Drafting arbitration agreements: the pitfalls of compromise

The Chinese courts have reminded parties of the need for clear and unambiguous drafting of arbitration agreements. This is particularly important as arbitration agreements are too often still the product of eleventh hour negotiations, reflecting a hasty compromise between the parties’ respective arbitration preferences.

In recent years, the Chinese courts have adopted a more liberal approach towards the interpretation of arbitration clauses and have enforced arbitration agreements which are ambiguous but nonetheless reflect a clear intention to arbitrate. Important decisions demonstrating this trend include Zhejiang Yisheng Petrochemical v INVISTA Technologies (as featured in issue 3 of this report), and Anhui Longlide Packing and Printing v BP Agnati S.R.L. (as featured in issue 4 of this report). In these cases, the Supreme People’s Court of China (SPC) upheld the validity of arbitration agreements providing, respectively, for a China-seated ICC arbitration and a China-seated UNCITRAL arbitration administered by CIETAC.

But there are limits to the Chinese courts’ willingness to enforce poorly drafted clauses. The decision in Wicor Holding AG v Taizhou Haopu Investment Co Ltd handed down by the Taizhou Intermediate People’s Court of China (IPC), highlights the risks of a poorly drafted arbitration agreement, particularly one which reflects an apparently hasty compromise between the parties’ respective arbitration preferences.

In 1997, a Swiss company, Wicor Holding AG (Wicor), entered into a joint venture contract with a Chinese company, Taizhou Haopu Investment (Haopu). The contract contained an arbitration clause providing that:

“the dispute shall be finally settled under the Rules of Mediation and Arbitration of the International Chamber of Commerce. If arbitration claim is brought by one party, the place of arbitration should be chosen by the other party.”

Haopu brought court proceedings in July 2011 against Wicor in the Taizhou IPC alleging that Wicor had breached the joint venture contract. The Taizhou IPC considered the validity of the arbitration clause in the joint venture contract and found that it was invalid as, in breach of article 16 of the PRC Arbitration Law, no administering arbitration institution had been specified in the arbitration agreement.

Although the parties had stipulated the arbitral rules applicable to the arbitration (ICC Rules), they had failed to include any express reference to an administering institution. Nor could one be inferred simply by reference to the ICC Rules: the rules in force at that time (ICC Rules 1998) did not contain provisions equivalent to those found in the later ICC Rules 2012 and 2017 which provide that “The [ICC] Court is the only body authorised to administer arbitrations under the Rules…”; and “By agreeing to arbitration under the Rules, the parties have accepted that the arbitration shall be administered by the [ICC] Court” (Articles 1.2 and 6.2).

Had the ICC Rules 2012 or 2017 been the applicable rules, pursuant to Article 4 of the Interpretations on Certain Issues Relating to the Application of the PRC Arbitration Law 2006, the arbitration clause would have been considered enforceable.

The Taizhou IPC’s decision was subsequently confirmed by both the Jiangsu High People’s Court (HPC) and the SPC in March 2012. The SPC, in endorsing the Taizhou IPC’s decision, considered which law applied to questions over the validity of the arbitration agreement. The parties had not specified in the arbitration agreement the governing law of the arbitration agreement. Moreover, the arbitration agreement had deferred the choice of arbitral seat until after an arbitration claim had been commenced – when Haopu issued court proceedings no arbitration claim had been raised nor had the place of arbitration been nominated or agreed.

To ascertain the applicable law, the SPC relied on the following principles

• In the absence of the parties’ agreement on the applicable law of the validity of an arbitration agreement, the law of the place of arbitration shall apply if such a place is chosen.
• If the place of arbitration is not chosen or not clear, the law of the place where the court is located shall apply.

The SPC therefore held that the law at the locality of the court, i.e., PRC law, applied to the arbitration clause. And applying PRC law, the arbitration clause was invalid given it breached article 16 of PRC Arbitration law.

In the meantime, Wicor had commenced arbitration proceedings in November 2011 against Haopu in respect of a different dispute arising out of the joint venture contract. In accordance with the parties’ arbitration agreement, Haopu was expected to, but did not, nominate a seat of arbitration. The ICC Court therefore chose the seat of arbitration (Hong Kong) in accordance with the ICC Rules. The validity of the arbitration clause was subsequently confirmed by the tribunal in an award issued in November 2012. The final award on the merits was issued in favour of Wicor in July 2014, with a supplementary award being issued in November 2014 (Awards).

Wicor applied to the Taizhou IPC for recognition and enforcement of the Awards. Haopu relied on the public policy exception to resist enforcement.

The Taizhou IPC held that recognition and enforcement of the Awards would be contrary to Chinese public policy. The Awards were issued on the assumption that the arbitration clause was valid, but the clause had already been found to be invalid by the Chinese court judgments in 2011 and 2012, before the Awards were issued. Therefore, the Awards were in direct conflict with the decisions of the courts, and it would be contrary to Chinese public policy to enforce them.

Earlier decisions of the Chinese courts have taken a different approach but it is likely that they can be distinguished. In one earlier case, even though the PRC courts had found the arbitration clause to be invalid, the SPC held that enforcement of the award was not in violation of Chinese public policy. In that case, however, the PRC’s decision on validity of the clause had been handed down after the arbitral award was rendered. The timing of the court’s decisions on validity of the arbitration agreement therefore seems key.

All of the cases referenced in this article concern the interpretation of a compromise arbitration agreement, i.e. one which seeks to reach a compromise between the parties’ competing preferences for resolving disputes. Often such a compromise is necessary to resolve a negotiating impasse. However, the lesson to be learned from these cases is that the compromise reached must not undermine the validity of the clause – clear and unambiguous drafting is necessary to ensure the validity of an arbitration agreement.

This is particularly so in China, where there are a number of idiosyncrasies to Chinese arbitration law which are not familiar to foreign parties. If the arbitration clause does not clearly spell out the seat, the rules and the administering arbitration institution, parties doing business in China run the risk of lengthy legal battles over the validity of an arbitration clause before they can even start arbitrating their substantive dispute. A dispute resolution clause is after all meant to be incorporated into a contract to assist in resolving disputes, not to create additional satellite litigation.