“Hybrid” clauses in China

Introduction

A Chinese court has indicated that, notwithstanding the prohibition on ‘ad hoc’ arbitration under Chinese law, PRC-seated proceedings may be conducted in accordance with the UNCITRAL arbitration rules.

A “hybrid” or compromise arrangement was the ground for a jurisdictional challenge to arbitration proceedings commenced before China International Economic Trade Arbitration Commission (CIETAC) in Beijing. The respondent disputed the validity of the arbitration clause – which provided for UNCITRAL arbitration taking place “at” CIETAC – asserting that it failed to nominate the administering institution.

In rejecting the challenge, the decision of the Ningbo Intermediate People’s Court (the Ningbo Court) – which is understood to have followed a reference to the Supreme People’s Court of China (SPC) – has provided welcome certainty on the validity of such clauses. Nonetheless, as this decision will not bind other PRC courts, care should be taken before agreeing to hybrid arbitration clauses. Such agreements may continue to invite jurisdictional challenges which can lead to significant additional cost and delay in arbitration proceedings.

Hybrid clauses

Article 4.3 of the CIETAC 2012 Rules grants parties to CIETAC administered arbitration the freedom to agree the application of ‘other arbitration rules’. This flexibility applies except where it is ‘inoperative or in conflict with a mandatory provision of the law as it applies to the arbitration proceedings’.

Parties agreeing to CIETAC arbitration proceedings sometimes take advantage of this flexibility by agreeing to the application of UNCITRAL, GAFTA or other rules, albeit under the administration of CIETAC. This compromise arrangement gives a western party comfort in arbitrating under a set of rules that it is familiar with and which promote a less ‘hands-on’ administrative style than the CIETAC rules, while the Chinese party can take comfort in the fact that proceedings will still be administered by an institution with which it is familiar.

Background

INVISTA Technologies Sàrl (INVISTA Technologies) is an affiliate of INVISTA Sàrl, one of the world’s largest integrated producers of polymers and fibres, primarily for nylon, Lycra (spandex) and polyester applications. INVISTA has its headquarters in Wichita, Kansas, in the United States, and is affiliated with Koch Industries Inc., one of the US’s largest privately held companies.

The dispute arose from two technology licence agreements with the Chinese company Zhejiang Yisheng Petrochemical Co. Ltd (Yisheng). Those agreements each contained an arbitration clause providing that ‘[t]he arbitration shall take place at China International Economic Trade Arbitration Centre [sic] (CIETAC), Beijing, P[eople’s] Republic of] China and shall be settled according to the UNCITRAL Arbitration Rules as at present in force’.

In 2012, INVISTA commenced CIETAC arbitration proceedings against Yisheng under the UNCITRAL Rules and pursuant to the parties’ arbitration agreements. In response, Yisheng brought a jurisdictional challenge before its home courts in Ningbo, Zhejiang. The October 2012 application sought a declaration that the parties’ arbitration agreement was invalid.

The Ningbo Court held a hearing in December 2012. In accordance with the ‘reporting system’ implemented by the Chinese courts in such cases, the matter was referred to the Zhejiang High People’s Court (the Zhejiang Court). The Zhejiang Court held a further hearing in August 2013 and it is understood that the case was further referred to the SPC.

Decision

It is generally considered that PRC law prohibits ad hoc arbitration. Articles 16 and 18 of China’s arbitration law require that arbitration agreements stipulate the arbitration commission selected by the parties; failure to do so will result in the invalidity of such a clause.

Yisheng argued that the arbitration agreements entered into between it and INVISTA were invalid. Yisheng contended

• The arbitration clauses had failed to stipulate an arbitration commission within the meaning of the Arbitration Law.
• By selecting the UNCITRAL Arbitration Rules as the rules governing the arbitration, the parties had reached a typical ad hoc arbitration agreement.
• The procedure which the arbitration had followed since its commencement was consistent with ad hoc arbitration.

The Ningbo Court concentrated its judgment on the first of the above three grounds, addressing whether the arbitration clause specifying UNCITRAL arbitration to take place ‘at’ CIETAC in fact provided for administered rather than ad hoc arbitration. In its judgment the court concluded that the clauses did provide for administered arbitration.

While the use of the ‘at’ designation could arguably be understood to refer to the place of arbitration rather than the administering arbitral institution, the court found it was possible in these circumstances to interpret the clauses differently. In particular, the court sought to ‘recognise…the intent and purpose of the parties’,in this case to designate an administering institution so as to ensure a binding arbitration agreement under PRC law.

The court also addressed the reference to the ‘China International Economic and Trade Arbitration Centre’ (Centre rather than Commission) contained in the arbitration clause. Again the court relied upon existing powers to reinterpret the provision to give effect to the clear intention of the parties. Having determined these two points the court did not go on to address the issue of hybrid CIETAC/UNCITRAL clauses under PRC law. Instead, it concluded that the arbitration clauses had designated CIETAC as the administering institution.

Effect of the decision

The decision of the Ningbo Court does not bind other courts under China’s civil law system. Nevertheless it is an important affirmation of the validity of CIETAC/UNCITRAL hybrid clauses under PRC law. It also reflects well on the Chinese judicial system and its growing sophistication in dealing with arbitration matters.

However, this jurisdictional challenge took almost 18 months to reach the decision stage. Parties to China-related contracts should therefore tread with care when drafting China-related arbitration agreements, especially hybrid clauses such as the one in this case.