Malaysian Airline System Berhad v. Taikoo (Xiamen) Aircraft Engineering Company Ltd.

Cite as: Malaysian Airline System Berhad v. Taikoo (Xiamen) Aircraft Engineering Company Ltd., The Supreme People’s Court (22 February 2012), in Fan Yang, Foreign-related Arbitration in China: Commentary and Cases, Part IV

Case identification

• Date of Decision: 22 February 2012 

• Court:

• The Supreme People’s Court

• The Higher People's Court of Fujian Province

• Arbitral Tribunal:

• N/A

• Case number / Docket number:

• No. 4 of the Fourth Civil Tribunal of the Supreme People’s Court [2012]

• No. 30 of the Higher People’s Court of Fujian Province [2011]

Classification of issues present

• Application of the New York Convention: No

• Key PRC law provision(s) at issue: Article 16 of <Interpretation of Several Issues Concerning the Application of “The Arbitration Law of the People’s Republic of China”>; Articles 16 and 18 of <Arbitration Law of the People’s Republic of China>.

Descriptors: Arbitration agreement; Validity of arbitration agreement; Applicable law to the arbitration agreement; The law governing the underlying contract; The law of the forum  

Malaysian Airline System Berhad v. Taikoo (Xiamen) Aircraft Engineering Company Ltd. 

An ad hoc arbitration agreement that only provides for the appointment of arbitrators, without stipulating the place of arbitration, or designating the arbitration commission, was found invalid under the PRC law. In its Report to the Supreme People’s Court, the Higher People's Court of Fujian found that although parties did not specify the law governing the arbitration clause, they did specify the law governing the whole contract, i.e. the PRC law. Thus, applying the law governing the underlying contract, it found that the arbitration clause concerned was invalid. In its Reply, the Supreme People’s Court was of the view that the law governing the underlying contract cannot be deemed to be the law governing the arbitration clause contained therein; and found that because the parties did not specify the law governing the validity of the arbitration clause or the place of arbitration, the law of the forum, i.e. the PRC law applied. The Supreme People's Court agreed that the arbitration clause was invalid under the PRC law.

Case text (English translation)

(22 February 2012 No. 4 of the Fourth Civil Tribunal of the Supreme People’s Court [2012])

The Higher People's Court of Fujian:

Your court’s <Request for instructions regarding the validity of an arbitration clause contained in the service contract agreed between Malaysian Airline System Berhad and Taikoo (Xiamen) Aircraft Engineering Company Limited> No. 30 of the Higher People’s Court of Fujian [2011] submission has been received. Upon deliberation, our reply is as follows:

According to the facts found, no clear stipulations were made concerning the Applicable Law determining the validity of the arbitration clause, the place of arbitration and the arbitral institution between the parties in the <Standard Ground Handling Agreement - Summary Procedures> and the relevant additional agreements including the main agreement. When considering the independence of the arbitration clauses and the general principles derived from judicial practice, the laws applicable to the contract agreed by the parties shall not automatically be deemed to be the Applicable Law determining the effectiveness of the arbitration clause contained in the contract. Your court’s opinion that the laws applicable to the contract agreed by the parties shall be the Applicable Law determining the validity of the arbitration clause under the contract is therefore not appropriate. 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”>, where the parties concerned neither clearly agreed upon the Applicable Law nor the place of arbitration, the validity of the arbitration agreement shall be determined pursuant to the lex fori, the Law of the People's Republic of China. Pursuant to Article 16 and 18 of the <Arbitration Law of the People's Republic of China>, no clear stipulations had been made regarding the arbitral institutions in the arbitration agreement, and no supplementary agreements can be reached after the arbitration agreement had been made. The arbitration agreement shall therefore be deemed invalid. Our court concurs with your court’s opinion that the arbitration agreement shall be deemed invalid.

It is so replied.

Enclosed:

Request for instructions regarding the validity of an arbitration clause contained in the service contract agreed between Malaysian Airline System Berhad and Taikoo (Xiamen) Aircraft Engineering Company Limited

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

The Supreme People’s Court:

Regarding the dispute related to a service contract agreed between the plaintiff, Malaysian Airline System Berhad and the defendant, Taikoo (Xiamen) Aircraft Engineering Company Limited, accepted by our court. Upon review, it is in our court’s opinion that the arbitration clause contained in the main agreement of the <Standard Ground Handling Agreement> shall be deemed invalid. 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]), we hereby report the related issues concerning the validity of the arbitration clauses for your investigation.

I. The parties

Plaintiff: Malaysian Airline System Berhad, domicile: 3/F, No. 1 Persiaran A, Lapangan Terbang Sultan Abdul Aziz Shah, Subang, Selangor, Malaysia.

Legal Representative: Abdullah. Aziz, Managing Director.

Defendant: Taikoo (Xiamen) Aircraft Engineering Company Limited, domicile: 20 Dai Jiang Lu, East side of Xiamen Gaoqi International Airport.

Legal Representative: Tang Kin Wing Augustus, Director.

II. The facts

In October 2007, a <Standard Ground Handling Agreement - Summary Procedures> had been concluded between the plaintiff and the defendant. The defendant agreed to provide short-term support services and apply for flight release certificates for the plaintiff’s A330 aircrafts stopping at the Beijing Capital International Airport which perform regular scheduled flights. The agreement shall be effective from 1 October 2007 to 30 September 2008. On 17 August 2008, an Airbus A330-300 aircraft owned by the plaintiff (Registration Number: 9M – MKH) was heading to Kuala Lumpur from Beijing. During the flight, crew members discovered problems with engine No. 2. After reading the <Quick Reference Handbook>, the flight returned to Beijing. During descending and landing, crew members discovered that problems with engine No. 2 remained, accompanied with large vibration indications. After landing at the Beijing Capital International Airport, the relevant errors were recorded in the technical log. The defendant’s engineer issued a certificate stating that the aircraft was fit for flight and signed a maintenance release certificate. The aircraft took off in Beijing Capital International Airport with Kuala Lumpur being the destination. When the aircraft was ascending, engine No. 2 recorded an abnormally high vibration indication and was subsequently shut down. The flight immediately returned and made an emergency landing at the Beijing Capital International Airport. Eventually, engine No. 2 was dismantled and replaced. Due to the incident, the plaintiff incurred a series of costs and therefore it filed a claim to our court. The defendant raised an objection as to the jurisdiction of our court during the period for submission of defence, arguing that as Article 9 of the main agreement of the <Standard Ground Handling Agreement> stipulates relevant matters for arbitration, and that our court should dismiss the plaintiff’s claims and the case should be arbitrated.

Upon review, the “Preamble” of the <Standard Ground Handling Agreement - Summary Procedures> signed between the plaintiff and the defendant stipulates that “This Annex B is prepared in accordance with the simplified procedure whereby the parties agree that the terms of the Main Agreement and Annex A of the <Standard Ground Handling Agreement> of April 1998 as published by the International Air Transport Association shall apply to this annex B as if such terms were repeated here in full. By signing this Annex B, the Parties confirm that they are familiar with the aforementioned Main Agreement and Annex A.” Article 9 “Arbitration” of the Main Agreement stipulated that “Any dispute or claim concerning the scope, meaning, construction or effect of this Agreement or arising therefrom shall be referred to and finally settled by arbitration in accordance with the procedures set forth below, the award shall be final and conclusively binding upon the parties”. On the other hand, Article 8 of the <Standard Ground Handling Agreement - Summary Procedures> provides that “this agreement shall be governed and interpreted in accordance with the Law of the People's Republic of China.”

III. Opinions of our court

Upon review, it is in our court’s opinion that no provisions regarding the Applicable Law governing the determination of the validity of the arbitration clause had been made in the main agreement of the <Standard Ground Handling Agreement 1998>. Article 8 of the <Standard Ground Handling Agreement - Summary Procedures> provides that “this agreement shall be applied and interpreted by the Law of the People's Republic of China.” Therefore, the determination of the validity of the arbitration clause shall be governed by the Law of the People's Republic of China. Article 16 of the <Arbitration Law of the People's Republic of China> stipulates that “an arbitration agreement shall include arbitration clauses stipulated in the contract and agreements of submission to arbitration that are concluded in other written forms before or after disputes arise. An arbitration agreement shall contain the following particulars: (1) an expression of intention to apply for arbitration; (2) matters for arbitration; and (3) a designated arbitration commission.” Article 18 provides that “if an arbitration agreement contains no or unclear provisions concerning the matters for arbitration or the arbitration commission, the parties may reach a supplementary agreement. If no such supplementary agreement can be reached, the arbitration agreement shall be invalid.” The arbitration clause only provides for appointments of arbitrators, but not the place of arbitration, the arbitration commission nor the arbitration rules. Since the domicile of the defendant is Xiamen, Fujian, under our court’s jurisdiction while the plaintiff is a foreign entity, this case should be classified as a foreign related civil commercial case. Therefore, our court has jurisdiction over this case pursuant to the law.

Please reply whether the above opinions are correct.