12 June, 2015
The place of arbitration is of pivotal importance to any arbitration because it determines:
- the legal system which supplies the lex arbitri, which is the law of the arbitration agreement that determines the meaning, validity and enforceability of the arbitration agreement; and
- the court which hears applications to challenge the arbitral tribunal (eg. jurisdiction, bias, etc…) and set aside the arbitral award.
Problems can therefore arise when the place of arbitration is ambiguous, particularly when the parties specify a place of arbitration to be a federal state that comprises of multiple distinct legal systems. For example, the People’s Republic of China (“PRC”) is made up of mainland China and the two former British and Portuguese colonies, namely Hong Kong and Macau respectively, which have their own distinct legal system. The distinctions between the mainland Chinese legal system and the Hong Kong legal system are particularly acute because the former is a civil law system and a non-Model Law jurisdiction, whereas the latter embraces a common law system and is a Model Law jurisdiction.
The case of Z v A (parties’ names have been anonymized in the judgment) is an illustration of the problems caused when it is unclear whether the parties have specified mainland China or Hong Kong as the place of arbitration and how the Hong Kong court resolved the ambiguity.
Background Facts
Party Z and Party A (including other related companies) entered into two related agreements, which we will refer to as the CKD Agreement and the TC Agreement.
The arbitration clauses in these two Agreements were broadly identical and they read as follows:
CKD Agreement: “In case of breach of any of the Articles of this agreement by either of the parties, both Parties agree to put best efforts to remedy by negotiations. Otherwise, those Parties agree to arbitration as per the International Chamber of Commerce and held in CHINA? ..(sic)” (emphasis added)
TC Agreement: “Any dispute, controversy or difference which may arise between the parties out of or in relation to this Agreement or for the breach thereof shall be settled amicably by the parties, but in case of failure, it shall be finally settled in CHINA by arbitration pursuant to the Rules of the International Chamber of Commerce whose award shall bind the parties hereto.” (Emphasis added)
The governing law of both Agreements is the law of mainland China.
The Parties could not resolve their differences, so Party A commenced a ICC arbitration against Party Z and identified Hong Kong as the place of arbitration in their Request for Arbitration because “China” meant Hong Kong. Party Z took the opposite view that the place of arbitration was mainland China. In view of the Parties’ disagreement on the place of arbitration, the ICC Secretariat fixed the place of arbitration as Hong Kong using its powers Article 14(1) of the ICC Rules (1998 edition, now superseded by the 2012 edition), which read:
“The place of arbitration shall be fixed by the (ICC Court) unless agreed upon by the parties.”
The ICC Court then proceeded to appoint Mr Gavin Denton as the sole arbitrator. The jurisdictional question of the proper seat of arbitration was referred to the Arbitrator for determination, who upheld the place of arbitration to be Hong Kong, so Hong Kong law was the procedural law applicable to the arbitration. In this regard, the Arbitrator reasoned that:
“As the parties could not agree on a city in China as the place of arbitration, on 15 December 2011 (in accordance with Article 14(1) of the ICC Rules), the ICC Court fixed the place of arbitration as Hong Kong, PR China.”
Party Z then applied to the Hong Kong Court of First Instance to set aside the jurisdictional award pursuant to Section 34 of the Arbitration Ordinance (Cap. 609) (which incorporates Article 16 of the Model Law into Hong Kong law) because the arbitration was not conducted in accordance with the agreement between the Parties. The application was heard by Justice Mimmie Chan.
The Court’s Ruling
Chan J upheld the Arbitrator’s ruling that Hong Kong is the place of arbitration for two key reasons.
1. Firstly, as there was an inherent ambiguity on whether the word “China” meant Mainland China or Hong Kong, the ICC Court was entitled to use its powers under Article 14(1) of the ICC Rules to fix Hong Kong as the place of arbitration.
2. Secondly, it is an established principle of contractual interpretation that the parties are presumed to be aware of the relevant legal background surrounding the formation of their contract and that they intend their contract to be legally enforceable. This principle gives rise to two consequential findings.
3. The Parties must have been aware that the PRC had resumed sovereignty over Hong Kong when they signed the two Agreements and it would have been artificial for them to refer to “China” as meaning “China excluding Hong Kong” or “China including Hong Kong”. It was therefore open for the ICC Court to fix Hong Kong as the place of arbitration.
4. Additionally, the Parties would also have been aware that there was uncertainty over whether a mainland Chinese court would enforce a ICC arbitral award that was seated in mainland China. This is because arbitral awards in mainland China must be administered by a registered arbitral commission pursuant to the PRC Civil Procedure Law and the ICC is not such a commission. Both Parties’ mainland Chinese law experts provided conflicting evidence on this issue, which was largely due to conflicting mainland Chinese case law on the enforceability of ICC arbitral awards in mainland China. By contrast, a ICC arbitral award rendered in Hong Kong would face no enforcement difficulties, either in mainland China or Hong Kong. Accordingly, Chan J held that: “On such basis and bearing in mind that the object of an arbitration agreement must be to have the dispute resolved by a process which would result in a final, binding and enforceable award, I would agree with the Arbitrator that the Arbitration between the parties in this case should be conducted in Hong Kong.”
Observations
It is common for lawyers and laymen to refer to mainland China as simply “China”. If parties wanted to refer to either Hong Kong or Macau, it is the author’s experience that the contract would expressly say ‘Hong Kong’ or ‘Macau’.
Z v A therefore poses an interesting conundrum: how does one refer to mainland China without also referring to either Hong Kong or Macau?
Common terms used to refer to mainland China, such as the People’s Republic of China, would logically suffer from same inherent ambiguity as “China”. It is unfortunate that Chan J did not offer more guidance to the arbitration community, but had instead held:
“As reasonable, rational businessmen I would accept that they must have been aware at the time the Agreements were made that China had resumed sovereignty over Hong Kong, and that legally as well as geographically, Hong Kong is a part of China. It would be artificial in my view to hold that ye parties had intended the relevant provision, with reference to the location where the Arbitration is to be held to mean either “Chia excluding Hong Kong”, or “China including Hong Kong”. Where the parties in this case had chosen to use “China” as the place where the Arbitration is to be held, it must, on a plain and ordinary reading of the expression used and of the agreements, mean just that.”
Accordingly, parties which have used the word ‘China’ or any of its equivalent, particularly those who have opted for ICC arbitration, should be psychologically prepared that their arbitrations will be seated in Hong Kong for the near future. For those parties who want mainland China to be the place of arbitration, they will be well advised to use the formula “China (excluding Hong Kong and Macau)” or its equivalent in their arbitration agreements.
This article was supplied by Andrew Chin, Baker & McKenzie
For further information, please contact:
Hong Kong International Arbitration Centre
adr@hkiac.org
