Chinese Courts Upholding the Validity of Defective Arbitration Clauses in Foreign-related Cases
Legal Development 16 December 2021 16 December 2021
On 19 March 2021, in the case of Sichuan Daiyalan Trading v. Hong Kong New Wish Electronics (the “Daiyalan Case”), the Beijing Fourth Intermediate People’s Court (the “Court”) issued a Civil Ruling ((2021) J04MCNo.52), holding that the defective arbitration clause in question (which designated a non-existing arbitral institution) was valid.
The case confirms a trend over recent years in China of increasing support for international commercial arbitration and this article considers the decision together with other relevant developments on this topic under Chinese law.
The wording of the arbitration clause in the Daiyalan case was as follows:
“All disputes arising from or in connection with this Contract including any question regarding the existence, validity or termination of this Contract, shall be submitted for arbitration to the Hong Kong Arbitration Commission under its applicable rules then in force. The arbitration fees, lawyer fees and all the expense incurred through arbitration should be borne by the failure party. The arbitral award shall be final and binding upon both parties.” (the “Clause”)
As a matter of Chinese law, when parties do not choose the applicable law to the arbitration clause, it is the law of the place of the arbitral institution（仲裁机构所在地）or the law of the seat of arbitration（仲裁地）that should apply to determine the validity of the arbitration clause. However, the “Hong Kong Arbitration Commission”, as agreed by parties in the Clause, does not exist and the Clause does not state the seat of arbitration either. In this circumstance, the issue will be which law should be applied to determine the validity of the arbitration clause. For example, if the Court finds that the place of the arbitral institution or the seat of arbitration is Hong Kong, then Hong Kong law would apply which will result in the Clause being held valid (despite the non-existence of the designated arbitral institution). However, if the Court finds that the place of the arbitral institution or the seat of arbitration is unclear, the Court will likely apply Chinese law, which will result in the arbitration clause being found invalid due to the non-existence of the designated arbitral institution.
In the Daiyalan Case, the Court found that Hong Kong law should apply to determine the validity of the Clause. To that end, the Court considered the following four aspects:
(1) The parties’ intention to submit the disputes to arbitration in Hong Kong.
Although the arbitral institution agreed by parties did not exist, the Court took the view that the wording of the Clause showed the parties’ intention to solve the disputes by way of arbitration in Hong Kong;
(2) The pro-arbitration position under both Chinese law and the New York Convention.
In accordance with Article 18 of the Law of the People's Republic of China on Choice of Law for Foreign-Related Civil Relations (《中华人民共和国涉外民事关系法律适用法》), parties may agree to choose the law applicable to the arbitration agreement. If the parties do not make a choice, the law of the location of the arbitral institution or the law of the seat of arbitration shall apply. Article 14 of the Provisions of the Supreme People's Court on Several Issues concerning Trying Cases of Arbitration-Related Judicial Review (《最高人民法院关于审理仲裁司法审查案件若干问题的规定》) (the “Provisions”) which came into force on 1 January 2018 further stipulates that if the parties do not choose the applicable law and the law of the place of the arbitral institution and the law of the seat of arbitration will lead to different outcomes on the issue of validity of the arbitration agreement, then the People's Court shall apply the law upholding the validity of the arbitration agreement.
In addition, the New York Convention (the “Convention”) also requires its Contracting States to comply with the “validation principle”. This principle is indicated in Article II of the Convention, which requires the Contracting States to recognise and give effect to the parties' agreement on the law governing their agreement to arbitrate, regardless of whether this choice is explicit or implied. Furthermore, when Article V(1)(a) provides for the application of the “law to which the parties have subjected” their arbitration agreement, it encompasses implied choice of law, including the parties’ implied agreement that the law governing their international arbitration agreement is the law that makes their agreement work and that will enforce it effectively. 
(3) Upholding the validity of the arbitration clause is conducive to the development of international commercial arbitration; and
(4) The Clause is considered to be valid under Hong Kong law, based on the legal advice issued by a barrister in Hong Kong.
It can be seen that the Court is inclined to respect the “parties’ true intention” and the pro-arbitration stance under both Chinese law and the Convention when reviewing cases in recent judicial practice. This is different from the Chinese court’s approach in earlier years. For example, in a Reply Letter regarding a dispute over a commission contract in 2008, the Supreme People's Court held that a similar defective arbitration agreement was invalid. In that case, the parties agreed to submit the disputes to arbitration by the British International Economic and Trade Arbitration Commission (英国国际经济贸易仲裁委员会) which did not exist, and no seat of arbitration was agreed either. Different from the Court’s finding in the Daiyalan Case, the Supreme People's Court earlier decided to apply Chinese law and since the parties had not agreed on a specific existing arbitral institution, the arbitration agreement was held to be invalid.
It is clear that Chinese courts have started adopting a more liberal approach in the interpretation of arbitration clauses/agreements, particularly since the Provisions came into effect on 1 January 2018, which in turn sends a positive message in support of upholding the validity of arbitration clauses/agreements in China.
 See G Born, International Commercial Arbitration (Kluwer Law International, 2nd Ed, 2014) at p 567.
 See G Born, International Commercial Arbitration (Kluwer Law International, 2nd Ed, 2014) at p 506.
 Gary Born, The Law Governing International Arbitration Agreements: An International Perspective (Singapore Academy of Law Journal (2014) 26 SAcLJ 814) at p 837, para 61.