China Model Case: Recognizing Validity of Agreement for SIAC Arbitration in Shanghai

by Yi Dai, Dimitri Phillips, and Michelle Zheng

In its release of model arbitration-related cases earlier this year, the Supreme People’s Court (“SPC”) included a ruling from a Shanghai court affirming the validity of an agreement for a foreign arbitral institution to administer an arbitration with a seat in Shanghai. Traditionally, arbitrations in China have had to be administered by domestic institutions, although several PRC courts and even one official determination by the SPC have come to a different conclusion in the past.[1] The recently published model case, Daesung Industrial Gases Co., Ltd. v Praxair (China) Investment Co Ltd (“Model Case”), is significant in several respects, first and foremost as a possible signal of opening-up reform, maybe even setting the stage for the promulgation of the PRC Arbitration Law amendment whose draft was released almost three years ago. This article examines the Model Case and its implications.

Case Background

In March 2016, the claimants in the Model Case had initiated arbitration at the Singapore International Arbitration Centre (“SIAC”) pursuant to the following arbitration clause:

“[…] 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.”[2]

The arbitral tribunal rejected a jurisdictional challenge and found Singapore to be the seat of the arbitration (with Singapore law governing the validity of the arbitration clause). Upon the respondent’s application, the High Court of Singapore also rejected the jurisdictional challenge, whereas the Court of Appeal of Singapore found as follows:

1. The arbitration clause specifies Shanghai, China, not Singapore, as the arbitral seat, and PRC law governs the arbitration clause.

2. Since Singapore was not the arbitral seat, no other issues in the case fell to the Singapore court for adjudication.

Shortly thereafter, the SIAC tribunal held hearings in Shanghai and, in February 2019, made a partial award on substantive legal liability. In October 2019, the respondent applied to the tribunal to “terminate” the arbitration proceedings. On 30 October 2019, the SIAC tribunal issued an interim order suspending the arbitration.

Finally, on 20 January 2020, the claimants filed an application with Shanghai First Intermediate People’s Court (“Shanghai Court”) to confirm the validity of the arbitration clause.

Issues

The Shanghai Court identified two legal issues in this case:

1. Should the court accept the claimants’ application to confirm the validity of the arbitration clause?

2. If so, was the arbitration clause valid or not?

Reasoning

1. The Court Should Accept the Claimants’ Application

While the second issue of the Model Case may be more high-profile, the Shanghai Court’s reasoning on whether it should even consider that issue is also worth attention. Among other things, the respondent argued that the claimants’ application was time barred by Article 20 of the PRC Arbitration Law and that the SIAC tribunal had already confirmed the invalidity of the arbitration clause under PRC Law.

The Shanghai Court noted that Article 20 of the PRC Arbitration Law states that “where a party raises an objection to the validity of the arbitration agreement, it shall be raised before the first hearing” but that the Model Case did not involve an objection to validity. Instead, the claimants sought confirmation of the validity of the arbitration clause, and therefore, according to the Shanghai Court, Article 20 did not apply and the claimants’ application was not time barred.

The Shanghai Court also noted that, although the SIAC tribunal had already decided on jurisdiction in the Model Case, the judgment of the Court of Appeal of Singapore took the foundation out from under the decision of the SIAC tribunal, as indicated also by the latter’s subsequent order to suspend the arbitration. The Shanghai Court stressed that there was then no binding decision on the validity of the arbitration clause under PRC law, and therefore it was proper for the Shanghai Court to decide on the issue.

2. The Arbitration Agreement Is Valid

Microscopically, the Model Case did not change, reinterpret, or supplement the status quo of PRC law. Already in 2013, the SPC had issued an official “Reply”, in the case of Anhui Province Longlide Packaging and Printing Co Ltd v BP Agnati S.R.L., (“SPC Reply”) supporting the validity of an agreement providing for arbitration by the ICC with a seat in Shanghai. In fact, the Shanghai Court explicitly followed that SPC Reply as a principal basis for concluding that the arbitration clause in the Model Case was valid: the Shanghai Court cited the SPC Reply and likewise found that the requirements for validity under PRC law (intention to arbitrate, subject matter of arbitration, and arbitration commission)[3] were satisfied in the arbitration clause at issue in the Model Case.

Furthermore, however, the Shanghai Court also stressed the lack of any express prohibition, under PRC law, against foreign institutions administering arbitrations in China. The court further noted that such a prohibition would run counter to international commercial arbitration trends. Maybe most importantly, with reference to the controversial fact that the third requirement for validity, designating an “arbitration commission”, was technically not fulfillable for foreign arbitral institutions (because Article 10 of the PRC Arbitration Law as amended in 2017 appears to not recognize them as “arbitration commissions”), the Shanghai Court stated that the PRC Arbitration Law “initially” lacked an international perspective. The ruling of the Model Case seems to carry some suggestion of the need to update (and even “improve”) the legislation.

Takeaways

Macroscopically, the SPC’s publication of the Shanghai Court’s ruling as a Model Case not only reinforces the acceptance of arbitration by foreign arbitral institutions in China and more generally the country’s opening-up, but may also send a signal for a major update to PRC arbitration legislation, which would likely be of far greater importance. The PRC Arbitration Law was promulgated in 1994, with only cosmetic changes in 2007 and 2009, and the only substantive amendment remains in draft form since July 2021. That draft amendment dealt with the issue of foreign arbitral institutions administering arbitrations in China, formally introduced the concept of the “seat of arbitration” (at issue in the Model Case, inter alia), and touched on many other matters of moment. While critical questions might remain even under that amendment (e.g., whether an award rendered in China by a foreign arbitral institution would be recognizable/enforceable under the New York Convention or under purely PRC rules, an issue on which PRC judges have expressed opposing views),[4] updating the PRC Arbitration Law would be most welcome in the world of international arbitration.

Footnotes

[1] SPC’s Reply in the case of Anhui Province Longlide Packaging and Printing Co Ltd v BP Agnati S.R.L., [2013] Min Si Ta Zi No. 13; SPC’s Reply in the case of Ningbo Beilun Licheng Lubricating Oil Co., Ltd. and Formal Venture Corp., [2013] Min Si Ta Zi No. 74; Brentwood Industries, Inc. (U.S.A.) and Guangdong Valanlong Machinery Complete Equipment Engineering Co., Ltd., [2015] Sui Zhong Fa Min Si Chu Zi No. 62.

[2] The original Chinese of this part of the arbitration clause is as follows: “双方均同意将该等争议最终交由新加坡国际仲裁中心根据其仲裁规则在上海仲裁。”

[3] PRC Arbitration Law, Article 16.

[4] Such awards have been deemed non-domestic (to be recognized/enforced or not according to the New York Convention) by some PRC court decisions, e.g., [2004] Xi Min San Zhong Zi No. 1 and [2008] Yong Zhong Jian Zi No. 4, while others have been treated as “foreign-related” (and thus subject to enforcement according to the PRC Civil Procedure Law), e.g., in the case [2015] Sui Zhong Fa Min Si Chu Zi No. 62.