Pursuant to article 5 of the Arbitration Law, where parties have reached a valid arbitration agreement and either of them institutes a legal action in court, the court will reject the same. This establishes the exclusive jurisdiction system for arbitration clauses. Nonetheless, in practice, there remain numerous disputes over jurisdiction between arbitration bodies and courts. For example, the authors recently discovered, in the judgment on a foreign-related equity dispute, that the court circumvented the constraints of an arbitration jurisdiction clause to “seize” jurisdiction. This column analyzes the application of arbitration jurisdiction clauses from the perspective of this case.
The equity transferee and the equity transferor, together with its actual controller, in the case executed an agreement (the actual controller held all shares in the transferor, and the transferor held all shares in the target company) which specified that any dispute that might arise in connection with the agreement and which could not be resolved through amicable consultations was to be referred to the China International Economic and Trade Arbitration Commission (CIETAC) for arbitration. However, there was a discrepancy between the way the transaction was ultimately carried out and the provisions of the agreement, resulting in the subsequent dispute over jurisdiction between arbitration and the court.
The transferee, deeming that the transferor failed to perform its attendant contractual obligations, instituted arbitration proceedings against the transferor demanding that the transferee be registered as the person in charge of the target company as agreed. The transferor, however, claimed that a condition precedent to registration was the payment in full by the transferee of the first four instalments of transfer moneys. Following the hearing by the arbitration tribunal, the award determined that the transfer moneys had been paid in full and upheld the transferee’s claim.
Subsequently, the actual controller of the transferor instituted a legal action in the court, claiming that the transferee had not paid in full the four instalments and demanding that it pay the balance of the transfer moneys. The transferee then filed an objection over jurisdiction with the court on the grounds that arbitration had jurisdiction over the case. However, the court held that, in the actual transaction framework for the equity transfer, the original transferor had become the actual controller of the transferor, which was inconsistent with the provisions of the agreement. It found that the actual controller of the transferor had reached a new oral agreement with the transferee, which was independent from the original agreement, and was, therefore, not bound by the arbitration clause. The court at the next higher level sustained the same finding.
Meanwhile, the transferor, after the rendering of the arbitration decision, petitioned the court for vacation of the arbitration on the grounds that, since the new oral agreement reached between the actual controller and the transferee was independent from the agreement, the arbitration clause in the agreement was not applicable to disputes between the parties; and the transferor and its actual controller did not consent to disputes between the parties being resolved through arbitration, so the arbitration procedure was not lawful. However, this reason was rejected by the court and it dismissed the transferor’s claim for vacation of the arbitration.
Can the actual controller of the transferor claim that it is not bound by the arbitration clause? In this case, the actual controller of the transferor, after the transferee secured a favourable arbitration award, petitioned the court demanding that the transferee pay the moneys for the equity on the grounds that the transferee had failed to perform its payment obligation on time. The controller additionally asserted that, since the transferor of the equity had changed from the original transferor to the actual controller of the transferor, it had the right to request the moneys but was not bound by the arbitration clause in the agreement.
Pursuant to article 2 of the Interpretations of the Supreme People’s Court of Several Issues Concerning the Application of the Arbitration Law, any dispute arising based on the formation, validity, amendment, transfer, performance, liability for breach, interpretation, termination, etc., of a contract may be found to be an arbitrable matter.
In the case, the objective of executing the agreement was to cause the transferee to acquire equity in the target company, and the modification of the transaction framework was an adjustment made to the method of performance solely for the purpose of achieving the objective of the transaction. The actual controller was also a co-signer of the agreement, it sought payment of the moneys for the equity based on its rights and obligations under the agreement, and no independent agreement was generated.
Accordingly, pursuant to article 2 of the interpretations, the claim of the actual controller that it was not bound by the arbitration seemed to have little merit. In the case in which the transferor petitioned the court to vacate the arbitration, the understanding held by the court was also consistent with the standpoint that it was bound by the arbitration.
Can a court in the finding of a fact be free to ignore the finding of the fact in a prior arbitration procedure? Another issue derived from this case: If another dispute over the same fact subsequently arises between the parties, is the court that subsequently accepts the case not bound by the finding of such fact when it is itself determining that fact?
Pursuant to item (5) of the first paragraph of article 9 of the Several Provisions of the Supreme People’s Court on Evidence in Civil Procedures, a party is not required to adduce evidence in support of a fact confirmed in an effective award of an arbitration institution. However, the second paragraph of the same article permits a party to overturn a fact confirmed in an effective award of an arbitration institution, if it has sufficient counter evidence to do so.
In the case, the fact of the transferee having paid in full the transfer moneys was determined in the prior arbitration.
In the subsequent legal action in which the actual controller of the transferor requested that the court order the transferee to pay the transfer moneys, the transferee did not bear the burden of proof, and unless the actual controller had counter evidence to overturn the fact, the trial court should have been bound by the fact as found in arbitration.
Alex Hsin is a senior partner and Chancy Chen is an associate at Martin Hu & Partners
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