A recent ruling of the Supreme Court of China has declared the arbitration provision on IATA's Standard Ground Handling Agreement invalid, leading to the conclusion that the Chinese courts do not recognize IATA as an arbitral body.

One of the most widely used standard contracts in the airline industry is IATA's Standard Ground Handling Agreement ("SGHA") which sets out the rights and liabilities of airlines and airport service providers. These contracts are in use at many Chinese airports.

Article 9 of IATA's SGHA provides for the resolution of disputes by arbitration. In the early versions of this agreement, the parties were left to appoint one or more arbitrators who would settle their own procedures. In the event that either party failed to appoint an arbitrator, such appointment would be made by the IATA Director General. In 1999, IATA produced a set of IATA Arbitration Rules though many ground handling agreements in use today in China do not explicitly refer to the existence of such rules.

In March 2000, a Malaysian Airlines ("MAS") Airbus A330 was declared a constructive total loss following leakage of a dangerous chemical described as general cargo. MAS and its insurers and reinsurers commenced proceedings against several defendants in the Beijing High Court. One of the issues to be determined was whether the court proceedings should be stayed in favour of arbitration, since MAS and its ground handler had signed an IATA SGHA providing for the resolution of disputes by arbitration. Article 5 of the Arbitration Law of the PRC 1995 bars a court from accepting jurisdiction over a dispute whether parties have concluded a valid arbitration agreement. However, under Article 26 of the Arbitration Law, if no objection to the court's jurisdiction is raised prior to the first hearing, the other party may be deemed to have waived its rights under the arbitration agreement and the court may proceed to try the case. Initially, the Court agreed that the claim of MAS must proceed by arbitration. However, the Court felt that MAS’ insurers and reinsurers were not bound by Article 9 and, therefore, could continue to pursue the ground handler in the Court. Given this rather odd decision, both MAS and their ground handlers appealed.

The Supreme Court has just issued a judgment declaring the IATA arbitration provision invalid because the parties failed to reach an agreement (at the time of contract or subsequently and before the court action) on the hearing of any dispute at a permanent arbitration tribunal.

The Arbitration Law does not explicitly exclude the possibility of ad hoc arbitration. However, it is implicitly discouraged, most obviously because: parties are required to reach agreement on the selection of a "designated Arbitration Commission" (Articles 6 and 16); where the parties cannot reach clear agreement on the arbitration organisation, the arbitration agreement shall be deemed void (Article 18); the mandatory provisions governing qualifications and selection of arbitrators are stated only within the context of arbitrators serving as part of an arbitration organisation (Article 13); and arbitration organisations, rather than arbitration tribunals, are assigned roles with respect to the appointment of arbitrators and applications for interim measures of protection (Articles 28, 32 and 68).

The inevitable conclusion to be drawn is that Chinese courts do not recognize IATA as an arbitral body and, therefore, parties should explicitly provide for institutional arbitration before a recognised institution. There are a number of formal arbitral institutions in China. However, handlers and airlines should consider very carefully what institution they choose since few have experience in handling aviation liability matters or an understanding of the manner in which aviation risks are arranged.

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