Taizhou Hope Investment Co. Ltd. v. WICOR Holding AG

 

Cite as: Taizhou Hope Investment Co. Ltd. v. WICOR Holding AG, The Supreme People’s Court (1 March 2012), in Fan Yang, Foreign-related Arbitration in China: Commentary and Cases, Part IV

Case identification

  • Date of Decision: 1 March 2012 

  • Court:

    • The Supreme People’s Court

    • The Higher People's Court of Jiangsu Province

  • Arbitral Tribunal:

    • N/A

  • Case number / Docket number:

    • No. 6 of the Fourth Civil Tribunal of the Supreme People’s Court [2012]

    • No. 0001 of the Higher People’s Court of Jiangsu 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; Designation of arbitration rules without designating the arbitral institution  

 

 

 

Taizhou Hope Investment Co. Ltd. v. WICOR Holding AG 

An agreement to arbitration under the old International Chamber of Commerce Rules of Conciliation and Arbitration (1988), without designating the International Chamber of Commerce as the arbitration institution, or the place of arbitration was found invalid under the PRC law. In its Report to the Supreme People’s Court, the Higher People's Court of Jiangsu Province 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)

(1 March 2012 No. 6 of the Fourth Civil Tribunal of the Supreme People’s Court [2012])

 

The Higher People's Court of Jiangsu Province:

Your Court’s <Request for instructions on the case regarding contractual disputes arising from a Chinese-Foreign Joint Venture between Taizhou Hope Investment Co. Ltd. and WICOR Holding AG> No. 0001 of the Higher People’s Court of Jiangsu Province [2011] submission has been received. Upon deliberation, our reply is as follows:

This case concerns the confirmation of the validity of a foreign-related arbitration agreement. Pursuant to the principle of independence of arbitration agreements and general principles derived from judicial practice, the Applicable Law governing the main contract agreed between the parties shall not be deemed to be the Applicable Law governing the arbitration clauses contained within the contract. Your court’s decision that the Applicable Law governing the main contract stipulated between the parties shall be regarded as the Applicable Law governing the arbitration clauses contained under the contract is unsupported. Even with considering the stipulation that “if a party initiates arbitration proceedings, the place of arbitration shall be chosen by the other party” contained within the arbitration agreement in question, no arbitration applications had been made by the parties. No issues concerning the choice of place of arbitration existed, and therefore no place of arbitration had been provided by the arbitration agreement in question. 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”>, in the circumstance that no Applicable Law governing the validity of the arbitration agreement and the place of arbitration had been clearly stipulated by the parties, the validity of the arbitration clause shall be determined pursuant to the lex fori, the Law of the People's Republic of China.

Here, the parties had provided in the arbitration agreement that “arbitration shall be conducted according to the International Chamber of Commerce Rules of Conciliation and Arbitration” (1988). No arbitration institutions had been stipulated in the arbitration agreement, while the arbitration institution cannot be determined by the <International Chamber of Commerce Rules of Arbitration> and no supplement agreement had been made between the parties subsequently. Pursuant to Article 16 and 18 of the <Arbitration Law of the People's Republic of China> and Article 4 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 agreement in question shall be invalid. Our court agrees with your court’s opinion that the arbitration agreement in question is invalid.

It is so replied.

 

Enclosed:

Request on instructions on the case regarding disputes over a contract on a Chinese-Foreign Joint Venture between Taizhou Hope Investment Co. Ltd. and WICOR Holding AG

(14 November 2011 No. 0001 of the Higher People’s Court of Jiangsu Province [2011])

The Supreme People’s Court:

 

On 26 September 2011, the Intermediate People’s Court of Taizhou requested our court’s instructions regarding the case concerning disputes over a contract on a Chinese-Foreign Joint Venture between Taizhou Hope Investment Co. Ltd. (Hope Investment) and WICOR Holding AG (WICOR), that the Intermediate People’s Court ruled that the foreign-related arbitration clause contained in the Joint-Venture Contract agreed between the parties is invalid and so the court shall have jurisdiction over the case. Upon review, our court agrees with the Intermediate People’s Court of Taizhou’s acceptance of the case. 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]) issued by the Supreme People’s Court, we hereby report the following for your consideration and examination:

 

I. The parties

Plaintiff: Taizhou Hope Investment Co. Ltd. Domicile: 40 Haiyang Lu, Taizhou, Jiangsu, the People’s Republic of China.

Legal Representative: Wang Jianning, Chairman of the company.

Defendant: WICOR Holding AG. Domicile: Neue jonastrasse 60 CH-8640 Rapperswil Switzerland.

Legal Representative: Franziska A Tschudi.

 

II. The facts

On 6 July 1997, a <Sino-foreign Taizhou Huawei Insulation Materials Co. Ltd. Joint-Venture Contract> (Joint-Venture Contract) had been concluded between Taizhou Insulation Material General Works and WICOR, for the production of electrical insulation papers and insulating components used in transformer industries. The registered capital of Taizhou Huawei was USD$ 10,000,000.00. Taizhou Insulation Material General Works would contribute USD$ 4,000,000.00 by cash, land use rights and tangible assets, representing 40% of the registered capital. WICOR would contribute USD$ 6,000,000.00 by cash and freely convertible foreign currency, representing 60% of the registered capital. Chapter 23, “the Basis for the Application of Law” of the Joint-Venture Contract provided that “the formation, effectiveness, interpretation and enforcement of the contract, and resolution of disputes arising from the contract shall be determined by the Law of the People’s Republic of China. If no relevant legal regulations can be found in the territory of business operation, reference shall be made to international commercial regulations. Any Chinese national laws and local regulations mentioned in this contract shall be interpreted as the existing laws and regulations currently in force.” Chapter 24 “Resolution of Disputes” provided that 1. Any disputes arising from the performance of the contract or relating to the contract (including the annexure) shall be resolved by amicable negotiations. 2. If it is impossible to reach an agreement through negotiations, the disputes shall be submitted for arbitration. The arbitration proceedings shall be made pursuant to the International Chamber of Commerce Rules of Conciliation and Arbitration. If a party initiates arbitration proceedings, the place of arbitration shall be chosen by the other party. The arbitration shall be conducted in English. 3. The arbitral award shall be finding and binding to the parties. 4. The parties shall continue to perform during arbitration, except the clauses involved in the arbitration. 5. Even if the contract becomes ineffective or the contract is terminated due to some reasons, this Chapter (Chapter 24) shall remain valid and enforceable.

In December 1997, upon approval, Sino-foreign Taizhou Huawei Insulation Materials Co. Ltd. was renamed Taichou Weidmann High Voltage Insultation Co. Ltd. (Taizhou Weidmann).

On 17 December 2004, Taizhou Insulation Material General Works was renamed Taizhou Hope Investment Co. Ltd. The Chinese investment for Taizhou Weidmann therefore was renamed Hope Investment.

During the performance of the contract, Hope Investment accused WICOR of selling the same products with those produced by the Joint-Venture in violation of the Joint-Venture Contract, establishing businesses in competition with the Joint-Venture in Shanghai and Jiaqing, Zhejiang and damaging the interests of the Joint-Venture by making connected transactions. Hope Investment had given written notice to WICOR requiring it to perform in accordance with the contract, yet no reply from WICOR had been received. On 14 July 2011, Hope Investment filed a claim in the Intermediate People’s Court of Taizhou, requesting that the court: 1. Confirm that the execution of the Joint-Venture Contract and its annexure agreed between the parties was terminated; 2. Confirm that the defendant shall be responsible for its breach of contract, and order that the defendant shall transfer its shareholding in the Joint-Venture Enterprise to the plaintiff; 3. Order the defendant to compensate the plaintiff for its economic losses amounting to RMB¥ 21,950,967.55; and 4. Make an order restraining the defendant from setting up enterprises in direct or indirect competition with the Joint-Venture Enterprise within the territory of the People’s Republic of China.

 

III. The opinions of the Intermediate People’s Court of Taizhou

(1) The Lex Fori shall be the Applicable Law governing the determination of the arbitration clause

The People’s Republic of China is a signatory of the <Convention on the Recognition and Enforcement of Foreign Arbitral Awards>. Article V(1)(a) of the Convention stipulates that the determination of the effectiveness of an arbitration clause shall be made under the Law Applicable to them. If no such provisions had been made but the parties had agreed on the place of arbitration, the law of the place of arbitration shall be the Applicable Law. 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 law 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.”

Here, considering the contents of the Joint-Venture Contract signed between Taizhou Insulation Material General Works and WICOR, no Applicable Law governing the determination of the validity of the arbitration clause was stipulated by the parties. Also no place of arbitration had been clearly agreed upon. Therefore, the validity of the arbitration clause shall be determined pursuant to the lex fori, the Law of the People's Republic of China.

(2) The arbitration clause in question shall be deemed invalid.

Article 18 of the <Arbitration Law of the People's Republic of China> stipulates 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.” Article 4 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 only stipulates the arbitration rules applicable to the dispute, it shall be deemed that the arbitration institution is not stipulated, unless the parties concerned reach a supplementary agreement or may determine the arbitration institution according to the arbitration rules agreed upon between them.”

The arbitration clause agreed upon provided that “arbitration proceedings shall be made pursuant to the International Chamber of Commerce Rules of Conciliation and Arbitration”. Pursuant to Article 7 of the <International Chamber of Commerce Rules of Conciliation and Arbitration 1988>, despite an arbitration agreement had been concluded between the parties, the agreement did not specify submitting disputes to the International Chamber of Commerce. Therefore, the agreement should be regarded as a situation where no arbitration agreements had been made. Article 8(1) of the rules of arbitration provided that where the parties have agreed to submit to arbitration by the international Chamber of Commerce, they shall be deemed thereby to have submitted ipso facto to the present Rules. At the same time, Article 11 of the rules of arbitration stipulated that the rules governing the proceedings before the arbitrator shall be those resulting from these Rules and, where these Rules are silent, any rules which the parties (or, failing them, the arbitrator) may settle, and whether or not reference is thereby made to a municipal procedural law to be applied to the arbitration. However, the 1988 and 1998 International Chamber of Commerce Rules of Conciliation and Arbitration did not provide that the parties shall be deemed to consent to submit the dispute for arbitration in the International Chamber of Commerce if they provide that the International Chamber of Commerce Rules of Arbitration shall be applicable to the arbitration procedure. Therefore, the arbitration institution cannot be identified by the <International Chamber of Commerce Rules of Conciliation and Arbitration 1988>. Similarly, the <International Chamber of Commerce Rules of Arbitration> would not exclusively confirm that the parties decided to submit their disputes to the International Chamber of Commerce for arbitration.

Summarizing the above, the arbitration clause in question did not clearly stipulate the arbitration institution. The parties failed to reach a supplementary agreement subsequently. The arbitration rules chosen by the parties also failed to determine the arbitration institution, and therefore the arbitration clause is ineffective. Our court may accept the plaintiff’s litigation application.

 

IV. The opinions of our court

Upon review, it is in our court’s opinion that considering that WICOR is a Swiss business entity, the Applicable Law shall be determined by the applicable principles of the laws concerning foreign-related cases. Chapter 23, “the Basis for the Application of Law”, of the Joint-Venture Contract in question provided that “the formation, effectiveness, interpretation and enforcement of the contract, and resolution of disputes arising from the contract shall be determined by the Law of the People’s Republic of China. Therefore, as the parties had stipulated the Applicable Law governing resolution of disputes arising from the contract, the Law of the People’s Republic of China shall be the Applicable Law governing the determination of the effectiveness of the arbitration clause in question. Although the arbitration clause in question stipulated that arbitration shall be made pursuant to the International Chamber of Commerce Rules of Conciliation and Arbitration, no clear stipulations as to the arbitration institution were provided. Even considering the International Chamber of Commerce Rules of Conciliation and Arbitration, it is not possible to identify the choice of the arbitration institution. In addition, the parties failed to reach a new supplementary agreement after the occurrence of the dispute between them. Pursuant to Article 4 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”>, it can be held that the stipulations of the choice of arbitration institution provided in the arbitration clause in question are unclear. Pursuant to Article 18 of the <Arbitration Law>, the arbitration clause in question shall be deemed invalid.

Summarizing the above, it is in our court’s opinion that the arbitration clause in question shall be deemed invalid. Considering that the place of performance of the contract in question is in Taizhou, Jiangsu, Pursuant to Article 241 of the <Civil Procedure Law>, the Intermediate People’s Court of Taizhou, Jiangsu being the court of the place of performance of the contract shall have jurisdiction over this case.

Please reply whether the above opinions are correct.