China: Shanghai People's High Court Upholds The Validity Of A Hong Kong Arbitration Clause

Last Updated: 14 January 2010
Article by Philippa Langton and Shirley Li

This case has provoked a certain amount of interest despite the fact that the High Court's decision simply followed the general law in China that the right of parties to agree law and jurisdiction should be respected by the Chinese courts. In the past, the courts in China have had a reputation for preferring to retain jurisdiction, in contradiction to the arbitration clause agreed between the parties.This latest decision, important because it is from a higher court, indicates a move away from that approach.

The facts of the case

Disputes arose in a fixture between Sinotrans Guangdong (the "Owners") and Lu Qin (Hong Kong) Co. Ltd. (the "Charterers") which provided "Arbitration in Hong Kong and English Law to apply". Such a combination of mixed law and jurisdiction is becoming increasingly popular. Ironically the Charterers, a Hong Kong entity, commenced a claim in the Shanghai Maritime Court (the "SMC"), ignoring the Arbitration Clause, and the Owners applied to contest the jurisdiction of the SMC in favour of arbitration in Hong Kong.

The SMC ruled that PRC law was the governing law in determining the effectiveness of the Arbitration Clause and rejected the owner's application on the basis that the Arbitration Clause failed to stipulate the arbitration tribunal and specify the number of arbitrators and accordingly it was invalid under PRC Arbitration Law. However, on appeal, the Shanghai People's High Court concluded that the arbitration clause was valid and binding on the parties under English Law and Hong Kong Law, and that the SMC did not have jurisdiction over the merits of the disputes.

The High Court's reasoning was as follows. On the interpretation of the Arbitration Clause, English law should be applicable. Under English law, there can be more than one national system of law bearing upon an international arbitration: the substantive law and the procedural law. In this case, the substantive rights and duties of the parties were governed by English Law and the procedure of the arbitration was governed by Hong Kong law (Hong Kong being the seat of the arbitration). Hong Kong law requires the parties to send an application to the Hong Kong International Arbitration Centre to determine the number of arbitrators.

Practical advice

In practical terms, parties carrying or trading goods to China should be aware of the general principles usually applied by the Chinese courts when deciding whether or not to recognise an arbitration clause. In brief, the courts should generally recognise a clause that has been expressly negotiated between the parties. In charterparties, this is not often a problem as the law and jurisdiction clause is often an express rider clause.

However, bills of lading can be problematic as it is common in a short form bill of lading to incorporate the terms and conditions of the governing charterparty. In order for the terms of that charterparty, and therefore its arbitration clause, to be validly incorporated into a bill of lading in the eyes of the Chinese courts, the charterparty should be clearly identified (preferably by date, names of parties, reference number, etc.) on the front side of the bill of lading and the incorporation clause should have a wide scope, for example "all terms, conditions and exceptions contained in the charterparty, including the arbitration clause, shall be incorporated". This is supported by Article 98 of the Guidelines in respect of Trials of Commercial and Maritime Disputes Involving Foreign Elements issued by the Supreme Court of China in 2004, which provides that:

"...clauses in respect of arbitration, jurisdiction and governing law in the charterparty shall not be binding upon a bill of lading holder (who is not the charterer) unless the incorporation clause expressly says that these clauses shall be incorporated."

There have been cases in which it was held that wordings like "freight payable as per charterparty dated XXX" are merely for the purpose of freight payment and are therefore not sufficient to incorporate, in particular, an arbitration clause from the charterparty.

Of course, whether a charterparty arbitration clause can be successfully incorporated into a bill of lading will depend upon the surrounding facts of each particular case and the court will also have some discretion in this regard.The point to note for shipowners and their P&I Clubs is that in order to have the best chance to successfully stay Chinese court proceedings in favour of a foreign arbitration, the charterparty must be clearly identified in the bill of lading and the incorporation clause must be wide enough to expressly include the arbitration clause.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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