China: Beijing Financial Court Upholds Validity Of Asymmetric Arbitration Clause

The Beijing Financial Court has recently upheld the validity of an asymmetric (or "unilateral option") arbitration clause, determining that it did not constitute an impermissible "either arbitration or litigation" clause under the law of the People's Republic of China ("PRC"). ((2022) Jing 74 Min Te No.4)

Background

The arbitration clause was contained in a pledge agreement concluded in July 2015 between China Development Bank ("CDB") as pledgee and (Cambodia) Fiber Optic Communication Network Co., Ltd. ("Cambodia Network") as pledgor. It provided for disputes to be submitted to the China International Economic and Trade Arbitration Commission ("CIETAC") for arbitration, unless CDB chose otherwise. It further provided that CDB could choose to submit disputes to the non-exclusive jurisdiction of the courts of Cambodia.

CDB commenced a CIETAC arbitration against Cambodia Network in September 2021. In early 2022, Cambodia Network applied to the Beijing Financial Court for confirmation that the arbitration clause was invalid because:

• it was an "either arbitration or litigation" clause (a dispute resolution clause which provides that a dispute may be submitted either to arbitration or filed with the people's court), which was not permitted pursuant to Article 7 of the Interpretation of the Supreme People's Court on Certain Issues relating to Application of the Arbitration Law of the PRC (the "SPC Interpretation on Arbitration Law"); and
• it was a standard term which was "manifestly unfair", because only CDB was entitled to choose which forum to submit the dispute to and Cambodia Network was deprived of the right of choice.

Decision

The Court upheld the validity of the arbitration clause.

First, the Court held that the legal requirements for a valid arbitration agreement under Article 16 of the Arbitration Law of the PRC were satisfied. There was a clear expression of the parties' intent to submit the disputes to arbitration, a description of the matters subject to arbitration, and a designated arbitration institution (i.e. CIETAC).

Second, the Court held that the clause was not an impermissible "either arbitration or litigation" clause but rather an asymmetric arbitration clause, which was not prohibited by PRC law. In this regard:

• The starting point was Article 7 of the SPC Interpretation on Arbitration Law, which stipulated that "either arbitration or litigation" clauses would be invalid. This was because such clauses caused uncertainty, because they provided that both parties could choose either arbitration or litigation. Although the Court did not say so expressly, such uncertainty would presumably arise, for example, in a scenario where each party submitted a dispute to a different forum, with no agreement between the parties as to which of the competing forums should take priority.
• The Court then distinguished the clause at issue. At the point when CDB submitted the dispute to CIETAC and waived its right to bring proceedings before a competent court, the clause constituted a definite consent to submit the dispute to arbitration exclusively. It was not, therefore, an "either arbitration or litigation" clause.
• The Court also observed that the clause was the result of commercial negotiations and that, since it did not violate any provisions of PRC law, party autonomy should be respected.

Third, the Court rejected Cambodia Network's argument that the arbitration clause was a "manifestly unfair" standard term. The burden was on Cambodia Network to show that the text of the agreement had been pre-prepared by CDB for repeated use and was not negotiated by the parties. Cambodia Network had failed to satisfy that burden. On the contrary, it was Cambodia Network which had circulated the initial draft of the agreement containing the asymmetric arbitration clause, and both parties had then revised the draft during the negotiation process. Moreover, Cambodia Network and CDB were equal commercial parties which were both advised by professional lawyers and able to understand the content and implication of the clauses in the agreement. Considering the entirety of the circumstances, the Court concluded that the arbitration clause was not manifestly unfair.

Commentary

Asymmetric arbitration clauses are increasingly popular in cross-border (particularly financing) agreements as a method to mitigate lenders' recovery risks by providing them with flexibility as to the dispute resolution forum. The unilateral nature of such clauses, however, can give rise to challenges as to their validity in some jurisdictions.

The approach of the PRC courts to asymmetric arbitration clauses has not always been consistent. For example, in (2016) Jing 02 Min Te No. 93, the Beijing No. 2 Intermediate Court concluded that an arbitration clause which allowed the lender to choose either arbitration or litigation constituted an "either arbitration or litigation" clause under Article 7 of the SPC Interpretation on Arbitration Law and was invalid. In contrast, the Shanghai No. 1 Intermediate Court and the Shanghai Pudong District Court both held in (2012) Pu Min 02 (Shang) Chu Zi No. S3375 that an asymmetric arbitration clause was valid and enforceable as it was not an "either arbitration or litigation" clause.

The present case provides a helpful indication to parties (including those involved in "One Belt One Road" projects) of the willingness of some PRC courts to employ sophisticated legal reasoning to uphold asymmetric arbitration clauses. On the other hand, it is important to note that none of the decisions discussed above has any precedential value, because PRC courts are not required to follow any previous decisions except those published by the PRC Supreme People's Court as Guiding Cases.

There is therefore still uncertainty as to the validity of asymmetric arbitration clauses under PRC law, and it would be prudent for parties to seek specialist advice before including them in PRC-related contracts. This contrasts with the position in relation to asymmetric jurisdiction clauses (where one party is limited to litigation in a single jurisdiction but the other party has a choice of jurisdictions), which are likely to be valid based on work conference minutes issued by the Supreme People's Court in 2021.

This article has been authored by Herbert Smith Freehills Kewei, a joint operation between Herbert Smith Freehills LLP and Kewei Law Firmbased in the Shanghai Free Trade Zone.

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.