UK: Enforceability Of English Arbitration Agreements And A Cautionary Tale On SAFE Registration In China

Last Updated: 5 June 2013
Article by Wai Yue Loh and Philippa Langton

Beijing Jianlong Heavy Industry Group v. Golden Ocean Group Limited and others [2013]EWHC 1063 (Comm)

This decision answered the question of whether a London arbitration agreement contained in a guarantee governed by English law would be unenforceable by reason of the guarantee itself being unenforceable as a matter of English public policy because it would involve committing an unlawful act in the guarantor's jurisdiction (in this case, China). On appeal from an arbitration award on the question of jurisdiction, the Commercial Court agreed with the Tribunal that the arbitration agreement was not impeached or tainted even if the guarantee in which it was contained was unenforceable. Consequently, the Commercial Court held that the arbitrators had the jurisdiction to rule on the enforceability or otherwise of the underlying guarantees.

The background facts

The matter involved claims pursued by various ship-owners against their charterers' guarantor in London arbitration proceedings. Five claims (which were heard together since they raised essentially the same issue) were brought in arbitration for payment under separate letters of guarantee given by Beijing Jianlong Heavy Industry Group ("Jianlong") to various ship-owning parties ("the Owners") in relation to several time charterparties concluded between the Owners and a subsidiary of Jianlong, Hong Xiang Shipping Holding (Hong Kong) Limited ("HXS"). The Owners sought payment from Jianlong under the guarantees on the basis that HXS had repudiated its obligations under the charterparties. Jianlong claimed that the guarantees were unenforceable as a matter of English public policy and that the Tribunal did not have jurisdiction to hear the claims since both the guarantees and the London arbitration agreements incorporated in them formed part of a scheme, the object and intention of which was to contravene the laws of China.

This Commercial Court decision related to Jianlong's appeal of the Tribunal's first instance determination that the arbitration agreements were valid and enforceable and that the Tribunal had jurisdiction over the substantive claim. The Tribunal had also granted the Owners anti-suit injunctive relief restraining Jianlong from continuing proceedings it had commenced in the Tianjin Maritime Court.

The unenforceability of the guarantees - SAFE registration

The parties had agreed to assume, for the purpose of the Commercial Court's determination, that the guarantees themselves would be unenforceable as a matter of English public policy because it would involve committing an unlawful act in China. It is illegal under Chinese law for a Chinese legal person (as Jianlong is) to give a foreign guarantee in favour of a foreign legal entity (as the Owners are) without having obtained the prior authorisation of the State Administration for Foreign Exchange ("SAFE"). Jianlong claimed that, during the negotiation of the charterparties and the guarantees, the Owners were aware of these requirements yet they deliberately conspired with Jianlong to contravene Chinese foreign exchange control law.

Separability of arbitration agreements

Jianlong's case, relying on the decision of Foster v. Driscoll [1929] 1 KB 470, was that an English law contract will not be enforceable if the common intention of the parties was to perform in a foreign-friendly country, some act which is illegal under the law of that country, even if that conduct was not necessarily required by the terms of the contract. Jianlong also asserted that any agreement(s) or ancillary contract(s) (such as the arbitration agreement) would be void or unenforceable by virtue of the illegality of the scheme of which they form a part. They further asserted that the arbitration agreements were directly impeached on the basis that the inclusion of London arbitration agreements substantially improved the chances of recovery under the guarantees by preventing the issue from coming before the Chinese courts (who would, applying the mandatory provisions of Chinese law, refuse to enforce the guarantees, in contrast to a tribunal in London who would only refuse enforcement if it issatisfied that the parties entered into them with the intention of breaking Chinese law in China). The arbitration agreements therefore served an important purpose in enabling the parties to circumvent the applicable provisions of Chinese law and, Jianlong argued, this was the sole purpose for which they were entered into.

The Commercial Court held that the nature and function of an arbitration clause is distinct and different from that of other contractual provisions and an arbitration provision is an agreement distinct and separate from the contract of which it otherwise forms part (Fiona Trust & Holding Corporation v. Privalov (2007) UKHL 50 and Section 7 of the Arbitration Act 1996).

It followed that the question is not the validity of the contract itself (i.e. the guarantee), but the validity of the arbitration clause; the arbitration provisions should not be simply swept away but must be evaluated individually to see whether or not they are impeached. The arbitration agreements would only be rendered void or unenforceable if Jianlong could show that they were directly impeached on grounds relating to the arbitration agreements themselves and not merely as a consequence of the invalidity of the guarantees.

International Comity & Public policy

The Commercial Court found that there was no basis to impeach and invalidate the arbitration agreements. The Judge preferred the Owners' interpretation of Foster v. Driscoll in that this decision did not stand for the sweeping proposition advanced by Jianlong. The Court observed that Jianlong's argument would be tantamount to saying that the arbitration agreements should be struck down simply because it would not be appropriate for the arbitrators (if they were determined to have jurisdiction) to apply the rule in Foster v. Driscoll to determine the validity of the guarantees. The Judge also concluded that upholding the validity of the arbitration agreements would not in any way be contrary to the English court's obligation of international comity; the policy and purpose of the rule which invalidates the guarantees did not strike down the arbitration provisions.

Jianlong attempted to argue that the arbitration agreements were concluded to assist in the furtherance of the illegal foreign guarantees and were therefore unenforceable. Public policy considerations do in fact forbid the English courts from enforcing a contract that is concluded by parties to an illegal adventure to assist in the furtherance or concealment of the illegal purpose or the evasion of a foreign law which is being broken in relation to the contract (Soleimany v. Soleimany [1999] QB 785).

However, this case was distinguished on the basis that the invalidating rule, whose policy must be considered, was not the rule of foreign law that was alleged to have been contravened (here, the Chinese exchange control regulations) but the rule of English public policy and that would not be defeated by giving effect to the arbitration agreements in the present case. The Judge stressed that if the guarantees were in fact found to be illegal by the arbitrators, the guarantees would not be enforced and this would not offend the English court's obligation of international comity or their notions of public policy.

Comment

Cases such as this inevitably turn on their own facts, but it seems clear that the courts will generally try to enforce arbitration agreements where possible. In reaching its decision, the Court clearly paid attention to the powerful commercial reasons supporting the upholding of arbitration provisions: the desirability of respecting the parties' choice of a forum to resolve their disputes and the inconvenience of having one issue resolved by the court and then, contingently on the outcome of that decision, further issues decided by the Tribunal.This case can be distinguished from another recent decision of the Commercial Court in the Pacific Champ [2013] EWHC 470 (Comm) (see Shipping E-Brief April 2013), where it was held that a complete lack of consensus between the parties not only prevented the main charterparty contract from coming into existence, but also the arbitration agreement contained in the charterparty. In the present case, there was no dispute that there was consensus between the parties in entering into the guarantees (and the arbitration agreements); rather, the issue was that they had consented to conclude agreements that were contrary to foreign law.

The decision in this case appears to suggest that Chinese parties whose parent companies have given performance guarantees without proper SAFE approval will now have less mileage in their attempts at bettering their bargaining position through invoking SAFE (non-) approval issues. Nonetheless, it remains important to comply with the SAFE requirements when obtaining guarantees from Chinese parties in order to avoid subsequent disputes as to their validity and enforceability.

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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