Administration of Arbitration in China by SIAC: Daesung Industrial Gases Co Ltd v Praxair (China) Investment Co Ltd

Apr 2021

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In what is regarded as a potentially significant sign of the developing internationalisation of China’s arbitration market, the Shanghai No.1 Intermediate People’s Court recently held that the Singapore International Arbitration Centre (“SIAC”) could administer an arbitration claim in China.  Previously, it had generally been thought that foreign arbitral centres were prohibited from administering cases in China.

What is notable is that although the decision turned upon a finding that there were sufficient ‘foreign elements’ to the claim to justify SIAC exercising an administrative role in China, almost all relevant connecting factors linked the matter to China and not to any other jurisdiction: the underlying contract was governed by PRC law, the seat of the arbitration was Shanghai, performance was to take place in China (i.e. production, supply and delivery) and the respondent was a Chinese entity.

Background

The matter involved a dispute involving a Takeout Agreement for the sale of industrial gases in China.  While the claimant was a Korean entity, Daesung and the parties agreed to submit their dispute to SIAC, all other relevant factors pointed to China.  The arbitration agreement stated that:

“…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.”

Nevertheless, Daesung commenced arbitration in Singapore in 2016 and the respondent, Praxair challenged the tribunal’s jurisdiction.  At issue was Praxair’s contention that PRC law was the proper law of the arbitration agreement and as PRC law would operate to invalidate an arbitration agreement which sought to reference a foreign arbitral commission, the SIAC tribunal could not have jurisdiction in the case.  Praxair submitted that under PRC law, reference to a specific arbitration commission is only valid if the arbitral commission (in this case, SIAC), is:

  • established in municipalities / seats of governments of provinces of autonomous regions, and registered with the relevant administrative department of justice; and
  • a member of the China Arbitration Association.

Praxair argued that PRC law does not permit foreign arbitral institutions to administer a PRC seated arbitration or a purely domestic dispute, and in this case, as the seat of the arbitration was Shanghai, the matter would be categorised as a domestic dispute.

The Tribunal disagreed making the point that “it makes no commercial or logical sense for parties to intentionally select a law to govern an arbitration agreement which would then invalidate it.”  The Tribunal accepted that as the governing law of the Takeout Agreement was PRC law, PRC law was also the parties’ presumptive choice of law of the arbitration agreement.  However, in circumstances where PRC law might invalidate the arbitration agreement, the parties’ presumptive choice of law should be displaced by Singapore law.

The Tribunal also concluded that with respect to the seat of the arbitration, so as to avoid the possibility that the parties’ manifest intention to arbitrate could be invalidated, the reference to ‘arbitration in Shanghai’ should be interpreted as a reference to the venue of the arbitration and not its seat.

Singapore Court Appeals

Praxair appealed the matter to the Singapore High Court where the Tribunal’s jurisdiction was upheld and similar reasoning adopted.  In doing so, the High Court noted one further point; that pursuant to SIAC’s Rules, Singapore is deemed to be the default seat of the arbitration unless otherwise expressly provided by the parties and that as Shanghai is a city – not a ‘law district’ or jurisdiction in the same way as Singapore – the reference to Shanghai should be read as a choice of venue not seat.

However, on a further appeal to the Singapore Court of Appeal, the Tribunal and High Court decisions were overturned.  The Court of Appeal held that the natural meaning of the words, ‘arbitration in Shanghai’, was that Shanghai was the parties’ intended seat of the arbitration.  There was nothing to displace this interpretation.  The potential ‘invalidating effect’ of the parties’ choice of PRC law was not relevant.  Moreover, PRC law was therefore the implied proper choice of law of the arbitration agreement.

Significantly however, the Court of Appeal held that as the seat of the arbitration was Shanghai, it had no supervisory jurisdiction over the arbitration and therefore would express no view as to the validity or otherwise of the Tribunal’s jurisdiction.  It was a matter for the PRC courts as to whether PRC law operated to render the arbitration agreement invalid and in turn, negate the Tribunal’s jurisdiction.

Judgment of the Shanghai No 1 Intermediate People’s Court

Matters then moved to China and the Shanghai No.1 Intermediate People’s Court which in a surprise decision, concluded that the agreement to arbitrate was valid.  The court held that the parties had: (i) expressed an intention to arbitrate; (ii) defined the scope of matters to be referred to arbitration; and (iii) selected an arbitration commission (albeit a foreign commission, SIAC).  The agreement complied with Article 16 of the PRC law on Arbitration and was therefore valid.

The Court justified its finding by reference to an official reply submitted by the Supreme People’s Court (“SPC”) in a 2013 case involving Anhui Longlide Packaging Printing v BP Agnati – a case concerning a reference to ICC arbitration seated in China.  The SPC reply stated that foreign arbitral institutions may administer domestic arbitrations which involve ‘foreign elements.’  Accordingly, the Court held that there is no express prohibition on foreign institutions conducting arbitration proceedings in China; where sufficient foreign elements are identified, a foreign institution may administer a domestic arbitration.  Interestingly, the Court noted that were such a prohibition to exist, it would be in contradiction with the prevailing trend in international commercial arbitration.

Importantly, however, the question as to what constitutes an arbitration commission under PRC law was not addressed by the Court.  Nevertheless, in what is considered a progressive approach, the Court acknowledged that PRC arbitration legislation lacked an international perspective and did not conform to international practice when enacted in 1994.  At the time, the law was primarily aimed at domestic arbitration, with some ancillary provisions dealing with cases involving ‘foreign elements’.  While noting there are therefore some gaps which call for further clarification and amendment by legislation, the court emphasised that judicial interpretation had full legal force and could fill legislative gaps so as to ensure the law reflected developing trends in international commercial arbitration.

Comments

Despite the judgment, and the positive indications of a more international approach that it signifies, there is still uncertainty regarding the legality of foreign arbitral institutions administering arbitrations in China and the recognition and enforcement of the arbitral awards issued in such cases.

As highlighted, the PRC Arbitration Law requires ‘arbitral commissions’ in China to be established by departments of the People’s Municipal Governments, or in the case of foreign-related arbitral institutions, by the China Chamber of International Commerce.  As international arbitral institutions such as SIAC are not established in accordance with these procedures, there remain concerns that despite the judgment in this case, these institutions are not qualified ‘arbitral commissions’ and therefore are not allowed to administer arbitrations seated in mainland China.

As a civil law jurisdiction (based on statute not case law), Chinese courts are not bound by the decisions of other Chinese courts regardless of how senior they may be, and therefore in practice, it is thought that legislation will be needed to clarify the uncertainty surrounding what constitutes permitted ‘arbitration commissions’.  Clearly, in this instance, the Shanghai Court adopted the view that the SPC had comprehensively answered the question and its opinion operated with full legal force in China.  Nevertheless, it did not explain how a foreign commission could administer an arbitration in China despite not being a registered commission and until addressed through legislation, it is likely this will continue to cause concern in similar cases.

Moreover, there remains uncertainty regarding the nationality of awards issued in cases that are administered by a foreign arbitral institute in China.  In most cases, the nationality of the arbitral commission has been treated as the determining factor but this has not been consistent and there have been conflicting decisions and opinions in recent years where some Chinese judges have favoured an approach based on the seat of the arbitration.  In practice, what this means is that parties armed with awards which in other jurisdictions might ordinarily be considered to be foreign arbitral awards and therefore enforceable under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, may find themselves instead seeking to enforce their awards as domestic awards in China.  The problem this raises is that domestic awards and foreign-related domestic awards are subject to a higher degree of scrutiny by a PRC supervising court pursuant to PRC domestic laws, whereas foreign arbitral awards under the New York Convention can in theory only be denied recognition and enforcement under limited procedural grounds.

Still, as an overall statement of intention, the judgment in Daesung is a positive sign and a potential indication that a more progressive, internationalist approach to resolving cross-border arbitration disputes is being adopted.  Moreover, as a matter of good practice, this case emphasises the importance of taking care when drafting dispute resolution clauses and in particular to ensure that when doing so, the parties specify not just the law governing the underlying (substantive) contract but also clearly state the intended seat of the arbitration and the law governing the arbitration agreement itself.

By doing so, parties may save themselves potentially significant time and costs in fighting over matters which could otherwise easily be avoided through good drafting.

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