing law of the arbitration clause was lawful under article 18 of the Law of the People’s Republic of China on Choice of Law for Foreign-related Civil Relationships


The term “take place at” under the arbitration clause should be plainly interpreted as designating a physical venue for arbitration. However, in order to effect the parties’ intention to arbitrate, the term can be interpreted as selecting an arbitration institution. Although the Chinese name of the arbitration institution was inaccurately set forth under the arbitration clause, on the basis of its English abbreviation “CIETAC”, it could be inferred that the parties had selected CIETAC in Beijing as the arbitration institution. As such, the arbitration clause was not in contravention with PRC law (article 3 of the Judicial Interpretation of PRC Arbitration Law). 


Based upon the foregoing, the Ningbo Court dismissed Yisheng’s application and ordered it to pay litigation costs. The ruling is final and binding upon the parties, subject to no appeal.


Comments


The Ningbo Court’s decision is an example of the Chinese courts being unwilling to strike down an arbitration clause simply because of a technical defect. In order to respect the parties’ true intentions to resolve their dispute by arbitration, a defect of the arbitration clause was cured and the arbitration clause was reconstructed and given effect. 


On the other hand, the decision was made squarely within the PRC arbitration regime, namely that parties are required to select a specific arbitration institution in China to administer the arbitration proceedings and arbitration agreements providing for ad hoc arbitration remains invalid in China. 


It is noteworthy that Article 4 (3) of the CIETAC Arbitration Rules (2012) provides that “where theparties agree to refer their dispute to CIETAC for arbitration but … have agreed on the application of other arbitration rules, the parties’ agreement shall prevail unless such agreement is inoperative or in conflict with a mandatory provision of the law as it applies to the arbitration proceedings. Where the parties have agreed on the application of other arbitration rules, CIETAC shall perform the relevant administrative duties.” In light of this provision, CIETAC is allowed to administer the arbitration proceedings between Yisheng and Invista as an arbitration institution under the UNCITRAL Rules.


Article 2 (4) of the China (Shanghai) Pilot Free Trade Zone Arbitration Rules promulgated by Shanghai International Arbitration Centre (SHIAC) (effective since 1 May 2014) has similar language suggesting that SHIAC can administer arbitration proceedings on the basis of other arbitration rules agreed by the parties. Further, Article 2 (5) provides that if the parties agree to adopt the UNCITRAL Rules, SHIAC will become the appointing authority “and perform other administrative functions” in accordance with the UNCITRAL Rules or the agreement of the parties. 


Again, this demonstrates that arbitration institutions in China are striving to accommodate the parties’ agreement (such as the adoption of the UNCITRAL Rules) on the one hand, and comply with the requirements for an arbitration institution in China to administer arbitration proceedings on the other, without opening the door to ad hoc arbitration. Although it is interesting to observe the increasing open-mindedness of Chinese arbitration institutions and their support for parties’ arbitration agreements, the challenge ahead lies in their level of sophistication when dealing with other arbitration rules going forward. One mistake may have ramifications on the enforceability of future arbitral awards.

 

Article supplied by David Gu, Allen & Overy

 

HKIAC Logo

 

For further information, please contact:

 

Hong Kong International Arbitration Centre

[email protected]

Homegrown Dispute Resolution Law Firms in China

 

International Dispute Resolution Law Firms in China

Comments are closed.