Beijing Court Upholds Arbitration Clause Designating Non-Existent Arbitral Institution

Case – Sichuan Daiyalan Trading v Hong Kong New Wish Electronics

In Sichuan Daiyalan Trading v Hong Kong New Wish Electronics (Fourth Intermediate People's Court of Beijing, 19 March 2021), the Court upheld an arbitration clause which failed to specify the seat of arbitration and provided for disputes to be submitted to a non-existent arbitral institution – the "Hong Kong Arbitration Commission".

Holding and Reasoning

Sichuan Daiyalan Trading ("Daiyalan") had entered into a contract to purchase masks from Hong Kong New Wish Electronics ("New Wish"). A dispute arose as to whether the masks supplied to Daiyalan were defective. Daiyalan initiated litigation against New Wish in the Beijing 4th Intermediate People's Court (the "Court").

The arbitration clause in the contract stated:

"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 [sic] party. The arbitral award shall be final and binding upon both parties."¹

As such, the arbitration agreement had provided for disputes to be submitted to a non-existent arbitral institution – the "Hong Kong Arbitration Commission".

The Court opined that the defective designation of the arbitral institution makes it impossible to confirm which institution should administer the dispute. However, the Court also noted that the parties agreed for disputes to be resolved by arbitration in Hong Kong, and that such agreement could be upheld, given that the parties could apply to the Hong Kong International Arbitration Centre (HKIAC) to determine the applicable arbitration rules and the appointment of arbitrator(s).

The Court went on to discuss the general pro-arbitration stance in China and in particular, how such stance would respect the parties' intention to choose arbitration as the method of dispute resolution and create a conducive environment for the development of international arbitration. In doing so, the Court referred to:

• PRC law which requires the court, in cases where the parties did not choose the governing law, and the laws of (a) the location of the arbitral institution and (b) the seat of arbitration point towards different conclusions regarding the validity of the arbitration agreement, to apply the law confirming the validity of the arbitration agreement;
• the New York Convention;
• trends in development in international arbitration; and
• how the PRC courts have addressed and analysed issues relating to international arbitration.

The Court thus upheld the parties' arbitration agreement and dismissed Daiyalan's action. It stated that Daiyalan could apply to the HKIAC to determine the applicable arbitration rules and the appointment of arbitrator(s).

Implications

This decision is consistent with China's signalled intention to develop a pro-arbitration landscape. It comes just several months prior to the issuance, in July 2021, of the draft revisions to the existing PRC Arbitration Law, which provide for, among other things, a more liberal approach in upholding arbitration agreements and recognition of the doctrine of competence-competence.

_{1 As quoted in the decision, accessible at China Judgments Online ("中国裁判文书网").}

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

_{© 2021 White & Case LLP}