Famous Apex Limited v. Zhuhai City Baolisanhao Co. Ltd

 

Cite as: Famous Apex Limited v. Zhuhai City Baolisanhao Co. Ltd., The Supreme People’s Court (5 March 2013), in Fan Yang, Foreign-related Arbitration in China: Commentary and Cases, Part IV

Case identification

  • Date of Decision: 5 March 2013 

  • Court:

    • The Supreme People’s Court

    • The Higher People's Court of Guangdong Province

  • Arbitral Tribunal:

    • N/A

  • Case number / Docket number:

    • No. 7 of the Fourth Civil Tribunal of the Supreme People’s Court [2013]

    • No. 5 of the Higher People’s Court of Guangdong Province [2012]

Classification of issues present

  • Application of the New York Convention: No

  • Key PRC law provision(s) at issue: Articles 5 and 16 of <Interpretation of Several Issues Concerning the Application of “The Arbitration Law of the People’s Republic of China”>.

Descriptors: Arbitration agreement; Validity of arbitration agreement; Applicable law to the arbitration agreement; The agreement on the seat of arbitration was ambiguous; Designation of two arbitral seats; Designation of two arbitral institutions; The law of the forum  

 

 

 

 

Famous Apex Limited v. Zhuhai City Baolisanhao Co. Ltd

An agreement to submit disputes to “arbitration either at CIETAC (Shenzhen) with the seat of arbitration in Shenzhen, or under the HKIAC arbitration rules” was found invalid under the PRC law. In its Report to the Supreme People’s Court, the Higher People's Court of Guangdong Province found that (1) the PRC law should apply to decide on the validity of the arbitration agreement because parties’ made no agreement on the law governing the validity of the arbitration agreement and their agreement on the seat of arbitration was ambiguous; and (2) given that parties had chosen two arbitral institutions and that there was no evidence that parties reached any supplementary agreement on one designated arbitral institution, applying the PRC law, the arbitration agreement concerned should be invalid. In its Reply, the Supreme People’s Court was of the view that the parties’ designation of two seats of arbitration should be regarded as parties’ agreement on the seat of arbitration was ambiguous. Thus, applying article 16 of the SPC’s Interpretation of the PRC Arbitration Law (2006), the law of the court/forum should apply to decide on the validity of the arbitration agreement. Accordingly, it agreed that the arbitration clause was invalid under the PRC law.

Case text (English translation)

(5 March 2013 No. 7 of the Fourth Civil Tribunal of the Supreme People’s Court [2013])

 

The Higher People’s Court of Guangdong:

Your court’s Request for Instructions on an Application to Affirm the Validity of a Foreign-related Arbitration ClauseAgreed Between Famous Apex Limited and Zhuhai City Baolisanhao Co. Ltd No. 5 of the Higher People’s Court of Guangdong [2012] has been received. Upon deliberation, our reply is as follows:

This is a case concerning the affirmation of the validity of an arbitration clause involving foreign elements. In the “Loan Contract” and the “Equity Pledge Contract” between the parties, arbitration agreements with the same content were provided. No applicable law governing the validity of the arbitration clause had been agreed on. The arbitration agreement in question contained a provision that “the place of arbitration shall be in Shenzhen” when arbitrating in the Huanan Sub-Commission, China International Economic and Trade Arbitration Commission (“CIETAC”), at the same time providing that the parties may arbitrate in the Hong Kong International Arbitration Centre (“HKIAC”) pursuant to its arbitration rules. Article 15.1 of the HKIAC Administered Arbitration Rules provides that “The seat of all arbitrations conducted under these Rules shall be the Hong Kong Special Administrative Region of the People's Republic of China, unless the parties have expressly agreed otherwise.” Considering that the arbitration agreement in question provided for arbitration in the HKIAC pursuant to its arbitration rules and no other place of arbitration had been stipulated, the place of arbitration shall then be in Hong Kong. As two places of arbitration were provided in the arbitration agreement in question, the provision as to the place of arbitration is unclear. Pursuant to article 16 of the Interpretation of the Supreme People's Court concerning Some Issues on Application of the “Arbitration Law of the People's Republic of China,” if the parties neither agreed upon the applicable law nor the place of arbitration, the laws at the locality of the court, [that is,] the laws of the People’s Republic of China, shall be applicable.

Article 5 of the Interpretation of the Supreme People's Court concerning Some Issues on Application of the “Arbitration Law of the People's Republic of China” stipulates that “Where an agreement for arbitration stipulates two or more arbitration institutions, the parties concerned may choose either arbitration institution upon agreement when applying for arbitration; if the parties concerned cannot agree upon the choice of the arbitration institution, the agreement for arbitration shall be ineffective.” Since the arbitration agreement in question provided for arbitration in the Huanan Sub-Commission, CIETAC and the HKIAC, Famous Apex Limited’s initiation of its litigation claim in the Intermediate People’s Court of Zhuhai represented its abandonment to resolve disputes by means of arbitration. Without evidence indicating the parties have reached a consensus as to the choice of the arbitration institution, the arbitration agreement in question shall be invalid. [Our court] concurs with your court’s opinion that the arbitration agreement in question shall be invalid.

It is so replied.

 

Enclosed:

Request for Instructions on an Application to Affirm the Validity of a Foreign-related Arbitration Clause Agreed Between Famous Apex Limited and Zhuhai City Baolisanhao Co. Ltd.

(28 November 2012 No. 5 of the Higher People’s Court of Guangdong Province [2012])

The Supreme People’s Court:

In the case concerning a dispute over a loan contract between Famous Apex Limited and Zhuhai City Baolisanhao Co. Ltd (hereafter “Baolisanhao”), the Loan Contract and the Equity Pledge Contract concluded between the parties on 5 September 2007 contained arbitration clauses. Upon review, the Intermediate People’s Court of Zhuhai (hereafter the “Zhuhai Intermediate Court”) held that considering that a party had initiated litigation in the people’s court, it would be impossible for the parties to reach a supplemental agreement as to the choice of the arbitration institution and therefore the arbitration clause shall be deemed invalid. Being the court of the defendant’s domicile, the Zhuhai Intermediate Court shall have jurisdiction over this case. Pursuant to the Circular of the Supreme People's Court on the Relevant Issues Regarding the Handling of Foreign-related Arbitration and Arbitration of a Foreign Country by the People's Court (No. 18 of the Supreme People’s Court [1995]), the Zhuhai Intermediate Court reported the case to our court. Upon review, our court decides to affirm the Zhuhai Intermediate Court’s opinion to declare the arbitration clause between the parties invalid. Therefore, [our court] requests your court’s instructions.

 

I. The parties

Plaintiff: Famous Apex Limited. Domicile: P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.

Legal representative: Liu Fu Wah, Patrick.

Defendant: Zhuhai City Baolisanhao Co. Ltd. Domicile: Shop 257, 259, Block 4, 161 Xia Mei Lu (Nansha Fengze Yuan), Zhuhai, Guangdong.

Legal representative: Lan Ning.

 

II. Basic facts of the case

The Loan Contract signed between Famous Apex Limited and Baolisanhao dated 5 September 2007, provided that the lender, Famous Apex Limited, shall provide the borrower, Baolisanhao, a loan amounting to RMB¥1 hundred million, to be paid in a foreign currency of the equivalent value. Article 12.2 of the said contract stipulates,

 Any disputes arising from the performance of this Contract shall be resolved by the parties’ amicable negotiation. If the negotiation fails, a party may submit the said dispute for arbitration in the Huanan Sub-Commission, China International Economic and Trade Arbitration Commission (“CIETAC”) pursuant to its effective Arbitration Rules as at the date of the arbitration application. The place of arbitration shall be in Shenzhen. [Alternatively, a party] may submit the said dispute for arbitration in the Hong Kong International Arbitration Centre (“HKIAC”) pursuant to its Rules and Regulations. The outcome of the arbitration shall be final and binding to the parties. Unless otherwise decided by the arbitration institution, the costs of arbitration shall be borne by the losing party.

The said contract had been duly signed and sealed by the authorized representatives of Famous Apex Limited and Baolisanhao. The said contract had been approved by the Zhuhai Central Sub-branch of the State Administration of Foreign Exchange, while the external debt registration formalities had been completed. On the other hand, Famous Apex Limited, Baolisanhao and Zhuhai Zhong Guang Real Estate Co. Ltd signed an Equity Pledge Contract on 5 September 2007, agreeing that Baolisanhao shall provide Famous Apex Limited a continuous guarantee of irrevocable joint and several liabilities by [pledging] its 85 per cent shareholding in Zhuhai Zhong Guang Real Estate Co. Ltd. Article 24.2 of the said pledge contract stipulates:

Any disputes arising from the performance of this Contract shall be resolved by the parties’ amicable negotiation. If the negotiation fails, a party may submit the said dispute for arbitration in the Huanan Sub-Commission, CIETAC pursuant to its effective Arbitration Rules as at the date of the arbitration application. The place of arbitration shall be in Shenzhen, or a party may submit the said dispute for arbitration in the HKIAC pursuant to its Rules and Regulations. The outcome of the arbitration shall be final and binding to the parties. Unless otherwise decided by the arbitration institution, the costs of arbitration shall be borne by the losing party.

The said pledge contract had been duly signed and sealed by the authorized representatives of Famous Apex Limited, Baolisanhao and Zhuhai Zhong Guang Real Estate Co. Ltd.

During the performance of the contract, Famous Apex Limited submitted that it has discharged the obligations provided in the Loan Contract by granting Baolisanhao a loan of RMB¥1 hundred million (in Hong Kong dollars of equivalent value) to Baolisanhao’s foreign debt account. Baolisanhao owed Famous Apex Limited RMB¥81,736,489.00 plus interest. Therefore, Famous Apex Limited requested the Zhuhai Intermediate Court to order Baolisanhao’s performance of the repayment obligations and to confirm that Famous Apex Limited shall have priority in receiving compensation on the abovementioned debts from the pledged shares.

It was also found that the Zhuhai Intermediate Court served Baolisanhao the litigation materials by public announcement, as the whereabouts of the company was unknown.

On 12 October 2011, Famous Apex Limited initiated litigation in the Zhuhai Intermediate Court demanding Baolisanhao’s fulfillment of its repayment obligation of RMB¥81,736,489.00 plus interest and to confirm that Famous Apex Limited shall have priority in receiving compensation on the abovementioned debts from the pledged shares.

 

III. The Zhuhai Intermediate Court’s opinion

Upon review, it is in the Zhuhai Intermediate Court’s opinion that considering that Famous Apex Limited is a company registered in the British Virgin Islands, this case involves a dispute over a foreign-related commercial contract. The Loan Contract and the Equity Pledge Contract in question contained arbitration clauses providing that a party may make an application for arbitration in the CIETAC Huanan Sub-Commission pursuant to its effective arbitration rules as at the date of the arbitration application, with Shenzhen being the place of arbitration, or the HKIAC pursuant to its rules and regulations. Article 5 of the Interpretation of the Supreme People's Court concerning Some Issues on Application of the “Arbitration Law of the People's Republic of China” stipulates that “Where an agreement for arbitration stipulates two or more arbitration institutions, the parties concerned may choose either arbitration institution upon agreement when applying for arbitration; if the parties concerned cannot agree upon the choice of the arbitration institution, the agreement for arbitration shall be ineffective.” Since the whereabouts of Baolisanhao was unknown [and] no evidence indicating the parties had reached a consensus as to the choice of the arbitration institution could be found and under the circumstance where Famous Apex Limited submitted a litigation claim to the people’s court, it shall be determined that the parties failed to reach a supplementary agreement as to the choice of arbitration institutions. Hence, the arbitration agreement shall be deemed invalid. An invalid arbitration clause shall not exclude the jurisdiction of the people’s court over civil disputes. Article 24 of the Civil Procedure Law of the People’s Republic of China provides that “A lawsuit brought on a contract dispute shall be under the jurisdiction of the people’s court of the place where the defendant has his domicile or where the contract is performed.” Since the domicile of Baolisanhao is in Zhuhai, Guangdong, the Zhuhai Intermediate Court, being the court of the defendant’s domicile, shall have jurisdiction over this case.

 

IV. The opinion of our court

It is in our court’s opinion that considering that Famous Apex Limited is a company registered and established in the British Virgin Islands and that disputes arose from the Loan Contract between Famous Apex Limited and Baolisanhao, this case belongs to a dispute over a foreign-related commercial contract. The Loan Contract and the Equity Pledge Contract between Famous Apex Limited and Baolisanhao contain arbitration clauses. Pursuant to article 16 of the Interpretation of the Supreme People's Court concerning Some Issues on “Application of the Arbitration Law of the People's Republic of China,” “The examination of the effectiveness of an agreement for arbitration which involves foreign interests shall be governed by the laws agreed upon between the parties concerned; if the parties concerned did not agree upon the applicable laws but have agreed upon the place of arbitration, the laws at the place of arbitration shall apply; if they neither agreed upon the applicable laws nor agreed upon the place of arbitration or the place of arbitration is not clearly agreed upon, the laws at the locality of the court shall apply.” Since no applicable law was provided in the Loan Contract and the Equity Pledge Contract between Famous Apex Limited and Baolisanhao and the place of arbitration was unclear, the laws at the locality of the court, [that is,] the laws of the People’s Republic of China shall be applied to determine the validity of the arbitration clause in question.

The Loan Contract and the Equity Pledge Contract between Famous Apex Limited and Baolisanhao both provided that:

During the performance of the Contract, any disputes arising shall be resolved by parties’ amicable negotiation. If the negotiation fails, a party may submit the said dispute for arbitration in the CIETAC Huanan Sub-Commission, pursuant to its effective Arbitration Rules as at the date of the arbitration application in Shenzhen. Alternatively, [a party] may submit the said dispute for arbitration in the HKIAC pursuant to its Rules and Regulations. The outcome of the arbitration shall be final and binding to the parties. Unless otherwise decided by the arbitration institution, the costs of arbitration shall be borne by the losing party.

Thus, the parties’ choice of arbitration institution was not unique. In addition, since the whereabouts of Baolisanhao was unknown, it would be impossible for the parties to negotiate and reach a consensus as to the choice of arbitration institution. Therefore, pursuant to article 5 of the Interpretation of the Supreme People's Court concerning Some Issues on “Application of the Arbitration Law of the People's Republic of China,” the arbitration clause in question shall be deemed invalid. Pursuant to article 24 of the Civil Procedure Law of the People’s Republic of China, “A lawsuit brought on a contract dispute shall be under the jurisdiction of the people’s court of the place where the defendant has his domicile or where the contract is performed.” Since Famous Apex Limited filed a claim in the court, the Zhuhai Intermediate Court, being the court of the defendant’s domicile, has jurisdiction over this case and may accept the case in accordance with the law.

Summarizing the above, upon review, our court decides to affirm the Zhuhai Intermediate Court’s opinion. Pursuant to article 1 of the Circular of the Supreme People's Court on the Relevant Issues Regarding the Handling of Foreign-related Arbitration and Arbitration of a Foreign Country by the People's Court (No. 18 of the Supreme People’s Court [1995]) that

For foreign-related, Hong Kong or Macau-related or Taiwan-related economic, commercial or maritime cases filed in the people’s courts, if the parties has stipulated an arbitration clause in the contract or reached an arbitration agreement subsequently and the people’s court considers that the said arbitration clause or arbitration agreement is invalid or cannot be enforced due to unclear stipulations, the people’s court shall make a report to the higher people’s court within its jurisdiction before making a decision to accept a party’s application; if the higher people’s court affirms the decision of acceptance, the opinions of the said higher people’s court shall be reported to the Supreme People’s Court. Before the Supreme People’s Court makes a reply, the case may not be accepted,

[our court] requests your court’s instructions.