HK court decision on scope of ‘China’ and implication for dispute resolution clauses

By Sally Wang, Martin Hu & Partners
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The High Court of Hong Kong heard an application earlier this year for a declaration that the arbitrator in the International Criminal Court (ICC) arbitration case no. 18228/C YK lacked jurisdiction and the arbitrator’s partial award should be set aside on that basis. A decision was rendered on 30 January.

王娅瑾 Sally Wang 胡光律师事务所 合伙人 Partner Martin Hu & Partners
王娅瑾
Sally Wang
胡光律师事务所
合伙人
Partner
Martin Hu & Partners

The applicant was a company Z from the mainland, while company A as well as three others were the respondents. In 2007, the applicant and respondents signed an agency agreement as well as a technical cooperation agreement. Both contracts contained arbitration clauses which provided that arbitration would be pursuant to the International Chamber of Commerce and held in China.

Company A filed a request for arbitration with the ICC in October 2011. The company sought relief in respect of company Z’s breach of contract, and suggested Hong Kong as the seat of arbitration.

Company Z filed a dissenting opinion, stating that the main purpose of the place of arbitration is to determine the nationality of the arbitration. The contracts, it said, had determined that the arbitration would be held in China, and the nationality of the arbitration award would also be China. There is no reason, it argued, for the ICC’s International Court of Arbitration to set a different place of arbitration.

The ICC court fixed Hong Kong as the place of arbitration and appointed a sole arbitrator to arbitrate the case. In the award handed down on 19 February 2013, the arbitrator held, “as the parties could not agree on a city in China as the place of arbitration … the ICC court fixed the place of arbitration as Hong Kong, PR China.”

It further set out, “Given that the ICC court validly determined Hong Kong SAR, PR China as the seat of the arbitration, the applicable arbitration law to be applied in determining whether or not the tribunal has jurisdiction to hear this matter is Hong Kong law.” In response, company Z filed the aforementioned application for the award to be set aside.

Decision of the HK court

Mimmie Chan, the judge hearing the case, held that both sides had agreed in the contracts to refer their disputes to the ICC pursuant to the ICC rules, so the ICC court therefore is entitled to hear disputes submitted by the parties per ICC rules.

Hong Kong has retained its own legal system post-handover but it is part of China, Chan stated. She noted, “it was argued that for arbitration, Hong Kong and mainland China are separate in their procedural law and that awards made in Hong Kong and in mainland China are enforced and supervised by different courts.” To that extent, she stated, the contracts’ arbitration clauses were unclear in setting out the place of arbitration, and that, in her view, the ICC court was entitled and bound to determine that matter.

Company Z, the applicant, argued that the sole arbitrator failed to take into account the parties had designated “China” as the place of arbitration, or had misinterpreted the arbitration clause and the meaning of “China”. It argued that the proper interpretation was that both sides had agreed to provide for the seat of arbitration to be in mainland China.

Judge Chan refuted this argument, setting out that when a court ascertains the construction of a contract, it attempts to consider what would have been the intention of ordinary, reasonable and sensible businessmen in the position of the actual parties to the contract.

Further, courts generally conclude that parties intended to produce a legitimate result when constructing the contract. “If a contract admits of two interpretations, one of which is legal and the other illegal, the courts will prefer that which leads to a legal result,” she wrote.

As the applicant and respondents are reasonable and rational, Judge Chan accepted that they must have been aware at the time the contracts had been concluded, Hong Kong is a part of China. It would be artificial, she wrote, to hold that the parties had intended the provision on place of arbitration to mean either “China excluding Hong Kong”, or “China including Hong Kong”. “It cannot, in my view, be incorrect for the ICC court to decide, on a plain reading of the arbitration clauses, that the arbitration should be held in Hong Kong, which is geographically and legally a part of China,” she stated.

The decision further raised that there is a risk that an ICC award made in the mainland may not be enforceable in the mainland, while one made in Hong Kong would be enforceable in Hong Kong, the mainland and other jurisdictions party to the New York Convention. It held that parties to a contract generally are unlikely to have intended to agree to do something legally ineffective.

Further, the decision noted that the courts tend to prefer a construction which renders the contract enforceable and legal when constructing a contract or clause. Judge Chan thus concurred that the arbitration should be held in Hong Kong.

Based on this analysis, the judge stated that she preferred the construction that the arbitration is to take place in Hong Kong instead of the mainland. She concluded that the tribunal had been properly constituted, and that the arbitrator had jurisdiction in the dispute between the two parties.

Contract drafting tips

In practice, not all parties to a contract have a full understanding of the importance of the arbitration clause. Often lawyers will follow or mirror a template when drafting the clause. Further, relatively few lawyers will research issues such as arbitral institution rules or relevant laws in a certain jurisdiction when drafting a contract. This could also include how to handle cases where an arbitral institution finds that parties had not been clear as to the place or arbitration or constitution of the tribunal.

Generally clients will only concern themselves with whether the dispute resolution clause opts for litigation or arbitration when reviewing contracts, and not consider more in-depth discussion. When time is tight clients may even ask for arbitration clauses to be simplified, and return to more substantive provisions once more time is available. Clients are also constrained by their limited legal knowledge and tend to be unable to determine whether the clause is enforceable and legal. As Judge Chan stated, when considering the scope of “China”, the parties, as rational, reasonable persons, will only have the plain and ordinary reading that Hong Kong is a part of China.

This is why, as lawyers, we need to increase the emphasis we place on arbitration clauses. We need to then help our clients understand the importance of these clauses, and how the various dispute resolution methods can engender disparate effects and results. Finally, we also need to make our clients aware of the difference in scope, meaning and understanding of “China”, and work with them to clarify what “China” they mean in the contract.

Sally Wang is a partner of Martin Hu & Partners

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王娅瑾 Sally Wang

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