‘Transplant’ of the arbitration agreement

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arbitration

Arbitration is one of the most important approaches of commercial dispute resolution. Together with litigation, they are known as the two carriages of dispute resolution over 100 years, and have worked perfectly in harmony.

The arbitration agreement is undoubtedly the starting point of the arbitration proceeding. It is no exaggeration to say that, as the cornerstone, an effective arbitration agreement is bound to exclude the jurisdiction of all courts and other arbitration institutions around the world.

According to current international conventions and the arbitration law of most countries, the arbitration agreement should clearly express the parties’ willingness to arbitrate. The expression should be active and in writing. The arbitration agreement can be inherited or transferred under certain circumstances.

Is the arbitration agreement entitled to be “transplanted”? And would the transplanted one still be recognized as an effective arbitration agreement? This article interpret and analyzes these questions, starting with a newly issued court ruling:

China International Economic and Trade Arbitration Commission’s South China Sub-Commission (CIETAC South China Sub-Commission, formerly known as CIETAC Shenzhen Sub-Commission) accepted a case arising out of the purchase and installation of equipment in September 2019, in which company A was the claimant and companies B and C were the respondents, according to the arbitration agreement incorporated in the sales contract of mobile phones signed by A and B, and the sales contract of mobile phones – tripartite co-operation agreement signed by A, B and C.

A claimed that B and C should reimburse the deposit and the service fee for developing the project. Upon the receipt of the notice of arbitration, C immediately brought an action in Shenzhen Intermediate People’s Court on the grounds of confirmation of the validity of the arbitration agreement.

According to article 20(1) of the Arbitration Law, the validity of the arbitration agreement in this case shall be determined by Shenzhen Court. In the meantime, in accordance with article 3 of the Supreme People’s Court’s Reply on Issues on Conformation of the Validity of the Arbitration Agreement, the arbitral tribunal decided to suspend the arbitration proceedings and cancel the original arrangement of an oral hearing.

On 20 January 2020, Shenzhen Court made a civil adjudication, which stated:

  1. C claimed: the arbitration agreement in the sales contract and the tripartite co-operation agreement should be confirmed invalid;
  2. The arbitration agreement: Article 9.2 of the sales contract stipulated that, “any dispute arising out of, or in connection with, this agreement and the related agreements, appendixes or the performance of this agreement, and the related agreements, appendixes shall firstly be solved through the friendly negotiation of parties. If no agreement can be reached through negotiation, the parties agree that either party may submit to CIETAC Shenzhen Sub-Commission for arbitration. If the disputes cannot be solved through arbitration, either party may file a lawsuit to a people’s court of the place where company B is domiciled”;
  3. C claimed that the arbitration agreement should be invalid on the grounds that: (i) there is no arbitration agreement between C and A, since there is no arbitration agreement in the tripartite co-operation agreement signed by C; and (ii) the scope of arbitration was not stipulated in article 9.2 of the sales contract, and therefore the arbitration agreement should be invalid due to the lack of clarity of scope of arbitration, according to the Arbitration Law; and
  4. Opinions of Shenzhen Court: First, although C did not sign the sales contract, C did sign the tripartite co-operation agreement in which the parties agreed the tripartite co-operation agreement shall form the integral part of the sales contract, and the remaining articles of the sales contract shall sustain. Second, the scope of arbitration covers any dispute arising out of, or in connection with, this agreement and the related agreements, appendixes or their performance. According to article 16 of the Arbitration Law, the arbitration agreement is valid with clear willingness and a specific arbitration institution. Therefore, Shenzhen Court will reject C’s claims.

Based on the above-mentioned ruling, A applied for resuming the arbitral proceedings. On the same day as A’s application, the arbitral tribunal decided to resume the arbitration proceedings.

Endowed by the Arbitration Law, the judicial confirmation of the validity of an arbitration agreement enables a people’s court to intervene in the judgment process, under the circumstance of when either party does not trust the competence-competence rule. In this case, while C is not a party to the sales contract, which incorporated the arbitration clause, C is a party to the tripartite co-operation agreement, which clearly stipulated the integral nature of the two agreements. Therefore, the arbitration agreement is transplanted to the tripartite co-operation agreement.

The ruling of this case confirms the reasonable expansion of the effectiveness of the arbitration agreement, and interprets the legislative intention of the Arbitration Law and relevant judicial interpretations, and the jurisprudence behind them. It fully respects the autonomy of the parties and expands the insight into the “original intention” of the parties at the time of contracting to the largest extent, endorsing the estoppel and applauding for good faith.

Li Xiaoguang is secretary general, and Zhang Xiaoyu is a case manager, of CIETAC South China Sub-Commission.

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