In a judgment on 14 July, Justice Saunders upheld the validity of an agreement to refer disputes to ICC Rules arbitration in Shanghai.

Having stipulated that the contract was subject to German law, the “Governing Law and Jurisdiction” clause provided that disputes “… shall be submitted to an arbitral tribunal comprising of three arbitrators and the arbitration venue shall be in Shanghai, China… The arbitration procedure shall be held in accordance with the arbitration rules of the International Chamber of Commerce (‘ICC’) …”

Nonetheless, the unpaid supplier of goods initiated a court proceeding in Hong Kong to recover the sum of US$1 million.  The purchaser reacted by seeking to have the proceeding stayed to arbitration.

Was the arbitration clause ineffective?

The supplier advanced two bases upon which it claimed that the arbitration clause was ineffective.

The first basis was that the dispute was outside the scope of disputes covered by the arbitration clause.  The second was that the arbitration agreement was governed by PRC law and the clause was, under that law, “null and void, inoperative or incapable of being performed” (Art. 8 UNCITRAL Model Law).

The first issue was fact sensitive, and the judge had little difficulty in finding that the dispute fell within the scope of the arbitration agreement.

The second issue turned on determining the lex arbitri.  The judge held that the burden of proving that the arbitration agreement was “null and void, inoperative or incapable of being performed”  was on the supplier and reiterated previous case law that it was “… necessary for him to show that the arbitration agreement simply cannot, with the best will in the world, be performed. I am satisfied that the words of exception should be strictly construed so as to reflect the intention of the Convention and the Act”.

The supplier’s argument

The supplier argued that PRC governed the arbitration agreement and the failure to identify an arbitration institution rendered the clause invalid and unenforceable under PRC law, the premise being that the lex arbitri follows the law of the choice of seat.  That submission was rejected.  The judge held that it was necessary to analyse whether there was “… any agreement, express or implied, by the parties as to both the proper law of the contract, or the lex arbitri”.  If no, then the presumption is that the law of the chosen seat is the lex arbitri.  However, the judge found three factors indicating that the parties had intended German law to be the lex arbitri:

  1. the language of the governing law clause (“… all of the obligations contained herein shall be governed in its entirety by the laws of ... [Germany]”) plainly covered the whole of the contract including the arbitration clause;
  2. the third arbitrator had to be a lawyer qualified to practise in Germany it being “… entirely logical that the parties should seek to have a German qualified lawyer as an arbitrator in a contract in which the proper law of the contract and the arbitration was German law”; and
  3. the statement as governing law and the arbitration clause were within the same clause; ie there was a link between them.

As German law was the lex arbitri, and there was no evidence that the clause was unenforceable under German law, the judge upheld the clause and stayed the proceeding.

Other considerations

The judge, in obiter, considered what the consequences would have been had PRC law been the lex arbitri.  The judge considered Arts 16 and 18 of the PRC Arbitration Law and The Supreme People’s Court Interpretation of 8 September 2006.  Art 16 stipulates that an arbitration agreement “… must contain … particulars [of] … a designated arbitration institution”.  Art 18 stipulates that, without the requisite particulars or a supplementary agreement by the parties, the arbitration agreement is null and void.  The Interpretation provides that “… the arbitration agreement can be identified through [the parties] agreed upon arbitration rules.” 

The judge considered that by the parties having agreed, the ICC Rules would be sufficient, as per the Interpretation, to invoke the ICC’s International Court of Arbitration and validate the arbitration agreement.

However, the judge was directed to a Supreme People’s Court decision regarding a similar arbitration clause, where it struck down the clause for failure to identify an institution.  A decision which the judge could not reconcile with The Interpretation; he stated: “Although no reference has been made to the last part of [The Interpretation], which, to a common lawyer permits the implication of an arbitration institution by reference to the rules, I must assume that the Supreme People’s Court were fully aware of all the provisions of [The Interpretation].  Notwithstanding the implication provision, the court was not prepared to hold that the reference to the rules of the ICC were sufficient to identify the arbitration institution”.

Therefore, the judge was compelled to note that if PRC law had been the lex arbitri, then the subject clause would have been declared invalid.  

Conclusion

Practitioners will be interested to note the continued usage of ICC Rules in ad hoc arbitration in the PRC.  However, given PRC law’s hostility to ad hoc arbitration, one can assume that enforcement within the PRC of any such ad hoc award issued may encounter difficulties.  The award should, nonetheless, be fully enforceable through the New York Convention in contracting states.  

Prudence requires that, if the arbitration venue is the PRC mainland, an arbitration institution is expressly identified.  And, although not a result of the ruling, common sense suggests that if the parties want to use the ICC Rules, then they stipulate that the dispute "shall be submitted to the International Court of Arbitration of the ICC".