The First International Commercial Court of the Supreme People’s Court of China (“CICC“) has recently published its first rulings [1] on the validity of three arbitration agreements in relation to one same transaction. CICC recognised the principle of severability of arbitration agreement and held that although the underlying contracts had not been formally signed, the parties had reached valid arbitration agreements.

Background

The dispute concerns a proposed sale of shares in Newpower Enterprise Inc. (the “Target“) by Luck Treat Limited (the “Seller“) to Zhongyuan Cheng Commercial Investment Holdings Co., Ltd. (the “Purchaser“) for a consideration of RMB900 million. The parties negotiated the sale and purchase agreement (the “SPA“) but it was never signed. The Seller is a subsidiary of China National Travel Service Group Corporation and holds 100% shares in the Target. The Seller and the Target are incorporated in the BVI, while the Purchaser is a PRC company.

In connection with the share transfer, the Purchaser and a number of the Seller’s affiliates also intended to enter into a debt settlement agreement (the “DSA“) under which the Purchaser was to pay certain debts owed by the Target and the Seller’s affiliates.

In the course of May 2017, the parties negotiated on the terms of the SPA and the DSA through email correspondence. The draft SPA and DSA both provide that the SPA/DSA shall be governed by PRC law and that disputes shall be submitted to arbitration administered by the Shenzhen Court of International Arbitration (“SCIA“). The dispute resolution clauses in the draft SPA and the draft DSA have not been changed since 11 May 2017.

The negotiations were very advanced and the parties proceeded to their respective internal approvals for signing in mid-May 2017. On 1 June 2017, the Seller issued a letter to the Purchaser, indicating that the purchase of Target’s shares would constitute an overseas investment under the applicable PRC laws, and thus the Purchaser was required to apply for certain governmental approval or filing procedures. The intended signing did not take place subsequently.

On 4 April 2018, the Purchaser commenced arbitration against the Seller and its affiliates in SCIA. In response, the Seller and its affiliates applied to the Intermediate People’s Court of Shenzhen for a confirmation that parties have not entered into valid arbitration agreements.

CICC considered this case significant and took it over.

CICC’s Rulings

The main issue for CICC to decide was whether the arbitration agreements in respect of the SPA and the DSA have been validly formed.

CICC first confirmed that this issue falls within its jurisdiction as a dispute on the validity of the arbitration agreement under Article 20 of the PRC Arbitration Law (the “Arbitration Law“).

It further confirmed that the governing law of the arbitration agreements was PRC law because the parties agreed so, and went on to apply PRC law to determine the validity of the disputed arbitration agreements at the beginning of the formal inquiry of the case. CICC then referred to Article 16 of the Arbitration Law, which provides that an arbitration agreement includes (1) the arbitration clauses provided in the contract, and (2) any other written form of agreement concluded before or after the disputes. In this case, the disputed arbitration agreements were in the form of arbitration clauses in the SPA/DSA.

CICC emphasised that it has been well established that an arbitration agreement (including in the form of an arbitration clause) is separable and independent from the underlying contract in which it is contained (the doctrine of severability of an arbitration agreement). The existence, validity and governing law of the arbitration agreement are to be considered separately from those of the underlying contract.

CICC referred to the doctrine of severability of arbitration agreement under PRC law as the legal basis. Article 19(1) of the Arbitration Law provides that an arbitration agreement shall exist independently, and any changes to, rescission, termination or invalidity of the contract shall not affect the validity of the arbitration agreement. In addition, Section 10(2) of the Interpretation of the Supreme People’s Court on the Application of the Arbitration Law specifically provides that where the parties reach an agreement for arbitration regarding the dispute when entering into a contract, the validity of the arbitration agreement shall not be impacted even if the contract is not formed.

In arriving at its decision that the disputed arbitration agreements have been validly formed, CICC looked at the parties’ negotiation history and considered whether the parties had in fact consented to submit any disputes to arbitration. Arbitration agreements, like other contracts, are governed by the relevant rules on contract formation, and specifically, rules regarding offer and acceptance under PRC law.

CICC gave weight to the fact that the earliest draft SPA provided by China Beijing Equity Exchange contained a clause allowing parties to submit the dispute to Beijing Arbitration Commission for arbitration. Upon negotiation, the parties changed the arbitration institution to SCIA and the arbitration clauses in the draft SPA and the draft DSA remained unchanged since 11 May 2017. Therefore, CICC came to the conclusion that the parties have consented to the agreement to arbitrate. Valid arbitration agreements have been formed, regardless of whether the SPA and DSA were signed. CICC also stated that whether valid SPA and DSA have been entered into is a separate issue for the arbitral tribunal to decide.

Comment

The first rulings of CICC are significant as CICC expressly confirms the doctrine of severability of arbitration agreement under PRC law. While Article 20 of the Arbitration Law does not expressly provides so, CICC confirmed that the dispute over formation of an arbitration agreement falls within the scope of a dispute over validity of the arbitration agreement.

This case also demonstrates CICC’s efforts to reduce any possible delays due to the tiered reporting mechanism and improve the efficiency to resolve international commercial disputes through its review of significant international commercial cases at first instance.