Ensuring arbitration clause validity in signed company contracts

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Zhang Jiechao is an arbitrator at the Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC)

A promoter of a company may enter into many contracts in relation to the establishment of that company. These contracts are frequently signed in the name of the promoter. Article 2 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (III) (Interpretation of Company Law III) provides rules for other parties in such contracts to claim against the promoter or the company in different situations.

The article, however, is silent on rules for the company to make claims under the contract. This unresolved question becomes tricky when an arbitration clause is involved. The following arbitration case illustrates this problem, and this article aims to provide its solution.

Facts of the case

In 2013, company A, the lessor, signed an office lease with Mr Wang. The arbitration clause refers the dispute to the Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC). Mr Wang paid the rent until the end of 2015, after the commencement of the lease.

Half a year later, company B was established and registered its domicile on the basis of the lease. Mr Wang is one of the promoters of company B. At the end of 2014, company B entered a dissolution and sent a notice of termination to company A, demanding a refund of the remaining one year of rent.

After unsuccessful negotiations, company B filed an arbitration against company A, claiming a termination of the lease and a refund. Company A raised an objection to jurisdiction, claiming company B had no contractual relationship under the lease, and therefore no arbitration clause existed between companies A and B. In other words, the BAC/BIAC had no jurisdiction over the case.

The above-mentioned case presents a typical situation where the promoter of the company signed contracts in its own name. Two tests should be considered for deciding the jurisdiction:

Test of capacity. The beginning and ending of a contract normally indicate the parties’ names, or their representatives. The persons who signed or sealed a contract (the signing parties) normally are the parties of the contract. In this case, the signing parties are company A and Mr Wang. That is, the lease binds these two parties. The first test will be whether the text of the contract deliberately expands the signing parties’ capacity.

In this case, the lease has expressly clarified that Mr Wang is the promoter of company B, and all the contractual rights and obligations will transfer to company B after its establishment. Therefore, the consent of company A was identified through the clarification. Company B’s filing of arbitration further confirmed the expansion of the signing party’s capacity, where the first test is satisfied.

Test of performance. Normally, in performance of a contract, contractual parties will have more than one communication. Especially in the lease, parties have to communicate on matters regarding the confirmation of rent payment, the use of the leased property, etc. The second test is whether the party concerned performed as the contractual party during the actual performance.

In this case, if the first test fails, it is necessary to consider the details of performance. If company A was aware of Mr Wang’s expanding capacity as the promoter of company B, and no objection was recorded during company B’s actual performance, the interpretation of Company Law III could be explained as the ground for company B’s claim against company A under the same arbitration clause.

However, where company B performed the lease with no indication or recognition as the contractual party, such performance could be taken as a non-party’s conduct. The non-party, entrusted or not, has no intention to be bound by the arbitration clause, and as a result the arbitration clause does not bind companies A and B.

Conclusion

Articles 8 and 9 of the Interpretation of the Supreme People’s Court on Concerning the Applicability of the Arbitration Law of the People’s Republic of China (the Interpretation of Arbitration Law) prescribe the rules of succession of arbitration clause concerning merger, division and assignment. Although some could argue the similarity, the articles do not directly apply to the situation in the establishment of a company. Therefore, in order to determine the validity of an arbitration clause in contracts signed by the promoter of the company, in its own name, the Interpretation of Company Law III is the possible gauge.

However, it only prescribes the situation for the contractual counterpart to claim, leaving vague the situation for the promoter or the company to advocate rights. The above two tests fill the gap – the first test places emphasis on the capacity where the above-mentioned articles of the Interpretation of Arbitration Law apply, while the second places emphasis on the performance where the Interpretation of Company Law III applies.

To ensure a valid arbitration clause in such situations, parties need to clarify the signing parties’ capacity in the text of the contract, and disclose the status of the performing party to the counterparty of the contract. Otherwise, the established company may face uncertainty when taking action on the basis of the arbitration clause signed by its promoter in its own name.

Zhang Jiechao is an arbitrator at the Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC). BAC/BIAC’s senior manager, Terence Xu, and senior counsel of the International Case Management & Business Development Division, Yang Yufei, also contributed to the article

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