The law governing validity of foreign-related arbitration clause

Under the Law on the Application of Law to Foreign-Related Civil Relationships and its judicial interpretations, if the applicable law on the validity of the arbitration clause is clearly stipulated in the contract, it shall prevail.

It should be noted that the agreed-upon law applicable to the contract is not necessarily the same as the law governing the validity of the arbitration clause. In this regard, the Supreme People’s Court (SPC) made it clear, in the Minutes of the Second National Work Conference on Foreign-Related Commercial and Maritime Adjudication issued in 2005, that “the governing law specified by the parties in the contract to be applied to resolve contractual disputes cannot be used to determine the validity of a foreign-related arbitration clause”.

Subsequently, article 13 of the Regulations of the Supreme People’s Court on Several Issues Concerning the Trial of Cases Involving Judicial Review of Arbitration again expressly provides that “the parties shall make a clear statement of intent when they agree on selecting the law applicable to determine the validity of their foreign-related arbitration agreement and if they have only provided for the law to be applied to the contract, such law cannot automatically become the law applicable to determine the validity of the arbitration clause in the contract”. Judicial practice also adheres to this provision, for example, in the case of Jin Min Zhong (2018), the agreement provided that it “shall be construed in accordance with the law of the United Kingdom”, but the Tianjin High People’s Court held that “the agreement does not provide for the law applicable to the arbitration clause”.

When the parties have not made a choice on the law applicable to the arbitration agreement, article 18 of the Law on the Application of Laws stipulates that the law of the place in which the arbitration authority is located or the arbitration takes place shall apply.

In the case of Zui Gao Fa Min Shen (2018), the parties did not specify the law applicable to their arbitration clause but provided that disputes “shall be submitted to the arbitration institution of the place where the respondent is located for arbitration”. The SPC held that the “arbitration institution of the place where the respondent is located” referred to an arbitration institution in the Hong Kong Special Administrative Region and that the “law of the place where the arbitration institution is located”, i.e. the law of the HKSAR, shall be applied when determining the validity of the arbitration agreement.

In the case of Lu Min Xia Zhong (2016), the arbitration clause provided that disputes shall be arbitrated in Hong Kong, applying UK law. The Shandong High People’s Court held that the agreement did not expressly provide for the law governing the validity of the arbitration clause, therefore the law of the seat of arbitration specified by the parties, namely the law of Hong Kong, was applicable when determining the validity of the clause.

It should also be noted that if the clause provides for both the arbitration institution and the seat of arbitration, and there is a conflict between their laws when determining the validity of arbitration clauses, then, pursuant to article 14 of the Regulations on Judicial Review of Arbitration, the law confirming the validity of the arbitration agreement shall be applied. This provision reflects the judicial decision principle of protecting the validity of arbitration agreements.

In such cases, article 12 of the Interpretation of the Supreme People’s Court on Several Issues Concerning Application of the Law of the People’s Republic of China on Application of Laws to Foreign-Related Civil Relationships (I) states that the courts may determine the validity of the arbitration agreement by applying the law of mainland.

In the case of Su Min Xia Zhong (2019), the agreement provided that, “if the parties to the contract fail to resolve it through amicable consultations, an application for arbitration shall be submitted to the Singapore Arbitration Commission or the court of the place where Party B is located”. The court held that the parties had not provided for the applicable law, that there was no arbitration institution known as the “Singapore Arbitration Commission” and that they had not provided for the seat of arbitration. So, the court applied the law of mainland to review the validity of the arbitration clause.

In practice, there are instances where a party claims that there is no valid arbitration clause between the parties on the grounds that the arbitration clause was not formed (e.g., the arbitration agreement was fabricated by the other party, or the arbitration clause was executed by another person who didn’t have the power to do so). In this regard, the courts usually determine the applicable law of the arbitration clause according to the provisions of the disputed arbitration clause.

With a view to enhancing the efficiency of dispute resolution, it is recommended that the governing law applicable to the arbitration clause itself be expressly provided for when drafting such a clause, for example, specifying that “the law applicable to this arbitration clause shall be the law of XX”; or that, at a minimum, the seat of arbitration or the arbitration institution be clearly specified to avoid the risk of the arbitration clause being found to be invalid.