PRC Court confirms validity of “SIAC-Shanghai” clause

03 September 2020

In Daesung Industrial Gases Co Ltd v Praxair (China) Investment Co Ltd (2020) Shanghai 01 Special Civil Procedure No. 83, the Shanghai No.1 Intermediate People’s Court confirmed the validity of an arbitration clause which provided for Singapore International Arbitration Centre (SIAC) arbitration in Shanghai. This is the first occasion where a PRC Court expressly confirms that a non-PRC arbitration institution may conduct arbitration hearing in the PRC, and that this has nothing to do with whether the PRC arbitration market is open to non-PRC arbitration institutions or not. In addition, this case further affirms the position that the PRC Court's power to review a non-PRC arbitral tribunal's decision on the validity of the arbitration agreement is not confined to the enforcement stage.

Background

The dispute arose in relation to a Takeout Agreement and its addendum ("Agreement") between Daesung Industrial Gases Co Ltd, a Korean company and its affiliate in Guangzhou ("Claimants"), and Praxair (China) Investment Co Ltd, a PRC company associated with Praxair Inc. in the USA ("Respondent").

The dispute resolution provision of the Agreement reads as follows:

ARTICLE 14: DISPUTES

14.1 This Agreement shall be governed by the laws ofthe People’s Republic of China.

14.2 With respect to any and all disputes arising outof or relating to this Agreement, the [p]arties shall initially attempt in goodfaith to resolve all disputes amicably between themselves. If such negotiations fail, it is agreed by both parties that such disputes shall be finally submitted to the Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai, which will be conducted in accordance with its Arbitration Rules. The arbitration award shall be final and binding on both [p]arties.” (emphasis added)

In 2016, the Claimants initiated arbitration proceedings with SIAC. The Respondent objected to the tribunal's jurisdiction on the basis that, under PRC law, a non-PRC arbitration institution is prohibited from running an arbitration in PRC.

The arbitral tribunal arrived at a split decision on the question of its jurisdiction, with the majority holding that the tribunal had jurisdiction. The majority considered that it would have made no commercial or logical sense for parties to have intentionally selected a law to govern the arbitration agreement which would then invalidate it. Therefore, it took the view that Shanghai was not the seat, but merely the venue of the arbitration.

The dissenting arbitrator took the view that Shanghai was the seat of the arbitration, and thus PRC law was the law of the seat as well as the applicable law of the arbitration agreement. As PRC law did not allow the dispute to be referred to arbitration, the tribunal lacked jurisdiction to hear the dispute.

The Singapore Court's decision

The Respondent then applied to the High Court of Singapore seeking a declaration that the tribunal lacked jurisdiction to hear the dispute. The Judge accepted that the choice of PRC law would serve as the starting point to determine the parties' implied choice of the applicable law. But he considered that Singapore law, as the law of the seat, would displace that implied choice, because it was likely that the parties' arbitration agreement would be invalid if PRC law were the applicable law. On that basis, the Judge dismissed the Respondent's jurisdictional challenge.

The Respondent appealed to the Court of Appeal of Singapore, which reversed the lower court's decision on the applicable law of the arbitration agreement. The Court of Appeal held that the natural meaning of the phrase "arbitration in Shanghai" was that Shanghai was the seat of the arbitration. Where parties had specified only one geographical location in an arbitration agreement, that ought to be construed as a reference to theparties’choice of the seat. It followed that the parties' implied choice of applicable law of the arbitration agreement was PRC law. The appeal was therefore allowed to that limited extent, but the Court of Appeal did not express any concluded view as to whether the tribunal did or did not have jurisdiction.

The Shanghai Court's decision

Shortly after the Singapore Court of Appeal's decision was rendered, the Claimants requested the Shanghai No.1 Intermediate People's Court to confirm the validity of the arbitration agreement in question.

The Court in Shanghai found that the arbitration agreement contained all the elements as stated in Article 16 of the PRC Arbitration Law, namely, (1) an expression of the parties' intention to submit the matter to arbitration; (2) the scope of matters being referred to arbitration; and (3) a designated arbitration commission. Therefore, the arbitration agreement was valid. 

As to the Respondent's argument that a non-PRC institution is prohibited from conducting arbitration proceedings in PRC, the Court in Shanghai determined that:-

First, arbitration is a dispute resolution mechanism which is based on the parties' consent. The question of whether the PRC arbitration market was 'open' or not was irrelevant. While the State had made reservation to ad hoc arbitrations under the New York Convention, non-Chinese arbitration institutions do not fall within the scope of such reservation.

Second, the Supreme People’s Court (“SPC”) had issued a reply letter in Anhui Province Long Li De Packaging and Printing Co Ltd v BP Agnati S.R.L. No. 13 [2013] of the Civil Division IV of the SPC on 25 March 2013 confirming that parties to a contract involving foreign elements may designate a non-PRC arbitration institution to resolve disputes there under by arbitration domestically. The said reply letter is a form of judicial interpretation which is legally binding.

Third, there is no statutory instrument or law which expressly prohibited non-PRC arbitration institutions from conducting arbitration proceedings in PRC. Such prohibition would go against the developing trend in international commercial arbitration.

Fourth, at the time of the promulgation of the PRC Arbitration Law, the legislators some what lacked an international perspective.  As a result, the legislation at the time was not fully in line with international practice. The proper interpretation of "arbitration institution" under the PRC Arbitration Law is a matter that needs to be resolved by legislation in the future.  However, in the absence of express provisions in the legislation, the Court saw fit to fill in the gap by way of judicial interpretation.

Key Takeaway

Daesung Industrial is a milestone decision in many ways. It is the first PRC Court decision which expressly confirms that a non-PRC arbitration institution may conduct arbitration hearing in the PRC.  It is also the first decision which directly addresses the 'silence' or perhaps ambiguity in the PRC Arbitration Law over the status of offshore arbitration institutions. This will certainly "open the door" for non-PRC institutions to conduct arbitrations in PRC. Commercial parties who are used to having overseas institutions administer their cases can now choose PRC cities as their seat of arbitration with a greater degree of certainty over its status and effectiveness.

The decision also demonstrates the commitment of the PRC Courts in further aligning its arbitration practices with international standards.

It is thus expected that the PRC Courts will continue to adopt a "pro-arbitration" policy, and that international arbitration practitioners will have a greater role to play in the development of arbitration practice there in.

What is also significant is that the Daesung Industrial was decided before the end of the arbitral proceedings. This further affirms the position that the PRC Court's power to review a non-PRC arbitral tribunal's decision on the validity of the arbitration agreement is not confined to the enforcement stage.

This article was authored by José-Antonio Maurellet SC and Ellen Pang from Des Voeux Chambers and Helen Shi, Allen He from Fangda Partners. 

 

José-Antonio Maurellet SC is a Hong Kong born Eurasian. He is an English, Cantonese and French native speaker. He also can speak some Mandarin. Jose read law at St Edmund Hall, Oxford University. He was called to the Hong Kong Bar in 2000 and to the Inner Bar in 2016. He was admitted in 2020 as a solicitor of the Eastern Caribbean Supreme Court, British Virgin Islands circuit.

He has advised and acted in numerous shareholder disputes, winding up petitions, and applications arising out of liquidations of companies. He also regularly acts in disputes arising from banking/financial services, in particular alleged mis-selling of financial products. He has previously acted for the Securities and Futures Commission as well as the Listing Division of the Stock Exchange of Hong Kong. He has appeared before the Listing Appeals Committee as well as the Takeovers and Mergers Panel.

Mr. Maurellet is a member of the HKIAC Panel of Arbitrators, Emergency Panel and the Panel for Financial Services Disputes, as well as the HKIAC Panel of Emergency Arbitrators. He currently is a Council member of the Hong Kong International Arbitration Center as well as a former member of its Appointments Committee. He regularly appears as counsel in arbitrations, and has acted in Court related proceedings such as injunctions in aid of arbitral proceedings as well as applications for leave to enforce and leave to set aside arbitral awards. He also sits as an arbitrator from time to time.

 

Helen Shi's practice focuses on international commercial arbitration and litigation. Ms. Shi is the lead counsel in the SIAC arbitration and Shanghai Court proceedings described in this article. Ms. Shi serves as an ICC court member for China and Co-chair of the IBA Asia Pacific Arbitration Group. Recognized by Chambers & Partners as "an icon of arbitration" in China, Ms. Shi has acted in more than 100 cases, representing many multinational companies and large domestic enterprises in a breadth ofdisputes, including equity acquisitions, oil and gas projects, aircraft leasing and construction.  

Ms. Shi represents clients in litigation before Chinese courts and in arbitration before the ICC, AAA, SIAC, HKIAC, CIETAC and ad hoc arbitrations under UNCITRAL rules.

Ellen Pang completed her LLB in Chinese Law at Peking University and was an associate of Fangda Partners' Beijing Office, where she specialised in PRC-related dispute resolution. She obtained the PRC Legal Qualification Certificate in 2011. Before joining Chambers, Ellen obtained her Juris Doctor degree with First Class Honours at the University of Hong Kong and her Bachelor of Civil Law degree at the University of Oxford. 

Ellen is developing a broad practice in civil and criminal law. She has been involved in a wide range of cases concerning trusts, land and company matters. Ellen has also been involved in criminal and family law matters. 

Ellen is fluent in both oral and written Chinese. She has previously been instructed to appear in proceedings conducted in Chinese.

  

Allen He's practice focuses on litigation and arbitration. Mr. He serves as the second chair for Daesung Industrial before the Shanghai No.1 Intermediate Court in thecase as described in this article.

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