The pre-dispute arbitration/litigation clauses are widely used as standard clauses in export credit insurance contracts in China, which stipulate that the insured shall seek arbitration or litigation to assess the loss before the insurer underwrites. Such clauses are quite disputable and a recent case reflected the judicial attitude from Chinese courts.
- Basic Facts
The insured, Company Y, signed an export credit insurance contract with the Guangdong Branch of China Export & Credit Insurance Corporation ("SINOSURE Guangdong"). The pre-dispute arbitration/litigation clause in the standard insurance contract provided by SINOSURE Guangdong stipulated that the insured shall first seek arbitration or litigation in the country or region of the buyer, and the insurer shall not underwrite until the effective arbitration award or court judgment has been rendered and the application for enforcement has been filed. The Statement of Policyholder signed by Company Y indicated that it had fully understood the content of the insurance policy and had no objection.
After the delivery, the buyer failed to make full payment to Company Y. Company Y thus requested SINOSURE Guangdong for compensation but the latter failed to reply or compensate to Company Y. Company Y then filed a lawsuit in the competent local court in China, requesting SINOSURE Guangdong for compensation. The court of first instance ruled that SINOSURE Guangdong should pay compensation and overdue interests to Company Y. SINOSURE Guangdong appealed to the Intermediate People's Court of Guangzhou and the court of second instance upheld the original ruling, affirming that the pre-dispute arbitration/litigation clause was invalid. SINOSURE Guangdong then applied for re-trial to the Guangdong High People's Court, and the Guangdong High People's Court ruled that the pre-dispute arbitration/litigation clause was valid but was not applicable to the case.
- Main Issues and the Relevant Ruling
1. The validity of the pre-dispute arbitration/litigation clause
The pre-dispute arbitration/litigation clause in this case was a standard clause provided by the insurer. Article 17 of the Insurance Law of the People's Republic of China (“Insurance Law”) provides that the insurer shall explain the contents of any standard clause to the policyholder. The insurer shall highlight any clause in an insurance contract which excludes the liability of the insurer and make an explicit explanation either in writing or orally to the policyholder in respect of the contents of such clauses.
The pre-dispute arbitration/litigation clause in this case has been marked in bold, and SINOSURE Guangdong had clearly explained it to Company Y by having Company Y to sign the Statement of Policyholder. Company Y had also clearly expressed that it had fully understood the terms and had no objection to them. Therefore, from the perspective of the contracting procedure, it could be confirmed that SINOSURE Guangdong had fulfilled its duty of drawing attention and offering explanation.
In terms of the content of the pre-dispute arbitration/litigation clause, Article 19 of the Insurance Law lists circumstances where a standard clause shall be deemed invalid, including those which exempting the insurer's liability to bear obligations pursuant to the law, placing extra liability on the policyholder and the insured, or exempting the rights lawfully enjoyed by the policyholder, the insured or the beneficiary.
Where there is an outstanding dispute over the subject matter of an export credit insurance contract, the insurer, as a third party of the sales and purchase contract, is indeed unable to assess the loss. Therefore, the mechanism of pre-dispute arbitration/litigation clause in this case, requiring the seller to seek arbitration or litigation to determine the insured’s right and the compensable amount as per the underlying sales contract, is in line with the characteristics of such contract.
Although the export credit insurance contract in this case had the pre-dispute arbitration/litigation clause, the policyholder (Company Y) was free to choose another insurance company with more favorable clause as SINOSURE was not the only provider of such kind of insurance. Even if the clause in the case was detrimental to the interests of the policyholder, such interests can still be protected by the “invisible hand” (i.e. the unobservable market force) as long as such clause was not obviously unfair. Where the market mechanism could play its role, the judiciary should remain modest and restrained rather than arbitrarily deny the validity of the clause. Therefore, the court held that the clause in this case did not lead to the serious imbalance of rights and obligations between the parties concerned and there was no circumstance of illegality or invalidity. Thus, the clause was legitimate and valid.
2. Whether SINOSURE Guangdong was entitled to refuse to make compensation as per the pre-dispute arbitration/litigation clause
SINOSURE Guangdong claimed that there was a contract dispute between Company Y and its buyer, so Company Y was supposed to define its contractual right by legal means according to the pre-dispute arbitration/litigation clause. However, Article 2 of the insurance contract in this case had made it clear that the insurer shall assume the insurance liability when the buyer defaulted on the payment for goods or refused to accept the goods, etc. Moreover, the current evidence did not indicate that the buyer had claimed to reduce the payment for goods and was insufficient to prove that Company Y had conducted any breach of the sales contract. On the premise of clear and sufficient evidence showing that the buyer had defaulted on the payment for goods, it could not assume that there was a genuine dispute between Company Y and its buyer. Therefore, although the pre-dispute arbitration/litigation clause was legitimate and valid, since there was no dispute between Company Y and its buyer, the clause was not applicable to this case. Therefore, SINOSURE Guangdong was not entitled to invoke the pre-dispute arbitration/litigation clause in order to refuse to make compensation.
With the Belt and Road Initiative, Chinese government is vigorously promoting the “go global” strategy for domestic enterprises. In such process, the export credit insurance is particularly needed to protect Chinese companies’ lawful interests when going abroad. However, in practice, there are many disputes arising out of or related to the export credit insurance, main issues such as objection to jurisdiction, the authenticity of the underlying transactions, validity of standard clauses, credit limits, amortization, premium payment, etc. The article hereby, from a Chinese law perspective, particularly focuses on the applicable law of export credit insurance disputes and the validity of the pre-dispute arbitration/litigation clause as a standard clause.
1.Applciabel law to disputes over export credit insurance
In the above case, the court decision was mainly based on the Insurance Law. However, the Insurance Law is supposed to regulate the commercial insurance, while the export credit insurance is a policy-based insurance rather than pure commercial insurance. Therefore, there are disputes over whether the Insurance Law shall apply to export credit insurance contracts.
At present, it is prevailed that the Official Reply of the Supreme People's Court to Issues concerning the Application of Relevant Laws in the Trial of Cases Involving Disputes over Export Credit Insurance Contracts (“Reply”) acknowledges that the Insurance Law shall regulate export credit insurance. The Reply confirms that "the Insurance Law does not specify the applicable law to export credit insurance contracts. In view of the particularity of export credit insurance, however, a People’s Court may refer to relevant provisions of the Insurance Law when hearing cases of export credit insurance contract disputes; if there are agreements otherwise in the export credit insurance contracts, such agreements shall prevail.”
As a result, in practice, while giving priority to the contract terms, a court will still refer to the Insurance Law when reviewing an export credit insurance contract. Therefore, the parties to an export credit insurance contract shall, when concluding the contract, pay attention to the mandatory provisions of the Insurance Law so as to avoid the invalidity of the contract.
2. The validity of a pre-dispute arbitration/litigation clause as a standard clause
Where an insurance contract contains a pre-dispute arbitration/litigation clause, the insurer often refuses to assess the loss on the ground that the insured has not sought arbitration or litigation in advance. In such disputes, the insured often claims that the pre-dispute arbitration/litigation clause aggravates its burden, which constitutes an invalid standard clause in accordance with Article 19 of the Insurance Law.
In judicial practice, it is often seen that courts have confirmed that such clauses comply with the special nature (i.e. policy and externality) of the export credit insurance business and that such clauses are only procedural agreements which do not impair the substantive rights of the insured. Whereas Article 19 of the Insurance Law only prohibits the insurer under a standard contract from restricting or excluding the substantive rights of the policyholder, it should not arbitrarily apply Article 19 of the Insurance Law to deny the validity of a pre-dispute arbitration/litigation clause.
Furthermore, it is noteworthy that in this case the court placed emphasis on judicial modesty, holding that when there were several insurance companies available in the market for a policyholder to choose from, the problem could be solved by market force as long as the relevant terms were not obviously unfair. Such judicial attitude has critical reference value for courts, arbitrators and parties.
In practice, a policyholder or an insured needs to pay attention to the relevant pre-dispute arbitration/litigation clauses in the process of claim settlement and treat the issue on a caseby-case basis—When the loss should be assessed through the pre-dispute procedure as prescribed in the pre-dispute arbitration/litigation clause, the agreement should be followed and the claim settlement should be made after the pre-dispute procedures have been completed. When the facts are clear and there is no dispute as specified under the predispute arbitration/litigation clause, compensation should be made directly in accordance with the insurance clause.