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Drafting arbitration clauses-Difficulties that can arise when specifying “China” as the seat of arbitration

In the  Court of First Instance (the Court) decision of Z v A & ORS [2015] 2 HKC 272, the Court was asked to construe the ambiguities arising out of two arbitration clauses concerning the seat of arbitration.

The arbitration clauses

The parties had entered into two contracts, the CKD Agreement and the TC Agreement, each of which contained an arbitration clause as follows:-

CKD Agreement arbitration clause: “In case of breach of any of the Articles of this agreement by either of the parties, both Parties agree to put best efforts to remedy by negotiations. Otherwise, those Parties agree to arbitration as per the International Chamber of Commerce and held in CHINA” [emphasis added]

TC Agreement arbitration clause: “Any dispute, controversy or difference which may arise between the parties out of or in relation to this Agreement or for breach thereof shall be settled amicably by the parties, but in case of failure, it shall be finally settled in CHINA by arbitration pursuant to the Rules of the International Chamber of Commerce (the ICC) whose award shall bind the parties hereto.” [emphasis added]

The ICC decision and the arbitrator’s award

The Respondents commenced an arbitration by filing a Request for Arbitration with the International Court of Arbitration of the ICC (ICC Court) wherein it was submitted that the place of arbitration should be Hong Kong SAR on the basis that Hong Kong SAR was part of and within China. On the other hand, the Applicant contended that the Agreements provided that the arbitration should be held in Mainland China.

In accordance with art 14(1) of the ICC Rules (which states that “the place of arbitration shall be fixed by… [the ICC Court] unless agreed upon by the parties”), the ICC Court made the decision to fix Hong Kong as the seat of arbitration and appointed a sole arbitrator as the arbitral tribunal.

The arbitrator handed down a partial award giving his ruling affirming the decision of the ICC Court that the seat of arbitration be Hong Kong SAR and the procedural law applicable to the arbitration be Hong Kong law.

The Applicant raised a jurisdiction challenge under s 34 of the Arbitration Ordinance (Cap 609) to the Court seeking a declaration that the arbitrator had no jurisdiction to hear and deal with the issues in dispute in the arbitration and, on that basis, to set aside the arbitrator's partial award.

Issues before the Court

The issue in dispute between the parties was whether “China” meant Mainland China or Hong Kong.

Madam Justice Mimmie Chan (Mimmie Chan J) affirmed the well-established principles that in the construction of a contract or a clause, the courts would lean in favour of a construction which rendered the contract enforceable and legal and in the construction of arbitration clauses, the judge should put himself in the place of rational businessmen. Rational and reasonable businessmen would not have intended by their agreement to refer their dispute to arbitration by an institution, or in a place, which would render the arbitral award unenforceable, or otherwise than binding and effective.

Expert evidence was adduced before the Hong Kong Court by the parties’ respective experts on PRC law. The Respondent’s expert referred to a case in which the Supreme People’s Court ruled that an arbitration clause providing for ICC arbitration on the Mainland was valid and another case in which a Mainland Court enforced an ICC award made on the Mainland under the New York Convention. The Applicant’s PRC expert, on the other hand, took the view that an arbitration held on the Mainland and administered by the ICC was not a domestic award and may not be enforced by the Mainland courts because ICC is not an arbitration institution registered with the Mainland authorities under the Mainland Civil Procedure Law. He further took the view that the arbitration in the TC Agreement was not even valid and enforceable under PRC law because it did not specify the arbitration institution, but only the application of the ICC Rules.

Accordingly, on the face of the expert evidence, there was a risk that an ICC award made in Mainland China may not be enforceable in Mainland China and that the ICC Arbitration and award might not be supervised by the Mainland court under the Civil Procedure Law or the Arbitration Law, whereas the PRC experts were in agreement that an ICC award made in arbitration proceedings conducted in Hong Kong would be enforceable in Hong Kong, on the Mainland and by other countries which are parties to the New York Convention. On such basis, and bearing in mind that the object of an arbitration agreement must be to have the dispute resolved by a process which would result in a final, binding and enforceable award, Mimmie Chan J decided that the seat of the arbitration should be Hong Kong, the tribunal was properly constituted and the arbitrator had jurisdiction over the dispute submitted by the parties.

Checklist for drafting arbitration clause

We welcome the judgment in Z v A & ORS which again reinforces the Court’s liberal approach in construing arbitration agreements in favour of arbitration.

As lessons learnt from the above case, the following practical tips for drafting arbitration clauses:-

  • Use precise terms to avoid disputes arising from different interpretations
  • Specify the applicable arbitration institution, law and seat of arbitration
  • Consider using model arbitration clauses
  • If appropriate, specify the city as well as the country as the seat of arbitration.

Key Contacts

Kwok Kit (KK) Cheung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9427

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