The Hong Kong Court of First Instance has declined to set aside a partial award for lack of jurisdiction where the arbitration clause provided for ICC arbitration “in China” and the ICC had determined that the seat was Hong Kong, citing concerns over enforceability of awards made in mainland China by non-Chinese arbitral institutions (Z v A [2015] HKEC 289).

Background

In an application by a mainland company (the “Applicant“) to set aside a partial arbitral award, the Hong Kong Court of First Instance has considered arbitration clauses providing for ICC arbitration with a seat in China. A similar clause was recently upheld by the Chinese Supreme People’s Court in the Longlide case (see here). However, concerns remain as to whether awards made pursuant to these clauses will be enforceable in mainland China.

The clauses in Z v A came from two separate contracts between the Applicant and its Egyptian counterparties for the manufacture, sale and purchase of goods in mainland China: the first contract is referred to as the CKD and Agency agreement (the “CKD Agreement“) and the second contract is referred to as the Technical Cooperation Agreement (the “TC Agreement“) (together the “Agreements“). The CKD Agreement provides for “arbitration as per the International Chamber of Commerce and held in CHINA? [sic]”. The arbitration clause in the TC Agreement does not specify an arbitration institution but only the application of the ICC Rules, which states that any dispute shall be “finally settled in CHINA by arbitration pursuant to the Rules of the International Chamber of Commerce“.

Disputes later arose between the parties under the Agreements, and the Egyptian companies (the “Respondents“) filed a Request for Arbitration with the ICC based on the arbitration clause in the CKD Agreement, seeking relief in respect of the Applicant’s alleged breach of both the CKD Agreement and the TC Agreement. The Respondents submitted that the place of arbitration should be Hong Kong, whilst the Applicant insisted the place of arbitration should be mainland China.

In view of the parties’ disagreement, the ICC Court fixed Hong Kong as the place of arbitration, pursuant to Article 14(1) of the 1998 ICC Arbitration Rules, which states that “the place of arbitration shall by fixed by [the ICC Court] unless agreed upon by the parties“. The ICC appointed a sole arbitrator, who was asked to determine whether he had jurisdiction to hear this matter. The sole arbitrator issued a partial award confirming his own jurisdiction, upholding the ICC’s decision to fix Hong Kong as the place of arbitration, and determining that the law applicable to the arbitration was Hong Kong law.

The Applicant applied to the Court of First Instance under s. 34 of the Hong Kong Arbitration Ordinance for a declaration that the sole arbitrator lacked jurisdiction and to set aside the partial award. The Applicant initially raised additional issues, including the validity of the arbitration clauses in the Agreements, but later opted not to pursue these issues.

The court’s decision

The Court noted that there was a dispute between the parties as to whether the arbitration clauses meant the arbitration should take place in mainland China or in Hong Kong. On the other hand, it was not in dispute that the parties had agreed the arbitration was to be governed by the ICC Rules. In these circumstances, the Court found that the ICC Court was entitled under Article 14(1) ICC Rules to determine the place of arbitration.

The Applicant argued that the sole arbitrator had mistakenly construed the meaning of “China” as used in the Agreements. The Court recognised that on the question of the construction of contracts, as an established principle, the judge should put himself in the place of the reasonable man having all the background knowledge “which would reasonably have been available to the parties in the situation in which they were at the time of the contract“. Apart from the factual background, the so-called “background knowledge” can also include the state of the law, that is to say that the courts generally conclude, “when considering the parties’ intentions, that the parties intended to produce a result that is legal, rather than illegal“.

As to the factual background, the Court held that as reasonable, rational businessmen, the parties must have been aware that Hong Kong is part of China when they entered into these Agreements in 2007. The Court opined that it would be “artificial” to conclude the parties intended the relevant arbitration clauses to mean either “China excluding Hong Kong” or “China including Hong Kong”. As such, in the Court’s view, the ICC Court was entitled to decide that the arbitration should be held in Hong Kong, which is part of China.

The Court went on to discuss the state of the law. As mentioned above, the Applicant initially raised issues including the validity of arbitration clauses and both parties filed expert evidence on PRC law. The expert for the Applicant took the view that an arbitration award resulting from proceedings held on the mainland and administered by the ICC would not be considered a domestic award under PRC law and may therefore not be enforced by the courts on the mainland, because the ICC is not an arbitration institution registered with the authorities on the mainland. On the other hand, the expert for the Respondents referred to the Longlide case and the decision of the Ningbo Intermediate People’s Court in the Duferco case, to show that an arbitration clause providing for ICC arbitration on the mainland is valid and can also be enforced.

In the face of conflicting expert evidence, the Court concluded there is a risk that an ICC award made in mainland China may not be enforceable in mainland China. By contrast, the experts were in agreement that an ICC award made in Hong Kong would be enforceable both in Hong Kong and mainland China, as well as other countries which are party to the New York Convention. Given that “the object of an arbitration agreement must be to have the dispute resolved by a process which would result in a final, binding and enforceable award“, the Court preferred the construction that the arbitration is to take place in Hong Kong, and held that the arbitrator had jurisdiction over the dispute.

The Court ordered the Applicant to pay the costs of this application on an indemnity basis, in line with the principle in Pacific China Holdings Ltd v Grand Pacific Holdings Ltd, that the Hong Kong courts will order indemnity costs against the applicant in an unsuccessful set aside application. The Court also took the opportunity to remind parties of the need to draft arbitration agreements clearly and precisely.

Conclusion

This case demonstrates that Longlide does not ultimately answer the question whether mainland Chinese courts would recognise and enforce an award made under a clause providing for arbitration administered by a non-Chinese arbitration institution with its seat in mainland China. While the uncertainty continues, we remain of the view that parties should avoid clauses that provide for arbitration in mainland China administered by any non-Chinese institution, and make sure that their clauses are drafted clearly and precisely, to leave no doubt as to the parties’ intentions.