Facts

Petitioner A was a controlling shareholder of a public company. B was a director of the public company and A's relative. The share transfer agreement at issue indicated that A had intended to transfer his shares in the public company to company C; however, B's signature (and not A's) was present on the agreement. Further, the agreement indicated that in the event of a breach by either party, the other party could submit the case for arbitration to the arbitral institution where the public company was located (Changsha, Hunan). A subsequently stated that he had not performed his duties under the share transfer agreement because he had not authorised B to sign it. Consequently, on the basis of the agreement, C initiated arbitration proceedings against A before the Changsha Arbitration Committee. After the committee heard the case, A petitioned the Intermediate People's Court in the Changsha Municipality (the Changsha Intermediate Court) to determine that the arbitration clause was invalid.

Arguments

A believed that he should not be bound by the arbitration clause in the share transfer agreement because C had not provided evidence that B had signed the agreement with prior authorisation or post confirmation from A. As a result, the share transfer agreement, as well as the arbitration clause therein, had no legally binding effect on A.

C proffered records of messages between B and relevant persons in charge at C in order to prove B's authority or, at a minimum, that B's words and behaviours in themselves constituted apparent authority with regard to A, thereby making the arbitration clause binding on both parties.

Focus of dispute

After hearing all of the parties' arguments, the Changsha Intermediate Court concluded that the focus of the dispute was whether the arbitration clause in the share transfer agreement had a binding effect on A and C. It therefore determined the validity of the arbitration clause given the specific circumstances of the case, which hinged on whether B could express intention on A's behalf.

Decision

The Changsha Intermediate Court held that an 'arbitration agreement' is an agreement entered into by parties before or after a dispute occurs in which both parties agree to voluntarily submit their disputes to an arbitral institution for resolution. In accordance with Article 19(1) of the Arbitration Law, which provides that "given its independent existence, the validity of an arbitration agreement is not affected by any change, rescinding, termination and invalidity of the contract", this case concerned only the arbitration clause's validity. Pursuant to Article 16 of the law, "an arbitration agreement should include the following contents: (1) an expression of intention for arbitration". Accordingly, an expressed intention for arbitration should be genuine and unambiguous.

In this case, B and C had signed the share transfer agreement in A's name. However, in order to express a party's intention to arbitrate on their behalf, explicit and not implied or apparent authority must be obtained. The evidence proffered by C in this regard was insufficient to establish that A had given explicit authority to B to express its intention to arbitrate. Further, A had clearly denied that he had given prior authorisation or post confirmation to B. As a result, the arbitration clause was not proved to be A's genuine expression of his intention to arbitrate and therefore had no binding effect on A. Thus, the court deemed the arbitration clause at issue to be invalid.

Analysis

Could A request the court to determine that the arbitration agreement was invalid? The question arose as to whether cases regarding the existence of an arbitration agreement fall within the scope of those on which a court can adjudicate in the context of an arbitration agreement's validity.

According to Article 20 of the Arbitration Law, a party can request an arbitration committee to decide or a people's court to adjudicate when parties dispute an arbitration agreement's validity. However, as to the interpretation of "the validity of an arbitration agreement" in this clause, the law provides no further clarification. The resulting question is thus whether Article 20 of the law can be used as a basis for requesting a court to determine an arbitration agreement's validity when disputes regarding the existence of such agreement arise between the parties.

As discussed above, Articles 17 and 18 of the Arbitration Law stipulate certain conditions which will render an arbitration agreement invalid, including:

  • where matters agreed for arbitration are beyond the scope of arbitration as prescribed by law;
  • where an arbitration agreement is concluded by persons which have no or a limited capacity to undertake civil acts;
  • where one party forces the other to sign an arbitration agreement under duress; and
  • where the matters for arbitration or the arbitration commission are not agreed by the parties to the arbitration agreement or are agreed on equivocally and the parties fail to reach a supplementary agreement.

Based on the above provisions, it seems that a precondition for a party to request a court to determine an arbitration agreement's validity is limited to a pre-existing arbitration agreement between the parties (ie, the parties do not dispute the fact that they have entered into an arbitration agreement despite the legal effect of such agreement being directly affected by certain deficiencies). However, in the case at hand, the focus of the dispute between A and C hinged on:

  • whether an arbitration agreement existed between them; or
  • given A's assertion that he was not subject to the arbitration agreement as he had not signed it, whether the court could dismiss the case on the ground that such circumstances exceeded the scope of cases in which a party can request a court to determine the validity of an arbitration agreement, as stipulated in Article 20 of the Arbitration Law.

Opinion in practice The Changsha Intermediate Court held that the existence of an arbitration agreement falls within the scope of cases on which a court can adjudicate in the context of an arbitration agreement's validity. Based on previous Hunan cases (primarily those decided by the Changsha Intermediate Court), this appears to be the common consensus.(1)

In Case 01749, the Hunan provincial people's government (the petitioner) argued that as it was not a signatory of the franchise contract at issue, it had no civil authorisation or empowerment relationship with the Hunan Provincial Transportation Bureau, which had signed the contract. Further, it argued that there had been no succession of rights or duties and that, as such, it was not subject to the arbitration clause at issue. As to whether this case fell within its jurisdiction, the Changsha Intermediate Court held that as the petitioner had requested a people's court to determine whether an arbitration agreement had binding effect on it and the petitionee, this case should be heard as a case for determining the validity of an arbitration agreement.

In the case at hand, after clarifying that the Changsha Intermediate Court – which is independent from the Changsha Arbitration Committee – held the mainstream opinion in this regard, A filed a petition directly with the court requesting it to determine the arbitration agreement's validity.

Existence of arbitration agreements within scope of cases on which courts can adjudicate in context of validity of arbitration agreements The Supreme People's Court also tends to rule that the matter of "the validity of an arbitration agreement" as stipulated in Article 20 of the Arbitration Law should include disputes over the existence of an arbitration agreement.

For example, in the Letter from the Supreme Court Responding to the Request for Instructions as to the Case Where Andre Juice Co, Ltd (the Petitioner) and Qingyang Municipality Hengsheng Juice Co, Ltd (the Petitionee) Requested for Determining the Validity of an Arbitration Agreement, the Supreme Court held that the six sales contracts at issue had been prepared by Qingyang Municipality Hengsheng Juice Co without being confirmed by Andre Juice Co. Thus, the court held that:

  • the parties had failed to provide consistent expressions of their intention to submit disputes arising from the sales contracts at issue to arbitration; and
  • the arbitration clause should thus be deemed invalid.

Further, in the Letter from the Supreme Court Responding to the Request for Instructions as to the Issues regarding the Arbitration Clause in the Confirmation Lawsuit between Shenhua Coal Transportation and Sales Company and Marinic Shipping Company,(2) the Supreme Court held that the Tianjin Maritime Court should hear the case in which the Shenhua Coal Transportation and Sales Company had requested it to determine whether an arbitration agreement existed between it and the Marinic Shipping Company.

However, most courts hold that the existence of an arbitration agreement exceeds the scope of cases on which a court can adjudicate with regard to an arbitration agreement's validity. For example, in recent cases ruled by the Number 1 Intermediate People's Court in the Shanghai Municipality(3) and the Number 3 Intermediate People's Court in the Beijing Municipality,(4) the petitioners each requested the courts to rule that the arbitration clauses at issue were invalid on the basis that the petitioners had not been parties to the relevant contracts. In both cases, the petitions were dismissed as they exceeded the scope of the people's courts' jurisdiction to hear cases regarding the validity of an arbitration agreement.

Risks Considering the abovementioned opinions, there is still a risk that a request for adjudication will be dismissed where one party seeks a court decision on disputes concerning the entering into of an arbitration agreement or an arbitration agreement's binding effect on one party. Therefore, parties should research the attitudes of the courts with jurisdiction on such matters before submitting a petition.

Was A bound by the arbitration agreement? The question also arose as to how a definite expression of an intention to request arbitration should be made within the framework of civil agency.

A key feature of arbitration is that it relies on both parties' mutual choice (ie, is conditioned on a clear arbitration agreement entered into by both parties). In the absence of such an agreement, an arbitral institution loses its jurisdiction to hear a dispute. Article 19(1) of the Arbitration Law provides that "given its independent existence, the validity of an arbitration agreement is not affected by any change, rescinding, termination and invalidity of the contract". Further, Article 16(1) of the law stipulates that an arbitration agreement should contain an "expression of intention to request for arbitration". Thus, a party's expression of its intention for arbitration is relatively independent and should be made severally and expressly. As such, questions arise as to how – under the system of civil agency – a party can express a definite intention to arbitrate.

Ultimately, agents with authority should be expressly authorised to sign an arbitration agreement, while agents without authority or with apparent authority should not be bound by an arbitration agreement.

If an agent signs a contract containing an arbitration clause in its principal's name, for such arbitration agreement to reflect both contracting parties' "expression[s] of intention to submit for arbitration", the principal must have clearly authorised the agent to sign the agreement on its behalf or give subsequent confirmation thereafter.

As regards the case at hand, given the materials submitted by C and the case's factual background, C failed to provide evidence that A had previously empowered or subsequently confirmed B's authority to sign the contract at issue in his name. Therefore, B's act of signing the contract on A's behalf constituted unauthorised agency and did not demonstrate that A had expressed his intention to arbitrate.

C further claimed that B's act had constituted apparent agency without taking into account C's inability to provide sufficient evidence to establish the elements required for apparent agency. However, apparent agency, based on its very nature, is a form of unauthorised agency. In a case of apparent agency, an agent's act of agency produces an objective appearance that it has authority, which in turn leads the counterparty to the contract to believe in good faith and without negligence that it has authority. For the purpose of protecting the interests of the counterparty of such a contract, apparent agency requiring the principal to be bound by such a contract is therefore created by law. Thus, apparent agency was not a reflection of A's intention to arbitrate.

Opinion in practice: can agents with apparent authority be bound by arbitration agreements? In practice, while the courts do not dispute that a party is not bound by an arbitration clause in cases of unauthorised agency (excluding apparent agency), differences in the approaches taken by the courts begin to occur when apparent agency is considered.

Although the Changsha Intermediate Court supports the argument that apparent agency cannot reflect a party's intention to arbitrate, other courts have considered that when an unauthorised act of agency by an agent establishes the elements required for apparent authority, the principal should be bound by the arbitration clause. One recent case in this regard was the Intermediate People's Court in the Mianyang Municipality in the Sichuan Province, in which the petitioner based its claim that the arbitration clause at issue was invalid on the ground that the stamp in the contract was not its stamp. The court held that although the agent had no authority to enter into the contract at issue on the petitioner's behalf, the agent's act constituted apparent authority according to the regulations relating to apparent agency under Article 49 of the Contract Law.(5) Under such circumstances, the petitionee had reason to believe that it had entered into the sales contract and agreed on the arbitration clause with the petitioner.(6)

Risks Given the disputes over whether an arbitration clause binds the principal within the framework of apparent authority, where an agent enters into a contract (including an arbitration agreement) in their principal's name, the counterparty to the contract should ask the principal to expressly empower the agent to conclude an arbitration agreement. Further, after entering into a contract, the counterparty should notify the principal in due time and preserve any relevant evidence.

For further information on this topic please contact Weiwei Gu or Yin Wu at Global Law Office by telephone (+86 10 6584 6688) or email (guweiwei@glo.com.cn or wuyin@glo.com.cn). The Global Law Office website can be accessed at www.glo.com.cn.

Endnotes

(1) See, for example, (2015) 长中民五仲字第0363号 and (2015) 长中民五仲字第01749号.

(2) ([2013] 民四他字第4号).

(3) Relevant cases include (2017) 沪01民特186号 and (2015) 三中民(商)特字第10138号.

(4) (2016) 川07民特字第1号.

(5) Article 49 of the Contract Law states as follows:

If an actor enters into a contract in the principal's name when he lacks authority of agency, or does so by exceeding the scope of or in spite of the expiration of his authority of agency, such act of agency shall be effective, provided that the counterparty has grounds to believe in the actor's authority.

(6) A similar case is (2017) 陕01民特92号, as ruled by the Intermediate Court in the Xian Municipality.

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