Jiangsu CASC Energine Wind Turbine Manufacture Co. Ltd v. LM Wind Power Blades (Tianjin) Co. Ltd.

Cite as: Jiangsu CASC Energine Wind Turbine Manufacture Co. Ltd v. LM Wind Power Blades (Tianjin) Co. Ltd., The Supreme People’s Court (31 August 2012), in Fan Yang, Foreign-related Arbitration in China: Commentary and Cases, Part IV

Case identification

Date of Decision: 31 August 2012
Court:

The Supreme People’s Court
The Higher People's Court of Jiangsu Province

Arbitral Tribunal:

Case number / Docket number:

No. 2 of the Fourth Civil Tribunal of the Supreme People’s Court [2012]
No. 0004 of the Higher People’s Court of Jiangsu [2011]

Classification of issues present

Application of the New York Convention: No
Key PRC law provision(s) at issue: Article 178 of the <SPC Opinions concerning the General Principles of the Civil Law>; Article 128 of the <PRC Contract Law>; Article 255 of the <PRC Civil Procedure Law>

Descriptors: Arbitration agreement; Validity of arbitration agreement; Foreign-related contract; Foreign-related dispute; Foreign-related elements; Submission of domestic disputes to foreign arbitral institution; ICC arbitration with the place of arbitration in Beijing

Jiangsu CASC Energine Wind Turbine Manufacture Co. Ltd v. LM Wind Power Blades (Tianjin) Co. Ltd.

An agreement to submit disputes (non-foreign-related) to the International Chamber of Commerce for arbitration pursuant to its arbitration rules, with the place of arbitration in Beijing, was found invalid. In its Report to the Supreme People’s Court, the Higher People's Court of Jiangsu Province found that (1) the sale of goods contract concerned was not foreign-related because the parties were mainland Chinese entities, the subject matter of their contract located in mainland China, and the creation, modifications and termination of their contract all happened in mainland China; (2) the guarantee and warranty liabilities of foreign entities contained in the contract should be regarded as independent from the sale of goods contract between the parties and did not render their sale of goods contract foreign-related; and (3) domestic parties’ agreement to submit their disputes arising from contracts that has no foreign-related elements to a foreign arbitration institution for arbitration should be deemed invalid. In its Reply, the Supreme People's Court agreed that the arbitration clause was invalid under the PRC law.

Case text (English translation)

(31 August 2012 No. 2 of the Fourth Civil Tribunal of the Supreme People’s Court [2012])

The Higher People’s Court of Jiangsu Province:

Your court’s <Request on instructions on an application to confirm the validity of an arbitration clause between Jiangsu CASC Energine Wind Turbine Manufacture Co. Ltd and LM Wind Power Blades (Tianjin) Co. Ltd.> No. 0004 of the Higher People’s Court of Jiangsu [2011] submission has been received. Upon deliberation, our reply is as follows:

Pursuant to your court’s request, the parties had stipulated an arbitration clause in their <Trade Agreement>, agreeing that the relevant matters in dispute may be submitted to the International Chamber of Commerce for arbitration in Beijing. As the parties of the Trade Agreement were Chinese legal entities, the subject matter was in China and the agreement was concluded and performed in China, no elements giving rise to issues related to foreign-related civil matters were involved, so the agreement was not a foreign-related contract. Given that the jurisdiction of arbitration is empowered/authorised by law and that Chinese law does not provide that the parties may submit disputes without any foreign-related elements to arbitration institutions outside the territory or ad-hoc arbitration outside China, the parties’ agreement to submit their dispute in question to the International Chamber of Commerce for arbitration therefore lacked legal support. Our court agrees with your decision that the arbitration agreement shall be invalid.

It is so replied.

Enclosed:

Request on instructions on an application to confirm the validity of an arbitration clause between Jiangsu CASC Energine Wind Turbine Manufacture Co. Ltd. and LM Wind Power Blades (Tianjin) Co. Ltd.

(30 November 2011 No. 0004 of the Higher People’s Court of Jiangsu [2011])

The Supreme People’s Court:

Regarding Jiangsu CASC Energine Wind Turbine Manufacture Co. Ltd.’s application to confirm the validity of an arbitration clause, upon review the Intermediate People’s Court of Nantong, Jiangsu decided that the arbitration agreement shall be deemed invalid, and submitted the decision for our court’s consideration. Upon review, our court proposes to affirm the opinions of the Intermediate People’s Court of Nantong. 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>, we hereby report the related issues for your consideration:

I. The parties

Applicant: Jiangsu CASC Energine Wind Turbine Manufacture Co. Ltd. Domicile: 168 Jianghai Lu, Economic and Technology Development Zone, Nantong, Jiangsu.

Legal Representative: Han Shuwang, Chairman of the company.

Authorized Attorney: Ji Xiaoxing, Zheng Chunhua, Attorney, Beijing Mingcheng Law Office

Respondent: LM Wind Power Blades (Tianjin) Co. Ltd. Domicile: 8 Laiyuan Road, Wuqing Development Area, Tianjin Economic-Technological Development Area.

Legal Representative: Soren Hoffer, Chairman of the company.

Authorized Attorney: Miao Pei, Wang Xin, Attorney, Beijing Zhongwen Law Firm.

II. The parties’ submissions

The applicant, Jiangsu CASC Energine Wind Turbine Manufacture Co. Ltd. submitted that it had signed a wind turbine blades trade agreement with LM Wind Power Blades (Tianjin) Co. Ltd., the respondent and had agreed on an arbitration clause in the trade agreement, providing that disputes arising from the Trade Agreement may be submitted to foreign arbitration institutions for arbitration. Pursuant to Article 128 of the <PRC Contract Law (1999)>, parties to a foreign-related contract may apply to a Chinese arbitration institution or another arbitration institution for arbitration. Since the parties of the Trade Agreement in question were Chinese legal entities, the place of conclusion of the Agreement and the place of production, transportation, sales and utilization of the subject matter were all situated in China, the Agreement did not possess foreign related elements. Therefore, the parties’ stipulation submitting disputes to foreign arbitration institutions for arbitration was in violation of the relevant laws and judicial interpretations. The Applicant requested that the court confirm the arbitration clause stipulated under the <Trade Agreement> between the respondent was invalid.

The respondent submitted in its defence that the performance of the Trade Agreement between the parties involved various foreign related matters, including guarantee responsibilities of foreign entities provided under the annexure of the agreement, while the letter of guarantee directly stipulated that foreign law shall be the Applicable Law governing guarantee responsibilities; The agreement provides that payment for the goods shall be settled in USD. The warranty clause under the agreement provided the warranty liability of LM Glasfiber Holding A/S (LM Denmark). Regarding disputes on foreign-related contracts, the parties’ choice of applying for arbitration by a foreign arbitration institution was not in violation of the prohibitive regulations of the law. In addition, the conclusion of the arbitration clause in question was the true intention of the parties. The choice of matters to be arbitrated and the arbitration institution were clear and shall be valid and effective. Thus the respondent requested the court to dismiss the applicant’s application to confirm the invalidity of the arbitration clause.

III. Facts found by the Intermediate People’s Court of Nantong

Nantong Aerospace Wanyuan Anxunneng Wind Power Equipment Manufacturing Co. Ltd. (Nantong Aerospace) was registered on 2 June 2005. The name of the company was changed into Jiangsu Energine on 19 September 2010. The company was a Sino-foreign enterprise. Acciona Energia S.A., a Spanish company, was one of the shareholders of Jiangsu Energine. The current shareholders of the Jiangsu Energine are Beijing Wanyuan Industry Co. Ltd, Inceisa S.A. and Treasure Express (Holdings) Limited. The enterprise specialises in production, assembly, testing and installation of wind turbine equipment, sales of its own products, provision of technical consulting services and after-sales services. LM Glasfiber (Tianjin) Co. Ltd. (LM Glasfiber) was established on 21 February 2001. The name of the enterprise was changed into LM Tianjin. The enterprise was a wholly foreign-owned enterprise with LM Denmark being its shareholder. The name of the aforementioned shareholder was changed into LM wind power blades A/S, specializing in development, production and sales of wind turbine blades and other related services, and the provision of relevant technical services.

On 23 December 2005, Nantong Aerospace and LM Glasfiber had concluded a Trade Agreement on wind turbine blades. Other than the Agreement, 6 annexures were further concluded, stipulating matters including rights, obligations and dispute resolution. Clause 19 of the Agreement governs dispute resolution and the Applicable Law. The content of the Agreement is as follows: 19.1 the <United Nations Convention of International Sales of Goods> shall be applicable to this agreement. Interpretation shall be made with reference to the Convention; 19.2 Regarding any disputes, demands or breaches (including the interpretation, performance or termination of this Agreement) arising from this Agreement or related to this Agreement, the parties shall firstly attempt resolving the disputes through amicable consultations and negotiations; 19.3 If no negotiations are initiated 30 days after the first request for amicable negotiation, the parties may submit the matters in dispute to the International Chamber of Commerce for arbitration pursuant to its arbitration rules. Concerning the production and sales of the products or similar products, the arbitrator appointed shall be knowledgeable or experienced (or both), and he shall be able to speak fluent English; 19.4 The arbitration shall be held 30 days after the appointment of the arbitrator. The arbitration shall be conducted in English. The place of arbitration shall be situated in a venue agreed between the parties in Beijing, the People’s Republic of China. The time of arbitration may be stipulated by the parties. If no consensus can be reached as to the time and place of arbitration, the arbitrator may stipulate so; 19.5 The arbitrator’s final award or decision shall be final and binding on the parties. The arbitration fee shall be paid in accordance with the determination of the arbitrator; 19.6 The arbitral award may be enforced in the courts of any parties or courts having jurisdiction over the relevant assets and properties. Clause 5.3 stipulates that payments shall be made in Renminbi, while the prepayments and the price shall be settled in USD. Clause 9 provides that the delivery terms shall be FCA (Incoterms 2000). Annex C provides LM Denmark’s liabilities for guaranteeing the prepayments. LM Denmark confirms that if LM Glasfiber fail to return the prepayment in accordance with the provisions stipulated in the Trade Agreement signed, LM Denmark shall immediately pay Nantong Aerospace any unreturned payments. The guarantee shall expire on 31 January 2010. The guarantee relationship shall be governed by the Danish Law; Annex D stipulates LM Denmark’s warranty liability. Pursuant to the maintenance warranty letter, LM Denmark is responsible for the substitution or repairs of any defects in the buyer’s place of operation, and any direct costs subsequently incurred; Annex E stipulates Acciona Energia S.A.’s guarantee liabilities, that if Nantong Aerospace fails to perform any obligations or responsibilities provided under the abovementioned Trade Agreement or any orders placed or act in compliance with the payment obligations to LM Glasfiber, Acciona Energia S.A. shall immediately perform the payment obligations to LM Glasfiber. The guarantee shall expire on 31 January 2010. The guarantee relationship shall be governed by the Spanish Law.

During the hearing, the applicant submitted the maintenance warranty letter and other relevant materials to prove that the wind turbine blades and other equipment purchased by Nantong Aerospace from LM Glasfiber were actually used in the Zhangbei Guotou Wind Power Plant and Longyuan Qidong Wind Power Co. Ltd., which were both located in the People’s Republic of China. Payments were made to LM Glasfiber in Renminbi via internet banking. Certificates of wire transfer were submitted. The respondent did not dispute the authenticity of the maintenance warranty letter and certificates of wire transfer, yet it submitted that the materials failed to support the applicant’s claims.

IV. The opinions of the Intermediate People's Court of Nantong

It is in our court's opinion that the parties' stipulation that the dispute in question shall be submitted to foreign arbitration institutions in their agreement was in violation with the relevant legal regulations. Clause 19 of the Trade Agreement which required arbitration conducted by foreign arbitration institutions shall be deemed invalid.

The reasons are as follows:

Article 178 of the <Opinions of the Supreme People's Court on Several Issues concerning the Implementation of the General Principles of the Civil Law of the People's Republic of China (For Trial Implementation)> (Opinions concerning the General Principles of the Civil Law) stipulates that where either party or both parties in a civil legal relationship is an alien, a stateless person or a foreign legal person, and the object of the civil legal relationship is within the territory of a foreign country, and the legal facts that produce, alter or annihilate the civil relations of rights and obligations occur in a foreign country, such relationship shall be called foreign-related civil relations. Considering that the parties of the Trade Agreement in question were Chinese legal entities, the wind power blades, the subject matter involved in the Trade Agreement, were situated in China and that the place of conclusion and performance of the Trade Agreement was in China, the parties, subject matter, the creation and the performance of the civil relations between the parties were all situated in China, which did not fall under the foreign-related civil relations stipulated under the <Opinions concerning the General Principles of the Civil Law>. Although the annexure of the Trade Agreement stipulated guarantee liabilities and warranty liabilities of foreign enterprises, the stipulation cannot change the situation that the civil legal relations of the Trade Agreement should be classified as domestic disputes. In addition, since the subject matter of the Trade Agreement is the applicant and the respondent, the agreement shall only be binding to the applicant and the respondent. Considering the content of Clause 19 of the Trade Agreement, no dispute resolution between foreign entities is involved. Therefore, no foreign-related elements in the legal sense exist.

Paragraph 2, Article 128 of the <Contract Law> provides that “parties to a foreign-related contract may apply to a Chinese arbitration institution or another arbitration institution for arbitration”. According to this provision, only parties of foreign-related civil commercial cases may agree application to a foreign arbitration institution for arbitration. Agreements for application to a foreign arbitration institution for arbitration made by parties of non-foreign-related civil commercial cases are in violation of the Chinese legal regulations and shall be deemed invalid. These principles are further clarified in the <Opinion of the Higher People’s Court of Jiangsu on Several Matters Regarding Hearing Judicial Review on Foreign-Related Civil Commercial Cases> (Opinion). Article 17 of the Opinion stipulated that, in civil commercial disputes without foreign elements, the parties’ agreement for application to a foreign arbitration institution or arbitration in a foreign country shall be invalid. Here, the parties of the Trade Agreement were Chinese legal entities, the place of conclusion of the agreement, the place of performance and the location of the subject-matter were in China. The parties’ legal relation arising from the agreement shall be considered domestic commercial relation. No foreign-related elements existed. Therefore, the arbitration clause contained in the Trade Agreement between the parties that disputes of the parties shall be arbitrated by the International Chamber of Commerce shall be invalid.

V. The opinions of our court.

Regarding the stipulation in Article 178 of the <Opinions concerning the General Principles of the Civil Law> that “where either party or both parties in a civil legal relationship is an alien, a stateless person or a foreign legal person, and the object of the civil legal relationship is within the territory of a foreign country, and the legal facts that produce, alter or annihilate the civil relations of rights and obligations occur in a foreign country, such relationship shall be called foreign-related civil relations”, it is in our court’s opinion that the contract of sale of wind turbine blades between the applicant and the respondent does not belong to foreign-related civil relations. Firstly, the parties to the contract, the applicant and the respondent, are both Chinese entities established in the People’s Republic of China. Secondly, the subject matter (the wind turbine blades) are to be manufactured, transported and used in China. Thirdly, the conclusion and the performance of the contract of sale were situated in China. Therefore, since the parties, subject matter, creation of legal relations, modifications and termination of the agreement are all situated in People’s Republic of China, the contract of sale shall not be classified as foreign-related civil relations.

The Trade Agreement between the applicant and the respondent does not merely involve the parties’ trade of wind turbine blades, the guarantee liabilities and warranty liabilities of the parent companies of the parties (the foreign entities) are also involved. Yet considering that guarantee and warranty should be regarded as independent legal relations compared to the legal relations arising from the trade of wind turbine blades, the guarantee liabilities and warranty liabilities do not influence the fact that the legal relations arising from the trade of wind turbine blades in the Trade Agreement shall be classified as a domestic civil relation.

Article 255 of the <Civil Procedure Law> provides that “in the case of a dispute arising from the foreign economic, trade, transport or maritime activities of China, if the parties have had an arbitration clause in the contract concerned or have subsequently reached a written arbitration agreement stipulating the submission of the dispute for arbitration to an arbitral organ in the People’s Republic of China handling cases involving foreign element, or to any other arbitral body, they may not bring an action in a people’s court”. Article 128 of the <Contract Law> also provides that “parties to a foreign-related contract may apply to a Chinese arbitration institution or another arbitration institution for arbitration”. According to these legal provisions, only parties of foreign-related civil commercial cases may agree application to a foreign arbitration institution for arbitration. Domestic parties’ arbitration agreements submitting disputes arising from contracts or property rights disputes with no foreign-related elements to a foreign arbitration institution for arbitration shall be deemed invalid. Therefore, the stipulation that “the parties may submit the matters in dispute to the International Chamber of Commerce for arbitration” contained in the contract of sale of wind turbine blades shall be invalid.

Pursuant to Article 1 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>, our court hereby make a request for your court’s instructions.