1 Overview of the Arbitration Agreement

Arbitration, as an ancient dispute resolution system, originated from ad hoc arbitration required for dispute resolution between businessmen. It appeared as early as ancient Greece and medieval Europe and came into being for the reconciliation and resolution of conflicts of interest between private individuals.

Arbitration is an agreement established on the basis of the principles of private autonomy and freedom of contract. The parties in the dispute voluntarily reach an agreement to submit the dispute to a third party other than the judiciary for trial, and the third party makes an award that is binding upon both parties to the dispute. In practice, arbitration, as an alternative to litigation, avoids the inconvenience of complicated, time-consuming and high cost of litigation procedures. Arbitration involves the selection of neutral arbitrators by the parties and the adoption of appropriate arbitration procedures to resolve disputes. Arbitration is contractual, autonomous and quasi-judicial in nature.

Arbitration, as a nongovernmental dispute resolution mechanism, essentially excludes the jurisdiction of the state based on party autonomy, and the arbitration agreement is an effective way to achieve party autonomy. Therefore, the arbitration agreement is the basis for arbitration and is also the cornerstone of modern arbitration system. Without the arbitration agreement, there would be no arbitration system in the modern sense. As a contract with dispute resolution as its agreed content, an arbitration agreement is different from a contract that determines the substantive rights and obligations between the parties. The fundamental difference is that an effective arbitration agreement can not only bind both parties but also take effects of authorizing arbitration institutions and excluding jurisdiction. This function is not based on contract theory but on the authorization of national legislation and the need for support and supervision of national judicial organs.

In conclusion, in addition to being the basis for submitting disputes to arbitration, arbitration agreement has the following main functions: (a) The arbitration agreement can bind behaviors of both parties. The arbitration agreement is the basis for the dispute between the two parties to be submitted to arbitration for settlement of the contract. Therefore, when the parties submit the dispute for arbitration, they should submit the arbitration to the arbitration institution agreed upon in the arbitration agreement, and shall not change the arbitration institution or the place of arbitration at will. Thus, both parties are binding. (b) The arbitration agreement is the basis for the arbitral tribunal to obtain jurisdiction. According to the arbitration agreement, the arbitral tribunal can only hear disputes submitted in the arbitration agreement and render an arbitral award according to matters requested by the parties. If the arbitration request of the parties exceeds the scope of the arbitration agreement, the arbitral tribunal has no right to render an arbitral award. (c) The arbitration agreement excludes the jurisdiction of the court. Once an arbitration agreement is established, the parties lose their right to sue in court on the disputed matter. Even if one party files a lawsuit to the court, the court shall, at the request of the other party, rule to stay proceedings and inform the party to submit to arbitration.

An arbitration agreement is a written document in which the parties voluntarily submit disputes that have occurred or may arise in the future between the parties to arbitration for settlement. An effective arbitration agreement is not only the basis for the smooth realization of the willingness of the parties to resolve their disputes through flexible and fast arbitration but also the basis for the arbitration institution to exclude the jurisdiction of the court. Therefore, the validity of an arbitration agreement is directly related to whether the arbitration procedure can be carried out normally, that is, a valid arbitration agreement is the most important factor in determining the jurisdiction of arbitration. In this sense, the legal importance of the arbitration agreement is no less than that of the commercial transaction itself. However, in the practice of commercial transactions, commercial subjects pay more attention to the success of the transaction than to the legality of the arbitration agreement, that is, importance of the arbitration agreement has not been given enough attention by commercial entities. Arbitration clause is also called “midnight clause”, that is, the consultation of such clause is often arranged at the final stage of negotiation. Prior to this, commercial entities devoted a lot of energy to the negotiation of contractual rights and obligations. However, insufficient attention is given to arbitration clause. Especially when determining the transaction relationship, there is often a fluke mentality that no dispute will occur, which leads to various forms of defects in arbitration clause.

The arbitration agreement does not directly stipulate the relationships of substantive rights and obligations between the parties. However, it indirectly define the relationships of rights and obligations by specifying the method of resolving disputes that may occur or have occurred between the parties—arbitration. It can be seen that arbitration clause is an agreement between parties on the dispute resolution method based on party autonomy. The agreement can be aimed at disputes arising from the performance of the contract, or at disputes over whether the contract is intrinsically valid. It is precisely because of the abovementioned functions of an arbitration clause that it should be independent, which is not only a reflection of party autonomy but also a reflection of the judicial support for arbitration.

The fairness of arbitration is the ultimate value pursued by arbitration, and it is also the vitality of arbitration as a civil dispute resolution mechanism for its existence and development. Among the many dispute resolution mechanisms, the parties choose arbitration mainly because the autonomy of the parties can be fully respected, but more importantly, the detachment and neutrality of the arbitration institution and the arbitrators provide an organizational basis for the fairness of the arbitration. However, the independence of the arbitration institution makes the arbitration lack the internal self-supervision of litigation. In this sense, the external supervision of the arbitration by the judiciary has become a necessary guarantee for the fairness of the arbitration.

As we all know, finality of arbitral award is observed in arbitration. Once the arbitral award made loses its fairness, it will inevitably damage the legitimate rights and interests of the parties. If an appropriate and effective arbitration supervision mechanism is not established, arbitration injustice caused by abuse of power is inevitable. Therefore, judicial review is indispensable as an impartial guarantee of the arbitration system. Judicial supervision further guarantees the fairness and legitimacy of arbitration. However, such supervision must have certain limits, which can only be limited to whether the arbitration is based on rational arbitration rules selected by the parties. Otherwise, it will not only make arbitration lose its simple, fast and efficient functions and violate the principle of party autonomy but may also lead to the suspicion of judicial substitution of arbitration. Supervision should not be absent or excessive. Therefore, appropriate supervision is the greatest support of the judiciary to the arbitration system, which is not only conducive to safeguarding the rights of the parties and safeguarding the public interest but also helps to promote the healthy development of arbitration and the just resolution of disputes during the process of judicial review.

2 Determination of the Written Form of the Arbitration Agreement

Generally, there are two forms of arbitration agreements: written and oral. A written arbitration agreement generally includes an agreement to submit to arbitration reached by correspondence, e-mail, fax or other recorded communications between the parties. Given that the arbitration agreement has the important function of excluding litigation by the parties agreeing to arbitration, in principle, the written form is required to ensure that the parties have indeed reached an agreement. To ensure the freedom, knowledge and voluntariness of this agreement, international treaties and most national legislation generally require that the arbitration agreement must be in writing.

Article 2, paragraph 1, of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereinafter referred to as the New York Convention) requires “[e]ach Contracting State shall recognize a written (arbitration) agreement.” Article 2 subsequently defines the clause: “The term ‘agreement in writing’ shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters and telegrams.” The New York Convention recognizes two forms of written agreement. One is an arbitration clause contained in a contract or a separate arbitration agreement that requires not only a written copy but also the signature of the parties. Another is the Convention allows arbitration agreements to appear in exchanged letters and telegrams, but there is no requirement for signing such arbitration clauses. Article 7 of the Model Law on International Commercial Arbitration (hereinafter referred to as the Model Law) enacted by the United Nations Commission on International Trade Law stipulates the written form of the arbitration agreement: firstly, signed documents by the parties. This is the most typical arbitration agreement. A mere written agreement is not enough to produce a legal effect and must be signed by both parties. The Model Law provides for the same provision as the New York Convention. The second is the exchange of letters, telexes, telegrams, or other means of telecommunications that provide a record of the agreement. Due to different times, the communication methods brought about by technological progress are also different. In the 1950s, only letters and telegrams were exchanged, so the New York Convention only regulated the means of communication that existed at the time. In the 1980s, the means of communication changed, and not only letters and telegrams but also other means of communication existed. It is worth noting that this article requires written proof that can be “recorded”; therefore, telephone recordings cannot be used as “records” required by this article. In other words, the “record” here not only has a written record but also must have the act of exchanging records between the two parties to prove the agreement of the declaration of intention. Records are not limited to paper, and other tangible recording methods brought about by technological progress should also be included. The third is that one party submits an arbitration application claiming the existence of an arbitration agreement, but the other party does not deny it in its defense, which also forms an arbitration agreement. The fourth is to clearly point out that the reference to the contract contains the arbitration clause, and the reference makes the arbitration clause part of that contract. This is the first time that international legislation has stipulated the arbitration clause to be invoked, which fills the insufficiency of the New York Convention and reflects the transaction practice in international trade and economics in the Model Law. Compared with the New York Convention, the Model Law has the following characteristics in terms of the provisions of the arbitration agreement written agreement: Firstly, it recognizes the existence of an implied arbitration agreement. To unify the arbitration systems of various countries, the international community has long emphasized the written requirement of the arbitration agreement, while the importance of implied or oral means has been seriously neglected. Article 2 of the New York Convention only emphasizes the written requirement, that is, an “arbitration agreement” of “agreement in writing” is also limited to an arbitration agreement that “signed by the parties” or other “in an exchanges of letters or telegrams”, excluding arbitration agreements entered into by implication or oral, etc. The Model Law is different. While clarifying the written form, in order to meet the development of modern technology, it is no longer limited to “exchanged letters and telegrams” but also allows an arbitration agreement to be found when both parties appear in the tribunal voluntarily without a written agreement and without objection to the jurisdiction. It can be said that the Model Law recognizes an implied arbitration agreement. In fact, there are already similar provisions in the domestic laws and practice of some countries. Secondly, it recognizes the arbitration clause incorporated by reference. The Model Law explicitly recognizes the practice of incorporation by reference that already exists in the practice of international commercial transactions. Since most of the standard contracts or general clauses invoked contain arbitration clauses, the Model Law clearly affirms the legal status of such arbitration clauses.

In arbitration practice, parties based on the principle of autonomy often choose different types of arbitration agreements according to their actual needs:

  1. (a)

    The arbitration agreement for actual disputes and the arbitration agreement for future disputes. This is based on the time when the arbitration agreement was signed. An arbitration agreement signed after a dispute arises is called a post-dispute arbitration agreement. This was the only type of arbitration recognized and regulated by law before the nineteenth century. After the nineteenth century, an “arbitration clause” was gradually entered into when a contract was signed, that is, a pre-dispute arbitration agreement was agreed upon before a dispute occurred. The international treaties that appeared after the twentieth century emphasized the equal status of these two kinds of agreements.

  2. (b)

    Ad hoc arbitration agreement and institutional arbitration agreement. This is based on the difference in the arbitration procedure mechanism chosen by the parties as the distinguishing criterion. An ad hoc arbitration agreement means that to resolve the dispute, the parties agree on the procedural rules of the arbitration, select arbitrators by themselves, and conduct arbitration at a mutually agreed place to resolve the dispute. In fact, all arbitrations prior to the nineteenth century were in the form of ad hoc arbitrations, in which the arbitration tribunal was established to deal with a particular case and dissolved after the case was settled. Therefore, it is called ad hoc arbitration. Since the nineteenth century, permanent arbitration institutions have been established by businessmen of their own accord, and arbitration rules have been established for arbitration to follow. From then on, the parties choose an arbitration institution and conduct arbitration in accordance with the arbitration rules, which is called “institutional/administered arbitration”. These two arbitration methods have been recognized by the legislation of most countries in the world. If the parties agree on “ad hoc arbitration”, an ad hoc arbitration tribunal shall be formed to make an ad hoc award in accordance with the agreed arbitration rules or the arbitration law of the place of arbitration. If the parties agree on “institutional arbitration”, they must go to the selected arbitration institution, form an arbitration tribunal according to the arbitration rules of the institution, and make an arbitration award.

  3. (c)

    Broad arbitration agreement and narrow arbitration agreement. This distinction is based on the parties’ agreement on the scope of the arbitration agreement to be resolved or dealt with. If the disputes agreed upon by the parties, whether they have occurred or have not occurred, include all disputes or most of the disputes, such an arbitration agreement is called a broad arbitration agreement. If the scope of disputes between the parties is limited to a small number of disputes, such an arbitration agreement is called a narrow arbitration agreement. The scope of the arbitration agreement also directly affects the scope of the jurisdiction of the arbitration tribunal. If the content of the arbitration tribunal’s award exceeds the scope agreed upon by the parties, it constitutes an excessive award and can be requested to be annulled.

  4. (d)

    Simple arbitration agreement and multistage arbitration agreement. This is based on whether the content of the arbitration agreement stipulates only arbitration or whether there are other dispute resolution mechanisms. A so-called simple arbitration agreement means that the agreement only stipulates that arbitration is the only way to resolve disputes. This agreement is conducive to the direct initiation of arbitration procedures to resolve disputes when they occur. If it is stipulated in the agreement that when a dispute occurs, other dispute resolution mechanisms such as alternative dispute resolution must be implemented first, and a third party will mediate first. When these procedures fail to resolve the dispute, arbitration can be selected. Such previous proceedings are called “pre-arbitral proceedings”, and thus, a multistage arbitration agreement has emerged. Of course, there can also be other classification standards, which will not be explained in detail here.

China’s Arbitration Law does not explain what is meant by “written form”. Article 11 of the China’s Contract Law defines the written form of a contract as follows: “[w]ritten form refers to the form in which the contents contained therein, such as contract documents, letters and data messages (including telegrams, telex, facsimile, electronic data interchange and electronic mail), can be tangibly expressed.” Since an arbitration agreement is also a contract by its very nature, the determination of the written form of the arbitration agreement can also be based on the relevant provisions of the Contract Law. In addition, Article 4 of the Electronic Signature Law (2004), drawing on the expression of the United Nations Model Law on Electronic Commerce, provides as follows: “[d]ata messages that can give tangible expression to the content contained therein and can be retrieved at any time shall be deemed to be in writing that meets the requirements of laws and regulations.” Article 1 of the 2005 Interpretation of the Supreme Court of China on Several Issues Concerning the Interpretations of China’s Arbitration Law follows the interpretation of “written form” in the Contract Law, and clearly stipulates: “[a]rbitration agreements in ‘other written form’ provided for in Article 16 of the Arbitration Law include agreements to request arbitration in the form of contracts, letters and data messages (including telegrams, telex, facsimile, electronic data exchange and electronic mail).” Accordingly, a data message containing an arbitration agreement should also be an arbitration agreement in writing.

Whether an arbitration clause entered by means of e-Mail is the written form as required by the New York Convention. In the case of the applicant, the GS Global Ltd. (hereinafter referred to as GS Global) for the recognition and enforcement of the award rendered by the Korean Commercial Arbitration Board in case no. 15113-0016,Footnote 1 GS Global and the respondent, Shanghai Zhenrong Petroleum Co., Ltd. (Zhenrong), signed a sales contract by email on November 11, 2014, which stipulates that GS Global, as the seller, confirms that the sales contract signed by the buyer hereby in its entirety and the terms stipulated below and on the back of this contract are signed in accordance with the above date, including an arbitration clause that stipulate the parties will submit any dispute to the Korean Commercial Arbitration Board, and hence will sell the following goods to Zhenrong… On the back of the contract is the General Terms and Conditions, article 10 of which governs law and arbitration: “This contract shall be governed by and construed in accordance with the laws of the Republic of Korea. All disputes, controversies or differences between the parties arising out of or in connection with this contract or from the breach of this contract shall be finally resolved by arbitration in Seoul, Korea in accordance with the Commercial Arbitration Rules of the Korea Commercial Arbitration Board and the laws of Korea. The award pronounced by the arbitrator shall be final and binding on the parties to this contract.” The Shanghai No. 1 Intermediate Court of China held that, in this case, the sales contract containing the arbitration clause was signed by e-mail, and according to Article 2, paragraph 2, of the New York Convention: “[t]he term ‘agreement in writing’ shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.” The New York Convention was signed in 1958, and electronic data communication, including electronic mail, had not yet appeared, but from the interpretation of the term “exchange of letters or telegrams” and the intent of the provisions used in the Convention, it should be regarded that e-mail is a written form rather than an oral form, so Zhenrong’s argument that the arbitration clause in dispute is not in written form cannot be established.

Whether an arbitration clause entered by means of SMS is in the written form as required by the New York Convention. In the case of the applicant, Noble Resources Pte. Ltd., Singapore (hereinafter referred to as Noble Resources) for the recognition and enforcement of the arbitration award rendered by the International Cotton Association. The International Cotton Association verified the following facts: after careful review, it is believed that a valid written contract has indeed been entered into between the buyer and the seller, including a written arbitration agreement, and the content of the contract has been confirmed by both the buyer and the seller.

The basic terms of this contract were initially conducted through short messages. The text message was sent by the staff of the seller Noble Resources to Mr. Zhou, the assistant to the general manager of the buyer China Zhong Heng Textile Co., Ltd. (hereinafter referred to as Zhong Heng) on September 5, 2008, with the content “Mr. Zhou, please confirm the following overnight enquiry to Noble Resources: 75.00 US cents/lb (pay by a 90-day forward letter of credit issued by an A-1 bank); applicable laws and arbitration rules: International Cotton Association; delivery method: Shanghai bonded warehouse delivery; other: apply to A-1 bank within 10 working days from the contract date to issue a letter of credit; the weight of the goods is based on net weight of the landed cargo approved by China Entry-Exit; the quality of the goods shall be subject to the warehouse quality”. Mr. Zhou added “Confirmation” after the text message as a reply. Zhong Heng expressed its opinion on whether the text message could conclude a contract in this case, stating that it received a text message invitation from Noble Resources in September 2008. Zhong Heng accepted the basic content of the invitation and proposed to go to a bonded warehouse with Noble Resources. After on-site inspection, Zhong Heng would decide whether to purchase and purchase quantity. The text message is an invitation to make an offer and should not be regarded as a contract that is established and entered into force. The Supreme Court of China held thatFootnote 2: The arbitration award involved in this case was made by the International Cotton Association in the United Kingdom. Both China and the United Kingdom are member states of the New York Convention. This case should be examined in accordance with the relevant provisions of China's Civil Procedure Law (2007) and the New York Convention. The focus of the dispute in this case is whether Noble Resources and Zhong Heng have reached a valid written arbitration agreement on the dispute over the cotton sales contract handled by the arbitration award and whether the arbitral tribunal has jurisdiction over the dispute. According to the facts stated in the request report, on September 5, 2008, the staff of Noble Resources and the representative of Zhong Heng, Mr. Zhou, confirmed through mobile phone text messages that Zhong Heng purchased 500 tons of Indian cotton from Noble Resources. After going through the contracting process of offer and acceptance, they have reached an agreement on the basic terms of the contract, such as the subject matter, quantity, price, payment method, etc., and the sales contract has been established. The dispute resolution clause stipulated in the SMS contract is “arbitration by the International Cotton Association”. Since the parties did not explicitly choose the applicable law for confirming the validity of the arbitration agreement, according to the provisions of Article 5(1)(a) of the New York Convention, the validity of the arbitration agreement shall be determined in accordance with the law of the country where the award is made, that is, English law. According to Article 5 of the UK’s Arbitration Act 1996, the arbitration agreement shall be in writing, including any form in which information can be recorded. The arbitration clause involved in this case has a clear declaration of intention of arbitration and the arbitration matters and is recorded in the form of a mobile phone text message that can tangibly represent the content contained in it, which meets the requirements of the written form of the arbitration agreement and is a valid arbitration clause. Accordingly, the International Cotton Association has jurisdiction over disputes between the parties arising from the sale and purchase of 500 tons of cotton. The dispute submitted by the parties to arbitration is whether the SMS contract only modify the contract NO. CS06780786A for the sale of 194 tons of cotton, or modify both the contract NO. CS06780786A for the sale of 194 tons of cotton and the contract NO. CS06780786B for the sale of 306 tons of cotton. According to the principle of independence of the arbitration agreement, the arbitration agreement exists independently of the principal contract, and its validity is not affected by the modification, rescission, termination or invalidation of the principal contract. The disputes arising from the modification of the SMS contract belong to the arbitration matters stipulated in the arbitration clause in the SMS contract. The arbitration clause can effectively bind disputes under the contract NO. CS06780786A and the contract NO. CS06780786B, including disputes over whether the two contracts are established or not. Whether fact finding of the modification of the SMS contract by the arbitral tribunal is correct is a substantive issue of the arbitration award and is not a statutory reason for refusing to recognize and enforce the arbitration award, as stipulated in Article 5 of the New York Convention. In summary, the claim made by Zhong Heng that the parties did not reach an arbitration agreement on the dispute involved in this case cannot be established. There is no circumstance stipulated in Article 5 of the New York Convention in this case, and the court should rule to recognize and enforce the arbitration award involved in this case.

3 Independence of the Arbitration Clause

Arbitration clauses are independent and not affected by the contract or agreement itself. The independence of the arbitration clause means that the arbitration clause under the contract is valid when the contract is modified, rescinded, terminated or invalid. That is, an arbitration clause can either be included in the contract as part of the contract, or it can be separate from the contract as a separate part. Generally, the independence of the arbitration clause is manifested in the following: (1) The nature of the arbitration clause. Although the arbitration clause is a kind of agreement, it is essentially a procedural clause that stipulates the jurisdiction of dispute resolution and belongs to the category of public law, which is different from the substantive clause that defines the civil rights and obligations between the parties and belongs to the category of private law. The function of the arbitration clause is that when the parties fail to perform their contractual obligations and damage the rights and interests of the other party, it can provide rights relief for the realization of their rights and interests. Therefore, it cannot directly bring economic benefits to the parties but can only provide rights relief. (2) The severability of the arbitration clause.

The validity of the arbitration clause is not affected by the principal contract and other clauses. It is not valid because the contract or other contract clauses are valid, nor is it invalid due to the modification, cancellation or invalidity of the contract or other clauses. Likewise, the validity of the contract and other terms are not affected by the validity of the arbitration clause, and the contract and other contract terms are not valid because the arbitration clause is valid, nor are they invalid because the arbitration clause is invalid.

In fact, the independence of the arbitration clause is not absolute independence but relative independence. The independence of the arbitration clause is the independence enjoyed for a specific purpose on the premise of maintaining the entire contract as an organic whole, and the arbitration clause has “subordination”. Although the arbitration agreement and the principal contract are regarded as two separate contracts in terms of validity, the principal contract clause and the subordinate arbitration clause belong to the same contract in terms of the composition of the contract text.

4 Relativity of Arbitration Agreements

Generally, an arbitration agreement can only bind the signatory parties, and the arbitral tribunal cannot dispose of the rights and interests of the non-signatory parties. An arbitration agreement is the embodiment of the autonomy of the parties, which is essentially a contract and thus is relative, and its effect is not extended to others other than the parties. The principle of party autonomy requires that the arbitration agreement has a relative effect, which means that only the parties to the arbitration agreement can apply the arbitration agreement, enjoy the procedural and substantive rights arising therefrom, and undertake corresponding obligations. The arbitration agreement is the source of the jurisdiction of the arbitral tribunal. Without the authorization of the nonparty, the arbitral tribunal has no power to deal with the rights and interests of the nonparty; otherwise, the arbitral award may be set aside. A valid arbitration agreement is the sole basis for arbitration jurisdiction.

5 Defective Arbitration Agreement

5.1 Circumstances of a Defective Arbitration Agreement

Defective arbitration agreement, also known as defective arbitration agreement or arbitration agreement to be remedied. The defective arbitration agreement refers to an arbitration agreement in which the arbitration matters agreed upon by the parties are unclear, nonstandard, or the content does not meet the legal requirements for the arbitration agreement, which makes the due arbitration procedure unable to start smoothly. Generally, the validity of an arbitration agreement is usually regulated by the domestic law of a country, except that relevant international conventions provide for the validity of an arbitration agreement. Due to the influence of different historical backgrounds, cultural traditions, legal systems and other factors in various countries, the domestic laws of various countries have different specific provisions on the effective elements of an arbitration agreement. However, looking at the provisions of the convention and the legislation of various countries, it is generally regarding the legality of the parties, the arbitrability of the disputed matters, the written form of the arbitration agreement and the legality of the content of the arbitration agreement as the main factors for confirming the validity of the arbitration agreement. However, China's Arbitration Law has different provisions on this. According to Article 16 of the Arbitration Law, an agreement for arbitration shall include the arbitration clauses stipulated in the contracts or other written agreements for arbitration reached before or after a dispute occurs. An arbitration agreement shall contain the following: (1) the declaration of the will to apply arbitration; (2) matters for arbitration; (3) the arbitration commission chosen. Article 17 stipulates that an agreement for arbitration shall be invalid in one of the following situations: (1) the matters agreed for arbitration exceed the scope of arbitration authorized by law; (2) agreements concluded by person with no or limited capacity for civil conducts; (3) an agreement forced upon a party by the other party by means of coercion. Article 18 stipulates “where the arbitration agreement does not stipulate the arbitration matters or the arbitration commission, or the agreement is unclear, the parties may supplement the agreement; if a supplementary agreement cannot be reached, the agreement for arbitration shall be invalid.”

Other than the subjects of a written arbitration agreement must have the capacity for civil conduct; the agreed matters are arbitrable; the arbitration agreement express the true intention of submitting arbitration, China’s Arbitration Law also require a selected arbitration committee, and the definiteness of the arbitration matters and the selected arbitration committee are regarded as an effective element of arbitration. Clearly, China's Arbitration Law has made strict provisions on the validity elements of an arbitration agreement, and it can even be said that it has set up harsh conditions, which a slight negligence of the parties in practice is going to lead to a defective arbitration agreement. The arbitration agreement involves not only the realization of the parties’ willingness to resolve their disputes through arbitration but also the realization of the functions of the diversified dispute resolution mechanism set up by the State to meet the needs of dispute resolution. Therefore, when the arbitration agreement has certain defects, it is necessary to use the interpretation of the arbitration agreement to realize the arbitration will of the parties.

5.1.1 Arbitration Agreement that Stipulates Both Arbitration and Litigation

An arbitration agreement that agrees on both arbitration and litigation is also known as an “arbitration or trial” arbitration agreement.

It is roughly manifested as: (1) Both parties agree on three dispute resolution methods, mediation, arbitration and litigation, and grant both parties the right to choose. For example, in the agreement on dispute resolution methods, both arbitration and litigation are allowed. (2) The same or different dispute resolution clauses of the contract stipulate that if the parties fail to reach an agreement through negotiation, the dispute can be submitted for arbitration or filed with the court. (3) The contract involved in the case stipulates that if a dispute cannot be reached through negotiation, it can be resolved to the arbitration institution where the contract subject is located or according to relevant legal procedures. Although this dispute resolution clause has the declaration of intention to request arbitration, it also stipulates that the dispute can be resolved according to relevant legal procedures, which indicates that the method of dispute resolution includes applying to an arbitration institution for arbitration as well as filing a lawsuit in the court. Arbitration is not the only way to resolve disputes.

It is often encountered in practice that the parties agree in the arbitration clause to resolve disputes by arbitration and litigation at the same time. To solve such problems, most countries believe that such dispute resolution clauses are effective because as long as the applicant chooses one of them to sue or apply for arbitration, and the problem will be solved naturally. For example, in the case of Walliam Company v. Chu Kong Agency, the High Court of Hong Kong held that the arbitration clause in the bill of lading as the basis for the claim “settled in a court of the People's Republic of China or settled in an arbitration in the People's Republic of China” is valid.Footnote 3 However, there are different understandings in China's legislation and judicial practice. According to Article 7 of the Interpretation of the Supreme Court of China on Several Issues Concerning the Application of the Arbitration Law of the People's Republic of China, if the parties agree that they may apply for arbitration to an arbitration institution or file a lawsuit in a Chinese court, the arbitration agreement is invalid. However, if one party applies to the arbitration institution, and the other party fails to raise an objection within the period specified in Article 20, paragraph 2 of the Arbitration Law, then it will be deemed valid. This provision holds that if the parties agree that the dispute can be submitted to an arbitration institution for arbitration or to a people's court, the arbitration agreement is invalid, but if the other party does not raise an objection within the statutory period, it shall be deemed valid. Taking the goods sales contract between China Y.S. Import and Export Co., Ltd. and M.M.O (Mauritanian) as an example, Article 9 of the Distribution Responsibility Agreement signed by both parties stipulates that both parties should cooperate in good faith, and if there is any dispute, they should negotiate amicably. If the negotiation fails, both parties can submit arbitration to the China International Economic and Trade Arbitration Commission or directly sue to the court where China Y.S. Import and Export Co., Ltd. is located. The place where the agreement was signed is in Zhuji City, Shaoxing. The Supreme Court of China responded to the letterFootnote 4: this case is a dispute over a contract for the sale of goods between China Y.S. Import and Export Co., Ltd. and M.M.O. Article 9 of the Distribution Liability Agreement signed by the two parties stipulates an arbitration clause. M.M.O is a Mauritanian, so the arbitration clause is a foreign-related arbitration clause. According to the provisions of Article 16 of the Interpretation of the Supreme Court of China on Several Issues Concerning the Application of the Arbitration Law of the People's Republic of China (“the Judicial Interpretation of the Arbitration Law”), the law agreed upon by the parties shall apply to the review of the validity of the foreign-related arbitration agreement; if the parties have not agreed on the applicable law but have agreed on the place of arbitration, the law of the place of arbitration shall be applicable; if the place of arbitration is agreed or the place of arbitration is unclear, the law of the place of court shall apply. The parties in this case did not clearly agree on the law that should be applied to confirm the validity of the arbitration agreement. Although the two parties agreed to submit the dispute to the China International Economic and Trade Arbitration Commission for arbitration, they did not agree on a clear place of arbitration. The validity review shall be governed by the law of the court, that is, the law of the People's Republic of China. The Zhejiang High Court of China held that the legal view that the place of arbitration should be applied in this case on the grounds that the parties agreed on the place of arbitration was unfounded. Article 9 of the Distribution Responsibility Agreement signed by both parties in this case stipulates that disputes can be submitted to the China International Economic and Trade Arbitration Commission for arbitration, or they can be directly sued in the court where China Y.S. Import and Export Co., Ltd. is located. According to Article 7 of the Judicial Interpretation of the Arbitration Law, if the parties agree that the dispute can be submitted to an arbitration institution for arbitration or to a people's court, the arbitration agreement is invalid.

This book argues that when the parties in the contract choose both arbitration and litigation, the Judicial Interpretation of the Arbitration Law simply identifies such an arbitration agreement as invalid is against the true wishes of the parties and is not conducive to the support of arbitration. In this kind of agreement that chooses both arbitration and litigation, from a formal point of view, it seems that the parties have not made a choice about the method of dispute resolution. In fact, this is not the case. The agreement of “arbitration or litigation” reflects that neither the arbitration method nor the litigation method is excluded, and both are acceptable and are completely the embodiment of the true wishes of both parties, which differs from the agreement that there is no dispute resolution at all. In the case of choosing both arbitration and litigation, it mainly depends on which dispute resolution method the parties choose first. If one party chooses arbitration first, then litigation is excluded; If one party chooses litigation first, then arbitration is excluded. This understanding is consistent with the common practice in general commercial activities, and consistent with the arbitration legislation and practice in most of the countries.

5.1.2 Arbitration Agreement with Two or More Arbitration Institutions

According to Article 5 of the Judicial Interpretation of the Arbitration Law, if the arbitration agreement stipulates two or more arbitration institutions, the parties may agree to choose one of the arbitration institutions to apply for arbitration; if the parties cannot reach an agreement on the selection of the arbitration institution, the arbitration agreement is invalid. Obviously, the Judicial Interpretation of the Arbitration Law holds that the validity of an arbitration agreement that stipulates two or more arbitration institutions depends on whether the parties can reach an agreement on which arbitration institution to choose; otherwise, the arbitration agreement is invalid. That is, the parties need to renegotiate the arbitration agreement, but it is difficult in most cases whether the two parties can jointly choose an arbitration institution after a dispute occurs.

This book argues that, when the parties choose two or more arbitration institutions in the arbitration agreement, although there are uncertain factors in the arbitration institutions, as long as one party chooses one of the arbitration institutions, it is in line with the arbitration method between the parties. The agreement is clearly specific and enforceable, and of course it should be effective. In fact, the parties can only choose one arbitration institution to arbitrate the same dispute. An open arbitration agreement is optional. Two or more of the arbitration institutions listed in it have been chosen by the parties by consensus. As long as one party applying for arbitration chooses one of the arbitration institutions, the arbitration institution should be the only arbitration institution for dispute resolution. Article 5 of the Judicial Interpretation of the Arbitration Law stipulates that allowing the parties to restart the negotiation on the selection of an arbitration institution actually ignores the original intention of the parties to resolve disputes through arbitration, complicates simple issues and is not a wise move to support arbitration.

5.1.3 Arbitration Agreements that Violate the “Finality of Arbitration Award”

The so-called arbitration agreement that violates the “finality of arbitration award” means that the parties have chosen two arbitration institutions and agreed that after one arbitration institution makes an award, and if one party disagrees with the award, the other arbitration institution will arbitrate. In the dispute over the sale and purchase contract between Yxen Service Inc. and Cangzhou Qian Cheng Steel Pipe Co., Ltd. (hereinafter referred to as Q. C. Company), the ZX0902 01-08 “Purchase and Sale Contract” signed by Yxen. Service Inc. and Q. C. Company stipulates that “in the process of performing the agreement, if a dispute arises, the two parties shall resolve it through friendly negotiation. If an agreement cannot be reached through friendly negotiation, it shall be submitted to the China International Economic and Trade Arbitration Commission according to the provisional arbitration procedure of the Commission. If one party refuses to accept the award, the arbitration shall be conducted in accordance with the relevant provisions of the Singapore International Arbitration Centre.” Regarding the validity of the arbitration clause, the Supreme Court of China held thatFootnote 5: the parties provided an arbitration clause in the abovementioned purchase and sale contract, and the Chinese version is different from the English version. Both parties confirm that the Chinese version shall prevail. The Chinese text is “dispute…submitted to the China International Economic and Trade Arbitration Commission for arbitration in accordance with the provisional rules of the Commission's arbitration procedures. If one party disagrees with the award, the arbitration shall be conducted by the Singapore International Arbitration Centre in accordance with the relevant provisions of the arbitration procedure of the Centre.” The parties have neither agreed on the law applicable to the arbitration agreement nor the place of arbitration. Therefore, in accordance with Article 16 of the Judicial Interpretation of the Arbitration Law, the law of the place of court, that is, the law of China, shall be applied to determine whether the arbitration agreement is valid. Article 9 Paragraph 1 of the Arbitration Law stipulates: “[t]he arbitration shall be governed by a system of one ruling and final decision.” The agreement of the parties in this case violated the abovementioned “finality of arbitration award” principle, both parties could not reach an agreement on the choice of the arbitration institution, and both parties believed that the abovementioned arbitration agreement was invalid, so the abovementioned arbitration agreement should be determined to be invalid.

5.1.4 Arbitration Agreement that Only Expresses the Intention to Arbitrate Without Specifying the Place of Arbitration or the Arbitration Institution

In practice, although the parties have stipulated the dispute resolution clause, they only express their intention to arbitrate and have not agreed on the place of arbitration or the arbitration institution. According to the provisions of the Judicial Interpretation of the Arbitration Law, such an arbitration agreement shall be invalid. In the dispute over the service contract between the plaintiff Malaysian Airline System Berhad (Malaysia Airlines) and the defendant Taikoo (Xiamen) Aircraft Engineering Co., Ltd., Article 9 of the Master Agreement of the Standard Ground Operations Agreement of 1998, which is the arbitration clause and signed by both parties stipulates that “any disputes relevant to the scope, meaning, interpretation or effect of this agreement, or any disputes or claims arising out of this agreement, shall be submitted in accordance with the procedures set forth below and finally resolved by an arbitral award, which shall be final and binding on the parties.” In addition, Article 8 of the Standard Ground Operations Agreement-Summary Procedure signed by both parties stipulates that “this agreement shall be fully interpreted in accordance with the laws of the People's Republic of China”. The validity of this arbitration agreement was determined, and the Supreme Court of China replied in a request for opinion letter thatFootnote 6: The parties in this case did not clearly agree on the applicable law, the place of arbitration and the arbitration institution for determining the validity of the arbitration agreement in the Standard Ground Operation Agreement-Summary Procedure and the main agreement and other relevant agreements. According to the independence of the arbitration clause and the general principles grasped in judicial practice, the law applicable to the contract agreed upon by the parties cannot simply be regarded as the applicable law for determining the validity of the arbitration agreement in the contract. The Fujian High Court of China’s opinion that the law applicable to the contract agreed upon by the parties is the applicable law for determining the validity of the contractual arbitration agreement is inappropriate. According to Article 16 of the Judicial Interpretation of the Arbitration Law, if the parties in this case have not made a clear agreement on the applicable law and the place of arbitration for determining the validity of the arbitration agreement, the law of the place of court, that is, the law of the People's Republic of China, shall be applied to review the validity of the arbitration agreement involved in the case. According to the provisions of Articles 16 and 18 of the Arbitration Law, the arbitration agreement involved in the case did not stipulate a clear arbitration institution, and the parties did not reach a supplementary agreement afterwards. Therefore, the arbitration agreement involved in the case should be deemed invalid.

China Yi Feng Environmental Protection Equipment Co., Ltd. and China Rong Sheng Group (Hong Kong) Co., Ltd. signed the Joint Venture Contract regarding China X.L.T. Friction Materials Co., Ltd., which stipulated in Article 72: “All disputes arising from the implementation of this contract or related to the contract shall be negotiated through friendly consultation between the two parties. If the disputes cannot be resolved through negotiation, they shall be submitted to an arbitration institution for arbitration in accordance with the rules of the arbitration institution. The arbitration award is final and shall be binding on both parties. Unless otherwise stipulated by the arbitration authority, the arbitration fee shall be borne by the losing party.” Regarding the validity of such an arbitration agreement, the Supreme Court of China stated in its replyFootnote 7: The parties in this case did not agree on the applicable law for confirming the validity of the arbitration agreement, nor did they agree on the place of arbitration. According to Article 16 of the Judicial Interpretation of the Arbitration Law, the law of the place of court, that is, the law of China, should be applied in this case as the basis for examining the validity of the arbitration agreement. Although the parties in this case agreed on arbitration as a method of resolving disputes, they did not agree on an arbitration institution, nor did they even agree on the place of arbitration. Since the parties have not reached a supplementary agreement on the selection of an arbitration institution, the arbitration agreement can be deemed invalid according to Article 18 of the Arbitration Law.

Of course, if the parties only agree on the place of arbitration but not an arbitration institution, and if there is only one arbitration institution in that place, how should the validity of the arbitration agreement be determined? This book argues that if the arbitration agreement does not specify the arbitration institution, but it can be reasonably inferred from the content of the arbitration agreement that the parties’ true intention is to submit the dispute to the local arbitration institution for arbitration, the arbitration agreement should be deemed valid. If the parties only agree on the place of arbitration but not the arbitration institution, and if there are more than two arbitration institutions in the place, how should the validity of the arbitration agreement be determined? This book believes that if there are two or more arbitration institutions in the place of arbitration agreed by the parties, the validity of the arbitration agreement should be determined to be valid based on the textual expression of the arbitration agreement concluded by the parties, with the goal of realizing the parties’ will to arbitrate, rather than simply denying the validity of the agreement on the grounds that the content of the arbitration agreement is not clear. Such as when the parties agree that “the dispute shall be submitted to an arbitration institution in Beijing for arbitration”. The dispute resolution clause expresses the willingness of the parties to arbitrate, but there are many arbitration institutions in Beijing, including the China International Economic and Trade Arbitration Commission, the Beijing Arbitration Commission, and the China Maritime Arbitration Commission. If the nature of the case falls within the scope of maritime affairs, it is more in line with the parties’ original intention to determine the arbitration institution as the China Maritime Arbitration Commission. If the type of case is a case other than maritime affairs, the specific arbitration institution shall be determined according to the time sequence in which the parties submitted arbitration to one of the arbitration institutions. That is, as long as the parties choose one of the arbitration institutions, the arbitration agreement should be deemed valid.

5.1.5 Selection of an Arbitration Agreement with Flawed Wording

According to Article 16 of the Arbitration Law, the arbitration agreement shall include the “selected arbitration commission”. However, in practice, due to the limitations of the parties’ own legal knowledge and their understanding of arbitration formulation and arbitration institutions, they often fail to correctly express the name of the arbitration institution when concluding the contract; that is, the name of the arbitration institution in the arbitration agreement is inaccurate. For example, the name of the China International Economic and Trade Arbitration Commission is expressed as the China International Trade Arbitration Institution or the China Council for the Promotion of International Trade Foreign Trade Arbitration Commission, or Xiamen Branch of China International Trade Arbitration Commission, Guangdong Branch, etc. From a formal point of view, there is no such arbitration institution in China. In this regard, the court cannot simply deny the validity of the arbitration agreement because the agreement of the arbitration institution is unclear. However, the court should interpret the arbitration clauses in good faith from the original intention of the parties, the parties’ choice of the China International Economic and Trade Arbitration Commission is clear, and such arbitration clauses are valid. That is, as long as the expression is not ambiguous in words and logic and the arbitration institution can be determined in words and logic, the court should confirm the validity of the arbitration agreement. In the case of Fang, Li and China Boya's partnership dispute, the two parties signed the Partnership Agreement, which stipulated in Article 13: “[i]n the event of a dispute over this agreement, the competent court shall be the China International Arbitration Commission.” Regarding the validity of such arbitration clauses, the Supreme Court of China reply to request to comment in the followingFootnote 8: Article 13 of the Partnership Agreement signed by Li, Zhang and Fang on November 12, 2008 stipulates: “Jurisdictional Court: In the event of a dispute over this agreement, the competent court shall be the China International Arbitration Commission.” Since the applicant Fang is of Korean nationality, the arbitration agreement in this case is a foreign-related arbitration agreement. Since the parties did not agree on the place of arbitration in the Partnership Agreement, according to Article 16 of the Judicial Interpretation of the Arbitration Law, China’s law as the law of the place of court should be applied to determine the validity of the arbitration agreement in this case. The arbitration institution “China International Arbitration Commission” agreed upon by the parties in this case cannot necessarily be understood as the China International Economic and Trade Arbitration Commission, and the parties cannot reach a supplementary agreement on the arbitration institution. According to the provisions of Articles 16 and 18 of the Arbitration Law, the above arbitration agreement shall be deemed invalid.

This book argues that in the above contract clauses, the expression of “competent court” indicates the willingness of the parties to choose litigation to resolve disputes, but no court has been selected as the dispute resolution institution. The China International Arbitration Commission is different. This statement indicates that all parties have a joint intention to request arbitration. Although there are flaws in the name of the arbitration institution, inferring from the literal meaning that the China International Economic and Trade Arbitration Commission is more in line with the parties’ true intention. Since it is only the China International Economic and Trade Arbitration Commission that has the word “China” before the Arbitration Commission, from the perspective of good faith interpretation, it is more appropriate to determine that the arbitration agreement in this case is valid.

In the case of a trade dispute between Fujian Quanzhou Old Captain Shoes Co., Ltd. (hereinafter referred to as the O.C. Company) and D.P. International Development Co., Ltd. (hereinafter referred to as the D.P. Company), the two parties agreed in the contract: “This contract shall be governed by the laws of China. In the event of a dispute, the two parties shall negotiate and resolve the matter on their own. If the dispute cannot be resolved by negotiation, the arbitration committee appointed by Party A (D.P. Company) or the Guangzhou Law Arbitration shall resolve the dispute, and the arbitration clauses of the said committee shall be applied.” The Supreme Court of China replied to the request for opinion in the followingFootnote 9: This case is a case in which the parties requested the court to confirm the invalidity of the arbitration agreement. According to Article 16 of the Judicial Interpretation of the Arbitration Law, the validity of the arbitration agreement in this case should be determined in accordance with the laws of China. The agreement between the two parties to submit the dispute to the arbitration committee designated by D.P. Company is an indication of the agreement of both parties in this case, and it is the result of the choice of both parties and does not violate the provisions of Article 6 of the Arbitration Law. Under the circumstance that D.P. Company has appointed an arbitration committee, the arbitration institution selected by the parties through the agreement is unique and does not belong to the situation where the agreement on the arbitration institution is unclear, as referred to in Article 18 of the Arbitration Law. D.P. Company has applied for arbitration to the Guangzhou Arbitration Commission of China, and it is inappropriate to hold that the arbitration clause involved in this case is invalid.

This book argues that the two cases of the Supreme Court of China above are both about interpretations of the incomplete and unclear arbitration institution, but the results of the court's interpretations are diametrically opposite, reflecting the change from a strict interpretation to interpret the arbitration agreement as effective as possible, and the openness, tolerance and internationalization of the judicial review of arbitration in China.

For similar agreements such as the “Beijing Arbitration Institution”, “Beijing Relevant Department for Arbitration”, etc., in view of the existence of the “Beijing Arbitration Commission”, “China International Economic and Trade Arbitration Commission” and “China Maritime Arbitration Commission” in Beijing, they can independently accept disputes and render awards. Therefore, the above agreement can determine that the parties have selected the above three arbitration institutions at the same time. This agreement is clear and enforceable. The parties only need to choose one of the agreed arbitration institutions to conduct arbitration, and the court has no jurisdiction over this. If the parties choose two of the arbitration institutions to initiate arbitration and it is impossible to distinguish the time of acceptance of the arbitration institutions, the jurisdiction of the arbitration shall first be determined through negotiation between the arbitration institutions. If the negotiation fails and the parties request the court to confirm the validity of the arbitration agreement, the court shall determine the arbitration institution based on the specific circumstances of the case.

5.1.6 Defects in the Arbitration Agreement Arising from the Separation of CIETAC and Its Former Branch

The China International Economic and Trade Arbitration Commission (hereinafter referred to as CIETAC) and its former branch—the Shanghai branch and South China branch separated in 2012, which caused a special issue of conflict of arbitration jurisdiction. The arbitration agreement of the parties stipulates that the Shanghai and South China branch will arbitrate, but then they became independent, so which arbitration institution will handle such cases? This not only causes disputes between the arbitration institutions but also troubles the parties. The court is also quite concerned when conduct judicial review of relevant arbitration awards. To solve this problem, the Supreme Court of China issued a reply in the form of judicial interpretation in 2015, that is, The Supreme Court of China's Reply on the Request by the Shanghai High Court on the Judicial Review of Arbitral Awards made by the China International Economic and Trade Arbitration Commission and Other Former Arbitration Institutions. This judicial interpretation starts from respecting the autonomy of the parties and takes the CIETAC separation time as the boundary (the South China branch was renamed on October 22, 2012, and the Shanghai branch was renamed on April 17, 2013) to delineate the jurisdiction disputes between the three parties, that is, the parties agreed that the cases under the jurisdiction of the South China Branch or the Shanghai Branch before the name change shall be under the jurisdiction of the South China International Economic and Trade Arbitration Commission or the Shanghai International Economic and Trade Arbitration Commission; after the name change (including the date of name change), the clauses that still submit to the jurisdiction of the South China Branch or the Shanghai Branch shall be under the jurisdiction of CIETAC. After the change of name and before the promulgation of the judicial interpretation, the court shall not support the case where the parties concerned apply for revocation or nonenforcement of cases that have not been accepted in accordance with the above-mentioned jurisdictional principles, and the other party has no objection, or the arbitration institution has already rendered an award.

In the reply to the request of the Jiangsu High Court on the application of Jiangxi Saiwei LDK Solar High-tech Co., Ltd. for enforcement of the (2013) CIETAC (Shanghai) Judgment No. 006 Award, the Supreme Court of ChinaFootnote 10 pointed out that this case is a domestic arbitration judicial review case arising from disputes over the revision and application of arbitration rules and the jurisdiction of the case by CIETAC and its former branch. Regarding the issue of whether the arbitral award involved in the case should be enforced, the review should base on Article 237 of the Civil Procedure Law of China (2012), and the Supreme Court of China (2015) No.15 Reply to the Shanghai High Court of China's request for instructions on judicial review of arbitral awards made by arbitration institutions such as the China International Economic and Trade Arbitration Commission and its former branches. According to the facts stated in the Jiangsu High Court of China's request for instructions, the parties signed the arbitration agreement on May 22, 2012, before the Shanghai Branch of CIETAC was renamed the Shanghai International Economic and Trade Arbitration Commission (hereinafter referred to as SHIAC). The agreement arbitration institution is Shanghai Branch of CIETAC. According to the principles determined in Article 1 of the Reply, SHIAC has jurisdiction over this case. However, since the parties applied to CIETAC for arbitration before the implementation of the Reply, CIETAC accepted and made an award, Article 3 of the Reply clearly stipulates in this case: “Before the implementation of this reply, in the cases that CIETAC, SHIAC or South China International Economic and Trade Arbitration Commission (SCIA) has accepted that should not be accepted by it according to Article 1 of this Reply, if the parties apply for revocation or non-enforcement of the arbitral award on the grounds that the arbitration institution has no right to arbitrate after the arbitral award is made, the people's court will not support.” And from the facts stated in the Jiangsu High Court of China’s request for instructions, there is no evidence that the court has accepted the party’s application for confirmation of the validity of the arbitration agreement and made a ruling that the case should be under the jurisdiction of SHIAC, or that both arbitration institutions have accepted the case. Therefore, according to the above provisions, the arbitral award involved in the case should not be rejected on the grounds that the CIETAC has no right to arbitrate.

5.2 Principles of Interpretation of Defective Arbitration Agreements

Making full use of diversified dispute resolution mechanisms and guiding more disputes to be resolved through arbitration procedures has a practical need to effectively alleviate the pressure of court cases. According to the common practice of the international community, it is a development trend to encourage and support arbitration. In terms of the standard of judicial review of arbitration agreements, the court should be as lenient as possible and encourage arbitration. In practice, some parties’ agreement on the arbitration agreement is too simplistic, or they lack a correct understanding of the arbitration system, or the language of the arbitration institution is unclear, which may affect the validity of the arbitration agreement to a certain extent. The agreement shall be properly interpreted to determine the authenticity of the arbitration agreement between the parties and fully respect the autonomy of the parties.

5.2.1 The Principle of Good Faith Interpretation

The arbitration clause is one of the clauses of the contract, and the interpretation of the defective arbitration clause should also follow the principle of contract interpretation; that is, it should explore the true intentions that have been shown by the parties and not only stick to the plain meaning of words. Unless the agreement of the parties violates the mandatory provisions of laws and administrative regulations, or it damages the social public interest or violates social morality. Article 125 of China's Contract Law stipulates: “If a party has a dispute over the interpretation of a contract clause, the actual meaning of the clause shall be determined in accordance with the terms used in the contract, the relevant clauses of the contract, the purpose of the contract, trading habits and the principle of good faith.” The interpretation rules applicable to exploring the true meaning of the parties in the contract terms include textual interpretation, overall interpretation, purpose interpretation, customary interpretation, fairness and good faith interpretation. In these rules of interpretation, the primary method for judging the true expression of the parties’ intention is the method of textual interpretation, that is, the textual expression of the parties’ intention. As long as (only if) the precise meaning of the clause cannot be determined by the textual interpretation, other interpretation methods can be used to determine the contract terms and filling gaps in contracts. Of course, the interpretation of the arbitration clause should also conform to the common practice or basic common sense of the profession and industry as much as possible.

For example, the parties agreed: “if a dispute arises in this agreement, the competent court shall be the China International Arbitration Commission.” How can the validity of such arbitration clauses be determined? This book argues that the expression “jurisdictional court” indicates the willingness of the parties to choose litigation to resolve disputes but does not choose which country's court is the dispute resolution institution. While the China International Arbitration Commission is different. This statement indicates that all parties have a joint intention to request arbitration. Although there are flaws in the name of the arbitration institution, it is inferred from the literal meaning that the China International Economic and Trade Arbitration Commission is more in line with the parties’ requirements. Since it is only the China International Economic and Trade Arbitration Commission that has the word “China” before the Arbitration Commission, and from the perspective of good faith interpretation, it is more appropriate to determine that the arbitration agreement in this case is valid.

5.2.2 Interpretation Principles in Favor of the Validity of the Arbitration Clause

The principle of interpretation that is conducive to the validity of the arbitration clause means that a defective arbitration agreement signed by both parties should generally be interpreted as valid unless both parties clearly express their intention to exclude arbitration. That is, both the arbitral tribunal and the court should try their best to find the true intention of the parties in the arbitration in a reasonable way, and take the finding of validity as a general rule, and invalidity as the exception when facing defective arbitration clause. Judging from the arbitration legislation and practice of most countries, as long as the parties clearly express their willingness to resolve disputes through arbitration by agreement, the desire to resolve disputes through arbitration should usually be satisfied. As for the flaws in the arbitration agreement should be corrected and explained in accordance with the principle of making the arbitration agreement as effective as possible, rather than completely invalidating the arbitration agreement.

For situations similar to appointing arbitration institution such as “Beijing Arbitration Institution” and “Beijing Relevant Department for Arbitration” in the arbitration agreement, according to the relevant provisions of the Judicial Interpretation of the Arbitration Law, the agreement of the arbitration institution is unclear. If the parties fail to reach an agreement on the arbitration institution afterwards, the arbitration agreement of this type is generally deemed to be invalid. However, there are also views in practice that, given the existence of the Beijing Arbitration Commission, CIETAC and China Maritime Arbitration Commission in Beijing, which can independently accept disputes and make rulings, the above agreement can be considered that the parties have chosen the above three arbitration institutions, and the agreement is clear and enforceable. The parties only need to choose one of the agreed arbitration institutions to conduct arbitration, and the court has no jurisdiction over it. If the parties choose two arbitration institutions to initiate arbitration respectively, the effective arbitration institution shall be determined according to the time of acceptance by the arbitration institutions.

In the case where the parties choose both arbitration and litigation in the contract, it is easy to find such arbitration agreements invalid according to the provisions of the current judicial interpretation of the Arbitration Law. In this regard, there are also views that simply finding invalidity is not only contrary to the true will of the parties, but also detrimental to support for arbitration. Moreover, it is believed that this kind of agreement to choose both arbitration and litigation, from the formal point of view, the parties seemed made no choice on how to resolve the dispute, but in fact, the agreement of “arbitration or litigation” reflects that the parties do not reject to use either arbitration or litigation to resolve dispute, and this is acceptable and completely within the embodiment of the true will of the parties, and is different from the agreement that there is no dispute resolution at all. In the case of choosing both arbitration and litigation, it mainly depends on which dispute resolution method the parties prefer, and if one party prefers arbitration, litigation is excluded; If a party prefers litigation, arbitration is excluded. This understanding is in line with people's common understanding in general commercial activities, and is also in line with the arbitration legislation and practice of most countries in the world.

Regarding the selection of two or more arbitration institutions in the arbitration agreement, according to Article 5 of the current judicial interpretation of the Arbitration Law, if the parties fail to reach an agreement on the selection of arbitration institutions, the arbitration agreement shall be deemed invalid. However, in practice, there are also views that although agreement over the arbitration institution is uncertain to some extent, as long as one of the parties chooses one of the arbitration institutions, it is in line with the willingness of the parties to settle the dispute by arbitration, and the agreement is clear and specific and enforceable, and of course it should be valid. In fact, the parties can only choose one arbitration institution for arbitration of the same dispute. An open-ended arbitration agreement is optional and two or more of the arbitral institutions listed are chosen by the parties, and as long as one of the arbitral institutions preferred by the party applying for arbitration, that arbitration institution should be the sole arbitration institution for dispute resolution. If the parties are allowed to restart negotiations on the choice of arbitration institution, it actually ignores the genuine intention of the parties to settle the dispute by arbitration, complicates simple issues, and is not a wise move to support arbitration.

5.2.3 Principles of Interpretation Against Drafters

The principle of interpretation against the draftsman, also known as the doctrine of Contra proferentem,Footnote 11 is part of the principle of contract interpretation. When a promise, agreement or word is ambiguous, it should make an unfavorable interpretation to the party who provided or drafted the text. This principle of interpretation is often applied to standard contracts or situations where the negotiating positions between the parties are disparate and unequal, which aims to facilitate the drafters of contract terms to consider what may happen in the future as much as possible and try their best to use clear and definite words to standardize the text. Therefore, when interpreting the arbitration clause, the balance of the interests of both parties should be considered as much as possible, especially when it comes to the determination of the validity of the existing arbitration clause in the standard contract. With the intention of protecting the legitimate interests of a party who was not the drafter of the standard contract, arbitration clauses should be invalidated when the standard clauses are against principle of fairness based on the principle of interpretation against drafters.

With the continuous development of e-commerce, arbitration clauses may be embedded in the standard contracts in network transactions at any time. Standard clauses refer to clauses drawn up in advance by the parties to regulate the rights and obligations of both parties for repeated use. For example, some e-commerce platform operators provide the “Consent to Agreement and Register” option, which directly defaults to the platform user's approval of the content of the platform service agreement, and when clicking this option, the contents of the arbitration agreement are not clearly stated, and you need to click on the “Platform Service Agreement” to check it. However, the platform service agreement has a lot of content, and the arbitration clause is mixed with a lot of cumbersome information, making it difficult for consumers to identify. This book believes that, in order to examine whether the arbitration clause in the standard contract is valid, the basic premise is to examine whether the e-commerce company has made special prompts and whether it respects the autonomy of consumers. If the operator of an e-commerce platform uses standard terms to enter into a jurisdiction agreement with consumers and fails to take a reasonable approach to draw the consumers’ attention, consumers’ claims that the jurisdiction agreements are invalid should be supported, considering the protection of consumers’ rights and interests, and from the perspective of maintaining social fairness and market order. Of course, the key is to see whether the platform operators draw consumers’ attention to the jurisdiction clauses in a reasonable way. What is a reasonable way to draw consumers’ attention? Generally, it should mean that under normal circumstances, the consumers can learn about information closely related to their rights and interests in a clear and obvious way. If the jurisdiction agreement provided by the platform operator fails to meet the above standards, it is a case of not taking reasonable measures to draw the attention of consumers.

However, standard contracts do not necessarily invalidate the arbitration clause. Not all clauses in standard contracts are standard clauses, nor are the arbitration clauses in standard clauses necessarily standard clauses. As long as the parties are given the right to choose the dispute resolution method, for example, multiple options are listed for the parties to choose or fill in, then such arbitration clauses should be considered to be signed after negotiation between the two parties and generally should be recognized as valid.

5.2.4 Exclusion of the Principle of Strict Interpretation

Exclusion of the principle of strict interpretation generally requires the search for the true common meaning of the parties. It should not be limited only by the inappropriate words and phrases used but should be based on the true intention of the parties and make interpretations that are conducive to the realization of the parties’ wishes. For a defect arbitration agreement, as long as the declaration of intention is clear, it should generally be interpreted loosely in accordance with the principle of the validity of the arbitration clause. The application of the exclusion of the principle of strict interpretation actually supports the interpretation principle that is beneficial to the validity of the arbitration clause to a certain extent.

For example, if the parties have only agreed on the place of arbitration but not an arbitration institution and there is only one arbitration institution in that place, how should the validity of the arbitration agreement be determined? In practice, there is a view that if the arbitration agreement does not specify the specific arbitration institution, but it can be reasonably inferred from the content of the arbitration agreement that the parties’ true intention is to submit the dispute to the local arbitration institution for arbitration, the arbitration agreement should be deemed valid. For another example, if the parties have only agreed on the place of arbitration but not an arbitration institution, and there are more than two arbitration institutions in that location, how should the validity of the arbitration agreement be determined? According to Article 5 of the Interpretation of the Supreme Court of China on Certain Issues Concerning the Application of the Arbitration Law of the People's Republic of China, if the parties fail to reach an agreement on the choice of an arbitration institution, such an arbitration agreement shall be deemed invalid. However, there is also a view that if there are two or more arbitration institutions at the place of arbitration agreed upon by the parties, it should be based on the written expression of the arbitration agreement signed by the parties, with the goal of realizing the parties’ intention to arbitrate and the principle of holding the arbitration agreement valid, instead of simply denying the validity of the arbitration agreement on the grounds that the arbitration institution is not clearly specified.

6 Expansion of the Validity of the Arbitration Clause

Based on the abovementioned traditional arbitration system theory, the arbitration agreement is relative, and its effect only extends to the parties to the arbitration agreement; that is, the arbitration agreement is only binding on its signatory parties. However, with the continuous development and change of commercial transaction methods and transaction models, if the validity of the arbitration agreement only extends to the traditional concepts of the signatories, it may lead to unreasonable results under certain circumstances, which may even be inconsistent with the basic nature of the efficient dispute resolution of the arbitration mechanism hindering the settlement of disputes.

For international arbitration practice, a new and urgent problem arises at the historic moment: how to interpret the validity of the arbitration agreement according to actual needs while fully respecting the parties’ agreement to submit disputes to arbitration to avoid possible occurrences in arbitration practice and the uncertainty of the arbitration decision. The response of arbitration practice is mainly manifested in two aspects: one is to relax the original strict requirements for the written form of the arbitration agreement, and exchange letters, data messages, verifiable emails, mobile phone text messages or other means that arbitration agreements in no strict written form of the arbitration agreement are gradually recognized; secondly, the expansion theory of the validity of the arbitration agreement is gradually accepted, sometimes expressed as “The Extension of the Arbitration Clause” or “Non-Signatories”. The extension of the validity of the arbitration agreement refers to the recognition that the validity of the arbitration agreement can be extended to the party that has not agreed to participate in the arbitration under certain circumstances and bind it, without denying that the agreement of the parties is the basis of the arbitration jurisdiction, so that such subject can participate in the arbitration process basing on the statutory or legal reasons rather than mere “consent”.

6.1 Determination of the Validity of the Arbitration Clause in the Assignment of Contracts

Contract assignment refers to the assignment of contractual rights and obligations; that is a legal conduct—on the premise of not changing the content of the contractual relationship, a party to the contractual relationship legally assigns all or part of its contractual rights and obligations to a third party.Footnote 12 Contract assignment can be divided into legal assignment and contract assignment. The main discussion here is the contractual assignment. According to the relevant provisions of China’s Contract Law, the assignment of contractual obligations shall be subject to the consent of the obligee of the contract, while the transfer of contractual rights does not require the consent of the obligor of the contract and only require the notification of obligor. Therefore, when the debt is transferred, the debtor and the transferee must obtain the consent of the creditor after reaching an agreement on the transfer of the debt. If the creditor's consent is not obtained, the debt assignment is not binding on the creditor, and the original contract, including the arbitration clause, is still valid for the debtor and the creditor. The general assignment of contractual rights and obligations belongs to the case of “concurrent assignment” of contracts stipulated by law; that is, in the case of assignment of creditor's rights and debts together, because the transfer content includes both creditor's rights and debts, the part of the debts transfer should be approved by creditors. In the assignment of the creditor's rights, the assigning parties may agree on the assignment terms by themselves, such as the assignment at a low price, and the disputes between the assigning parties will be settled by arbitration without obtaining the consent of the debtor.

Question: the contract concluded by Party A and Party B contains an arbitration clause, A transfers contractual rights and obligations to C, and whether C is bound by the arbitration clause in the original contract? That is, whether the original arbitration agreement is binding on the assignee and the counterpart of the assignor of the original contract?

In the case of Shouguang Inzone Mall and BOC Insurance Shandong Branch, the parties agreed in the insurance policy that the dispute should be submitted to Jinan Arbitration Commission for arbitration.

After the fire accident, due to the delay in settlement of claims by the BOC Insurance Shandong Branch, the assured Shouguang Inzone Mall signed the Debt Assignment Agreement with China L.W. Economic and Trade Co., Ltd. (L.W. company). They agreed to transfer the creditor's rights under the insurance policy to L.W. company. L.W. company expressly objected to the arbitration agreement in the insurance policy in the agreement. After L.W. company sued the court, the insurance company raised an objection, claiming that the dispute should be arbitrated by the Jinan Arbitration Commission on the grounds of the existence of an arbitration agreement, and the court has no jurisdiction. The insurance company believed that as the transferee of the creditor's rights, it should be bound by the dispute jurisdiction agreement of creditor’s rights. Otherwise, one party may maliciously change the jurisdiction of the dispute through the transfer of the creditor's rights, which violates the principle of good faith in contract. Shandong High Court of China held in the second instance that, according to Article 9 of the Judicial Interpretation of the Arbitration Law, because the assignee expressly opposes the arbitration clause when it is assigned the creditor's rights and debts, the arbitration clause was not binding on L.W. company, and the case was under the jurisdiction of the court.

Article 9 of the Judicial Interpretation of Arbitration Law of China stipulates: “[w]here the creditor's rights and debts are entirely or partially assigned, the arbitration agreement shall be binding upon the assignee, unless the parties concerned have agreed otherwise, or the assignee expressly objects or does not know that there is a separate arbitration agreement when the creditor’s rights and debts are assigned.” It can also be seen from the above cases that there is no disagreement in the understanding of Article 9 of the Judicial Interpretation of the Arbitration Law: “[i]f the creditor’s rights and debts are entirely or partially assigned, the arbitration agreement is binding upon the assignee”.

However, there are different opinions in practice regarding the provison of “except when the assignee expressly objects or does not know there is a separate arbitration agreement when the creditor's rights and debts are assigned”. The main objections are as follows: when the creditor's rights are transferred, the assignment agreement is signed by the assignor and the assignee, both parties expressly exclude the jurisdiction of the arbitration clause in the original contract or the assignee unilaterally expressly expresses that it is not bound by the arbitration clause in the original contract; since the assignment of the claim does not require the consent of the debtor, the debtor cannot participate in the signing of the contract for the assignment of the claim, and there is no objection after receiving the notice of assignment of the claim, the agreement between the assignor and the assignee of creditor’s rights or the assignee's unilateral objection should not terminate the arbitration clause involving the debtor. The above conclusion obviously violates the basic principles of the Contract Law and is extremely unreasonable. The main legal basis for the opponents is Article 77, Paragraph 1 of China's Contract Law stipulates: “a contract may be modified if the parties reach a consensus through consultation.” In Articles 79, 80, and 84 of the Contract Law, the creditor may assign all or part of the contract's rights to a third party without the debtor's consent, but the debtor should be notified. After the contract is assigned, only the subject of the contract is changed. Without negotiation with the counterparty of the original contract, both parties to the assignment cannot change the rights and obligations established in the original contract. If the creditor's rights assignment agreement changes the original contract, the debtor's consent shall be obtained; otherwise, the changed content can only bind both parties to the assignment. This is determined by the party autonomy and the principle of relativity of contract. Therefore, the dispute settlement clauses agreed upon by both parties to the assignment of the creditor's rights are limited to the assigning parties and cannot bind the debtor. That is, it only applies to the assignment of the creditor's rights itself but not to the original contractual legal relationship.

Obviously, in the case of contract assignment, if the stakeholders agree otherwise on the dispute resolution method, the arbitration agreement in the original contract is no longer valid, which is in line with the principle of party autonomy; if the assignee objects to the original arbitration agreement and the counterparty of the original contract agrees, it means that both parties have terminated the original arbitration agreement through negotiation. However, in the case where only the assignor and the assignee agree that the original arbitration agreement is invalid or the assignee objects unilaterally, whether the original arbitration agreement should be deemed invalid for the assignee? It is the main argument between the Article 9 of the Judicial Interpretation of the Arbitration Law and the opponent's opinion lies. This book believes that the provisions of Article 9 of the Judicial Interpretation of the Arbitration Law and the opinions of opponents have their own rationality. However, this book tends to support the provisions of Article 9 of the Judicial Interpretation of the Arbitration Law. Firstly, Article 9 of the Judicial Interpretation of the Arbitration Law establishes the basic principle that the arbitration clause in the original contract is valid for the assignee in the case of contract assignment, whether it is an assignment of rights, debts, or a combination of rights and debts. The principle reflects the principle of autonomy of will and the relativity of contracts stipulated in China's Contract Law. Secondly, the assignee is not a party to the original contract, so the arbitration clause in the original contract should not be binding on him. Generally, once the parties to the original contract agree on the arbitration clause in the original contract, they have a legitimate and reasonable expectation interest, and this reasonable expectation interest should be protected. However, in the case of assignment of contract rights, the assignee is the successor of the assignment of contractual rights and is not a party to the original contract, so the arbitration clause in the original contract should not be binding on him. Thirdly, from the perspective of being beneficial to transactions and protecting the interests of the rights holders, the assignee should be given more options for dispute resolution methods. There is an arbitration clause in the original contract, and the reasonable expectation of the debtor as one of the parties to resolve the dispute by arbitration should be supported, which is beyond doubt. But this conclusion should be limited to the parties to the original contract. However, after the transfer of contractual rights, if the transferee is not allowed to choose the dispute resolution method as a new creditor, the transfer of contractual rights may not be so smooth, and some transferees who are unwilling to accept the arbitration clause may not consider the transaction of the transfer of creditor's rights, which is not conducive to the conduct and completion of the transaction, nor is it conducive to the protection of the legitimate rights and interests of new creditors. Therefore, if a choice is made between protecting the reasonable expectation of the debtor in the original contract to resolve disputes through arbitration and protecting the assignee's choice of dispute resolution to safeguard its legitimate rights and interests, the legitimate rights and interests of the assignee seem to be given priority for protection. Even if a party may maliciously change the jurisdiction of the dispute through the assignment of the creditor's rights, it is very rare. Whether it is arbitration or litigation, the liability of the debtor in the original contract cannot be reduced or exempted by the assignment of the creditor's rights.

In the dispute between Shi and China S.H. Import & Export Co., Ltd. (hereinafter referred to as S.H. Company) regarding jurisdiction over the assignment of creditor's rights, China X.S. Co., Ltd. (hereinafter referred to as X.S. Company) was a company established under the laws of the Philippines, and it signed six contracts for the sale of minerals with the defendant S.H. Company. The three contracts and the Contract NO. GHGC0808005 stipulate: “All disputes concerning the contract or the execution of this contract shall be settled through friendly negotiation. If there is no solution through negotiation, the dispute shall be submitted to the China International Economic and Trade Arbitration Commission for arbitration in accordance with its Rules and China's laws to make an arbitration award. The arbitration result of the China Economic and Trade Arbitration Commission will be final and binding on both parties.” Contract NO. GHGC-SH-9001 and NO. GHGC-SH-9602 in the agreement stipulate: “Contract disputes, both parties should negotiate amicably. If it fails, it should be submitted to the Hong Kong International Trade Arbitration Commission in accordance with the arbitration rules. The arbitration commission's award is the final award.” X.S. Company held a board meeting and reached a resolution that the receivables of the abovementioned six contracts of S.H. Company were transferred to Mr. Shi. Afterward, X.S. Company and Shi signed the Credit Transfer Agreement, which stated that “because Party B (referring to Mr. Shi) expressly objected to the arbitration clause stipulated in the original Sales Contract on which the creditor's rights transferred under this agreement were based, in the event of any dispute between Party B’s realization of the creditor's rights transferred under this agreement with S.H. Company, it will be submitted to the competent court for settlement through litigation.” In addition, according to the evidence provided by Shi, when the Credit Transfer Agreement was signed, he was the chairman of the board of directors of X.S. Company. After that, Shi appealed to the Jiaxing Intermediate Court of China in Jiangsu Province, requesting that S.H. Company be ordered to pay the amount owed.

The main focus of the dispute in this case is whether the arbitration clause in the original contract is binding on the assignee after the contractual rights and obligations are generally transferred. According to Article 9 of the Judicial Interpretation of the Arbitration Law, if the creditor's rights and debts are transferred in whole or in part, the arbitration agreement shall be valid for the transferee, expect the parties have agreed, and the transferee expressly objected to the transfer of the creditor's rights and debts or did not know that there was a separate arbitration agreement otherwise.

The Supreme Court of China replied thatFootnote 13: The main focus of the dispute in this case is whether the arbitration clause in the original contract is binding on the assignee after the contractual rights and obligations are generally transferred. The six mineral product Sales Contracts signed between X.S. Company and S.H. Company involved in this case all stipulated arbitration clauses. When the receivables of the abovementioned six contracts were transferred to Shi, Shi clearly opposed the arbitration clause stipulated in the “Sales Contract”. It is also stipulated in the Credit Transfer Agreement that “any disputes between the creditor's rights transferred under this agreement and S.H. Company will be submitted to the court with jurisdiction to resolve through litigation.” According to Article 9 of the Judicial Interpretation of Arbitration Law stipulates that if the creditor's rights and debts are transferred in whole or in part, the arbitration agreement shall be valid for the assignee, except the parties have agreed otherwise, or the transferee expressly objected to the transfer of the creditor's rights and debts or did not know that there was a separate arbitration agreement. The assignee, Shi, expressly objected to the arbitration clause between X.S. Company and S.H. Company in the Credit Transfer Agreement. The arbitration clause is not binding on Shi, and the Jiaxing Intermediate Court of China, where the defendant is located, has jurisdiction over this case.

6.2 Determination of the Validity of the Arbitration Agreement in the Case of Claiming on Behalf of Others

Article 73 of China's Contract Law stipulates that “if the debtor fails to exercise its due creditor's rights and causes damage to its creditor, the creditor may request the people's court to exercise the debtor's creditor's rights in its own name, except the creditor's rights are exclusive to the debtor.” This article stipulates the creditor’s right of subrogation system. The exercise of subrogation by creditors in China is a kind of legal system arrangement in which they claim creditor's rights against the sub-debtor in their own name within the scope of the debtor's rights to the sub-debtor, exercising their own substantive claims and receiving benefits to themselves.

Proposition of the question: If there is a valid arbitration agreement between the debtor and the secondary debtor before the creditor claims the claim, should the creditor be bound by the arbitration agreement?

The right of subrogation under China's Contract Law has the following characteristics: First, the right of subrogation is statutory. The right of subrogation arises in accordance with the law and is a kind of legal claim, regardless of whether there is an agreement between the parties, as long as there are conditions that meet the law, the right of subrogation can be exercised. Second, the exercise of the right of subrogation allows a direct substantive legal relationship between the creditor and the sub-debtor. By claiming a claim against a sub-debtor in its own name, the creditor is actually exercising its right to claim its own claim, and the sub-debtor is the debtor of the creditor, and the substantive law effect of the creditor's exercise of the right of subrogation is directly attributable to the creditor himself. Third, the precondition for the exercise of the subrogation right must be that the debtor has a due claim against the sub-debtor and that the claim is not exclusive to the debtor.

The difference between the exercise of subrogation by creditors and the assignment of claims: First, the basis for the two is different. Subrogation arises in accordance with the provisions of the law and is a legal right that does not require an agreement between the creditor and the debtor. In the assignment of claims, an agreement must be formed between the assignee and the assignor to assign the claim, otherwise, the assignment of the claim cannot occur. Second, the effectiveness of the two is different. The exercise of the right of subrogation enables the formation of a substantive legal relationship between the creditor and the sub-debtor, rather than becoming a party to the contractual relationship between the debtor and the sub-debtor, so the creditor does not inherit the debtor's status as a party in the contract and is naturally not bound by the contractual relationship. Assignment of debt claims differs in that the assignee becomes a party to the contract in place of the assignor by virtue of succession rights, and therefore the assignee should be bound by the contractual relationship. Third, the content of the contractual relationship changes differently. The exercise of the right of subrogation changes the legal relationship between the debtor and the sub-debtor, and forms a direct substantive legal relationship between the creditor and the sub-debtor. The assignment of claims is different, the assignment changes the subject of the contract, the assignee replaces the assignor of as the creditor, and the content of the contract does not change as a result, but the contractual rights are transferred with the transfer of the subject. Fourth, there is a difference in whether a defense can be raised. The exercise of the right of subrogation is statutory, and the sub-debtor has no right to raise a defense against the creditor's exercise of the right of subrogation. Article 80 of China's Contract Law stipulates that if a creditor assigns contractual rights, it shall notify the debtor. Thus, after the assignment of the claim, the debtor's defense against the assignor may be asserted against the assignee.

Based on the above analysis, the creditor's exercise of subrogation is not bound by the arbitration agreement of the original contract. The reasons are as follows: First, there is no arbitration agreement between the creditor and the sub-debtor. Whether the right of subrogation can be realized by arbitration depends on whether there is an arbitration agreement between the parties. Obviously, because the debtor is negligent in exercising its rights, it is also impossible to form a valid arbitration agreement between the creditor and the sub-debtor. Second, the legal nature of the right of subrogation determines that the arbitration agreement cannot be reached. China's subrogation system derives from the explicit provisions of the law, rather than the agreement of the parties, and is a legal right. In other words, whether the debtor agrees or not does not affect the exercise of the right of subrogation. Third, the law actually excludes the right of creditors to initiate arbitration with an arbitration institution. Article 73 of China's Contract Law stipulates that if the debtor neglects to exercise its due claims and causes damage to the creditor, the creditor may request the court to exercise the debtor's claim in its own name. Although this provision does not explicitly exclude the right of creditors to initiate arbitration with an arbitration institution, in fact, in the absence of an arbitration agreement between the creditor and the sub-debtor, the statutory right of subrogation can only be exercised through litigation.

In (2016) Hu Min Xia Case No.121, CNBM Import and Export Company (hereinafter “CNBM”) signed a shipping contract with HNA to initiate arbitration with the Beijing Arbitration Committee. As the insurer of the goods involved in the case, Ping An Financial Insurance Beijing Branch (hereinafter “Ping An Beijing”) filed a subrogation claim. When signing the Insurance Indemnity Agreement with CNBM, Ping An Beijing expressly stated that the arbitration clause in the shipping contract was not binding on it. After Ping An Beijing sued, HNA argued that Ping An Beijing should be bound by the arbitration clause and that the court had no jurisdiction. Both the first and second instance rulings rejected HNA's objections in accordance with the above-mentioned judicial interpretations. In (2014) Yue Gao Fa Limin Zhong Zi No. 1875, the warehousing contract signed between Taibao and Henderson had an arbitration clause, and after the Guangdong branch of Ping An Insurance as the insurer paid the insured Taibao, it obtained the right of subrogation and sued Henderson in court. Henderson raised a jurisdictional objection on the ground of the existence of an arbitration agreement. The Guangdong High Court held in the second instance that Ping An Insurance Guangdong Branch was not a party to the warehousing contract, and the arbitration clause was not the intention of Ping An Insurance Guangdong Branch, and the arbitration clause was not binding on Ping An Insurance Guangdong Branch unless it expressly accepted the arbitration clause. The ruling dismissed Henderson Company's objection to the jurisdiction of the case. From these cases, the court held that as long as the assignee expressly opposed to arbitration in the contract for the assignment of rights, the arbitration clause in the original contract was not binding on the assignee and the assignee could sue the debtor.

In the case of disputes over the contract of carriage of goods by sea between Beijing Branch of PICC P&C (hereinafter referred to as PICC Beijing), Beijing Branch of S.D. International Shipping Co., Ltd. (hereinafter referred to as S.D. Beijing), China S.D. International Shipping Co., Ltd. (hereinafter referred to as S.D. Company), S.D. Beijing and China. S.T. Software Technology Co., Ltd. (hereinafter referred to as S.T. Company) signed an international cargo transportation framework agreement, agreeing that it will ship the goods for S.T. Company. The agreement stipulates: “All disputes arising from the implementation of this agreement or related to this agreement shall be settled through friendly negotiation by both parties. If these disputes cannot be settled through negotiation, it shall be submitted to the China International Economic and Trade Arbitration Commission for arbitration in accordance with its arbitration rules. The place is Beijing, and the arbitration award is final and binding on both parties. The arbitration shall be governed by the substantive laws of the People’s Republic of China.” After the signing of the agreement, S.D. Company transported a batch of video network equipment from Tianjin to Uganda for S.T. Company. The batch of goods is underwritten by the PICC Beijing. The shipment was later stolen in transit. PICC Beijing paid the compensation to S.T. Company. Therefore, the PICC Beijing filed a lawsuit with the Maritime Court of Tianjin, requesting that the two defendants compensate for the loss of goods, etc.

The Supreme Court of China wrote thatFootnote 14: The arbitration clause in the transport contract involved is a valid clause concluded by the parties to the transport contract to resolve disputes by means of arbitration. The insurer, the PICC Beijing, after paying the insured for the loss of the goods in accordance with the insurance contract, legally obtains the right of subrogation to claim compensation for the loss of the goods from the carrier and other responsible persons. Since the insurer is not the party that negotiates and concludes the arbitration clause of the contract of carriage, the arbitration clause is not the declaration of intention of the insurer, and the arbitration clause is not binding on the insurer unless the insurer expressly accepts it. The Maritime Court of Tianjin, as the court where the loading port of the goods involved is located, has jurisdiction over this case.

This book argues that the main issue of the dispute in this case is whether the arbitration clause is valid for the insurer after the insurance claim is settled. It is generally believed that after the insurer settles a claim, the arbitration clause is invalid for the insurer unless the insurer expressly accepts it. That is, after the insurer pays the insured for the loss of the goods in accordance with the insurance contract, it legally obtains the right of subrogation to claim compensation for the loss of the goods from the carrier and other responsible persons. Since the insurer is not the party that negotiates and concludes the relevant arbitration clause in the contract, the arbitration clause is not the declaration of intention of the insurer, and the arbitration clause is not binding on the insurer unless the insurer expressly accepts it.

6.3 If the Parties to the Arbitration Agreement are Merged, Split-Up or Terminated, Whether the Original Arbitration Agreement is Binding on the Successor of Its Rights and Obligations

According to Article 19 of the Arbitration Law, “the arbitration agreement exists independently, and the modification, rescission, termination or invalidity of the contract shall not affect the validity of the arbitration agreement.” That is to say, in the context of transfer of rights and obligations, though the assignee did not directly sign an arbitration agreement, but based on the joint legal consequences of this transfer of rights and obligations, it should be bound by the arbitration clause in the original contract. Therefore, when the arbitration agreement is valid, if the parties to the arbitration agreement is merged, spilt-up or terminated, and the successor of its rights and obligations and the counterparty to the arbitration agreement have not reached a new arbitration agreement or have not reached an agreement to cancel the arbitration clause, the original arbitration agreement is binding on all parties, and all parties shall resolve disputes through arbitration in accordance with the original arbitration agreement.

6.4 The Issue of the Arbitration Agreement Binding Non-signatory Parties in Certain Circumstances

Arbitration is a product of party autonomy. An arbitration agreement is an expression of the parties’ declaration of intention to submit to arbitration. In addition, an arbitration agreement is essentially a contract. For the parties, their contractual obligation is to resolve disputes through arbitration. In principle, an arbitration agreement can only bind the signatories to the arbitration agreement. If the arbitral tribunal's award involves non-signatory parties to the arbitration agreement, the award may be set aside on the grounds that there is no arbitration agreement. However, with the development of arbitration practice, in some special cases, the validity of the arbitration agreement can also be extended to non-signatory parties. Theories on the binding force of an arbitration agreement on non-signatory parties mainly include agency, incorporation by reference, acceptance of the arbitration clause by conduct, piercing the corporate veil, group of companies doctrine and estoppel, etc. To judge that an arbitration agreement is binding on a non-signatory party, two key issues should be considered: firstly, whether the arbitration clause reflects the declaration of intention of the non-signatory party; secondly, whether the contractual rights and obligations of the signatory party are transferred to the non-signatory party.

6.4.1 Circumstances in Which an Arbitration Clause is Incorporated by Reference

Incorporation by reference generally means that there is no arbitration clause in the contract signed by the parties, but it is stated in the contract that the existing standard contract model or other contracts drawn up between the parties can be invoked, and these cited contracts or documents containing arbitration clause constitutes a part of the contract between the parties. Such an arbitration clause incorporated by reference is different from a general arbitration clause. That is, the general arbitration clause is usually part of the principal contract, while the arbitration clause incorporated by reference is usually outside the principal contract. It is just included by a standard contract templates or document that the parties will incorporate by reference when entering into the contract. Incorporation of an arbitration clause by reference into the scope of a contract is called an incorporation of an arbitration clause by reference to other documents. This situation is often seen in construction contracts and contracts for the carriage of goods by sea. Construction projects, especially major construction projects, will use standard contract templates or general clauses. Because the construction project is a long-term contractual relationship, the implementation of the project involves strong professionalism. To make the construction follow certain norms, the standard model is not only drawn up by engineering experts of the relevant construction engineering associations but also are familiar to people in the construction industry and recognized by judicial practice. Therefore, some standard contract templates or related documents are generally listed in the principal contract signed by the parties, and these standard contract templates or related documents form part of the principal contract and are binding on the parties.

Question: When the non-signatory party of the arbitration clause has fulfilled the rights and obligations pre-established in the arbitration agreement, can the non-signatory party of the arbitration clause become a party bound by the arbitration agreement? This book will use Shanghai Huashi Zhongxing Shopping Center Management Co., Ltd. (hereinafter referred to as Huashi Company) and Defa Shopping Center Management (Shanghai) Co., Ltd. (hereinafter referred to as Defa Company) applying to set aside the Shanghai International Economic and Trade Arbitration Commission (Shanghai International Arbitration Center) (2013) Shanghai Trade Arbitration Zi No. 415 Arbitration Award to illustrate.Footnote 15

Basic facts: Article 11.6 of The Framework Agreement on No. 688 Huaihai Middle Road, Luwan District, Shanghai, China, signed by Union Investment Real Estate AG (hereinafter referred to as Union Company) with Shi Jia Company Co., Ltd. (hereinafter referred to as SJ Company) and Huashi Company, etc. (hereinafter referred to as Framework Agreement), Article 3 of Framework Agreement Amendment Agreement, and Article 13 of the Supplementary Clauses of Shanghai Real Estate Sales Contract annexed to the Framework Agreement signed by Union Company and Huashi Company, all stipulated that any disputes arising out of or related to this agreement (excluding the Net Profit Guarantee, the Contract Guarantee and the Purchase Price Guarantee of the Framework Agreement) shall be submitted to SHIAC for final settlement through arbitration. After the dispute, the Union Company and Defa Company filed for arbitration. SHIAC rendered the (2013) Hu Mao Arbitration Zi No. 415 Award, supporting the arbitration claim of the Union Company. Huashi Company and SJ Company applied for cancellation of the abovementioned award on the grounds that there was no arbitration agreement between them and Defa Company, Union Company and Defa Company cannot simultaneously become the arbitration applicant, and the arbitration procedure violated the arbitration rules, etc.

The Supreme Court of China reply to the request for opinion that,Footnote 16 the arbitration clause involved in the case complied with the provisions of the applicable law of the arbitration agreement, that is, the laws of China, and this had legal effect on Union Company, SJ Company and Huashi Company. On the question of whether Defa Company was a party to the arbitration clause. When the above agreement was signed, Defa Company had not been established, nor had it signed the agreement, but from the content of the Framework Agreement (the annex), SJ Company and Huashi Company as sellers, agreed the Union Company to purchase the shopping mall located at No. 688 Huaihai Middle Road, Luwan District, Shanghai. The seller agreed to take all necessary measures and actions to ensure the commitments and rights granted to the buyer under the agreement. It is further stipulated in Article 2 of the Supplementary Clause of the Annex Shanghai Real Estate Sales Contract that the Union Company and Huashi Company confirmed that when signing this contract, the two parties intended to let affiliated person designated by the Union Company to purchase the shopping mall in Shanghai, and will cooperate with Union Company so that the Union Company can establish a designated person as soon as possible after the signing of the contract. According to the above agreement, Huashi Company and SJ Company has known and agreed that the Union Company will perform the Framework Agreement by designating the newly established company as the buyer, and it will be fully anticipated that the disputes between them and the designated new company arising from the performance of the Framework Agreement will be subject to arbitration clauses. Judging from the implementation of the agreement, Union Company has informed Huashi Company and SJ Company that it had applied for the establishment of a wholly foreign-owned enterprise, Defa Company, in Shanghai through letters dated November 2 and November 7, 2006, so that the enterprise can purchase shopping malls. In December 2007, the Huashi Company also confirmed that the Union Company had appointed Defa Company as the purchaser in the arbitration application filed by the Union Company as the respondent. Therefore, since Defa Company was designated as the buyer by the Union Company, it became a party to the arbitration agreement contained in the Framework Agreement, and no further arbitration clause was needed. Article 1.2.1 of the Framework Agreement stipulates that when the Union Company designates the buyer, the Union Company still has the right to exercise its rights under its own authority, and Article 11.4 stipulates that the obligations of the Union Company and the buyer of the Union Company under the agreement are joint and several, so the United Company did not withdraw from the Framework Agreement by appointing Defa Company as the buyer, and the Union Company still had the qualification to initiate arbitration. In summary, from the content of the agreement and the background and purpose of the transaction, the Union Company and Defa Company had the basis of the agreement as the arbitration applicant, which was conducive to the settlement of disputes.

6.4.2 Circumstances in Which a Specific Conduct Indicates Acceptance of an Arbitration Clause

In the event of a dispute, the arbitration clause shall be binding on the non-signatory party if the non-signatory party has indicated by its own conduct that it is bound by the arbitration clause.

Take the application of determination of the validity of the arbitration agreement between applicant Peng and the respondent, the Hangzhou Branch of PICC P&C (hereinafter referred to as the “PICC Hangzhou”) as an example. Basic facts: In 2013, the applicant Peng purchased a Mercedes-Benz from Yuan, an outsider of the case in the second-hand car trading market. Peng purchased insurance for the vehicle from PICC Hangzhou, but because the title of the vehicle had not yet been transferred, it was still insured in the name of “Yuan”. On June 29, 2013, when the engine was flooded in a rainstorm, Peng request PICC Hangzhou for insurance proceeds. After that, the PICC Hangzhou sent Peng the Motor Vehicle Insurance Policy (original) and the Compulsory Motor Vehicle Traffic Accident Liability Insurance Policy (original), both signed on June 26, 2013. The insurance period is from 18:00 on June 26, 2013 to 18:00 on June 26, 2014. Contract disputes are resolved by the Hangzhou Arbitration Commission. On August 30, 2013, at the request of the policy holder Peng, PICC Hangzhou changed the policy holder from Yuan to Peng, but it was verified that the signature at the signature office of the policy holder was not written by Peng himself. The two parties had a dispute over the settlement of claims, and Peng filed an arbitration with the Hangzhou Arbitration Commission. During the hearing of the arbitral tribunal, Peng found that the Mandatory Application Form for Motor Vehicle Insurance/Motor Vehicle Traffic Accident Liability of the PICC and the Explanation on the Exemption of Liability for Commercial Motor Vehicle Insurance were not signed by him, so he applied for withdrawal of arbitration application. Later, the Hangzhou Arbitration Commission allowed him to withdraw the arbitration application. In August 2014, Peng applied to the Hangzhou Intermediate Court of China in Zhejiang Province for confirmation of the invalidity of the arbitration agreement. The Hangzhou Intermediate Court of China held that although the signature of Peng on the insurance application form and the instruction manual was not signed by him, the act of Peng's application for arbitration itself indicated that he had accepted the arbitration clause on the insurance policy and was willing to be bound by it, so it ruled to reject Peng’s application. The Zhejiang High Court of China also held that after review,Footnote 17 Peng himself expressed his willingness to be bound by the arbitration clause by submitting the arbitration and agreed to reject Peng's request. The Supreme Court of China wrote thatFootnote 18 although the signature of Peng on the insurance application form was not signed by him, and the insurance policy was unilaterally issued by PICC Hangzhou, after Peng received the insurance policy, knowing the arbitration clause recorded in the insurance policy, and then initiate the arbitration according to the arbitration clause to the Hangzhou Arbitration Commission, this behavior shows that Peng agrees to be bound by the arbitration clause and that he and PICC Hangzhou have reached an arbitration agreement through specific acts in the arbitration procedure, so they agree to reject Peng's request for confirmation of the invalidity of the arbitration clause.

This book argues that the focus of the dispute in this case is whether Peng's behavior indicates that he has accepted the arbitration clause stated in the insurance policy. Although Mr. Peng's signature on the insurance application form was not signed by him and the insurance policy was unilaterally issued by the PICC Hangzhou, the dispute resolution methods and important reminders recorded in the insurance policy did not constrain Peng. However, Peng changed the policy holder to himself in August 2013 and did not raise any objection to the dispute resolution method specified in the policy. Moreover, when Peng failed to settle dispute through negotiation, he filed an arbitration with the Hangzhou Arbitration Commission, and the arbitration tribunal had already held a hearing. The above facts show that Peng has actually agreed to the arbitration clause stated in the policy through his act of applying for arbitration.

6.4.3 Only the Main Contract Stipulates the Arbitration Clause, and the Supplementary Contract Does not Stipulate It. How to Address It?

Regarding the dispute resolution method stipulated in the main contract is arbitration, and the supplementary agreement does not stipulate the dispute resolution method, whether the arbitration institution can arbitrate the principal contract and the supplementary agreement together. It is generally believed that the premise of using arbitration to resolve disputes is that the parties voluntarily reach a legal and valid agreement or clause to select an arbitration institution to resolve their disputes. If the parties do not agree that their disputes will be resolved by an arbitration institution, under normal circumstances, the arbitration institution has no right to arbitrate the disputes. However, when there are a principal contract and a supplementary agreement, the parties have agreed in the principal contract that their disputes will be resolved by an arbitration institution. The key to whether the supplementary agreement that does not stipulate the method of dispute resolution can apply to the arbitration clause in the principal contract is that whether the relationship between the principal contract and the supplementary agreement is separable. If the principal contract and the supplementary agreement are mutually independent and severable, then if there is no special agreement, the dispute resolution method for two completely independent and severable contracts or agreements shall be handled according to the contract or the supplementary agreement, respectively. If the supplementary agreement is a supplement to the principal contract, must be attached to the principal contract and cannot exist independently of the principal contract, then the dispute resolution clause stipulated in the principal contract is also applicable to the supplementary agreement.

Huaxia Construction Co., Ltd. (hereinafter referred to as Huaxia Company) and Chang De Arts and Crafts School (hereinafter referred to as Art School) appealed against the enforcement ruling. Basic facts: The contract signed by both parties through bidding on December 8, 2007, clearly stipulated that the disputes between the two parties shall be under the jurisdiction of the Changde Arbitration Commission. At the same time, the contract also clearly stipulates that the pile foundation, indoor and outdoor decoration, doors and windows, water and electricity installation and ancillary works are not included in the scope of the contract. On November 30, 2007, the two parties signed a supplementary agreement to agree on the cost of the abovementioned water and electricity installation and decoration but did not agree on the settlement method of the dispute. The arbitral tribunal made a ruling on the cost of this part of the project when hearing the principal contract. The Supreme Court of China held that,Footnote 19 in this case, the contract signed by the two parties through bidding on December 28, 2007, clearly stipulated that the dispute between the two parties shall be under the jurisdiction of the Changde Arbitration Commission, so the Changde Arbitration Commission has jurisdiction over the case. Since then, the supplementary agreement signed by both parties on March 20, 2008, clearly stipulated that the two parties had signed the contract on December 28, 2007. The purpose of the supplementary agreement is to refine clauses and to resolve outstanding issues left by the principal contract and possible new issues. It is clearly stipulated that “the signed supplementary agreement has the same effect as the previously signed agreement”. So the dispute resolution clause stipulated in the principal contract that disputes should be submitted to the Changde Arbitration Commission for arbitration, which should also be applied to the supplementary agreement. In addition, according to the law, any objection by the parties to the validity of the arbitration agreement shall be raised before the first hearing of the arbitral tribunal. In this case, after Huaxia applied to the Changde Arbitration Commission for arbitration, the Art School did not object to the validity of the arbitration agreement before the first hearing of the arbitration tribunal but filed a counter application for arbitration with the Changde Arbitration Commission. The Art school applied for the Changde Arbitration Commission to conduct judicial appraisal on the project cost of water and electricity installation and decoration according to the standards agreed in the contract, which indicates that both parties agree to resolve the dispute over the project arrears between the two parties by the Changde Arbitration Committee according to the agreement. In its appeal to the Hunan High Court of China, the Art School claimed that the contract and supplementary agreement actually performed by both parties had no arbitration clause, and the Changde Arbitration Commission did not support the reason that the case was wrongly arbitrated. Therefore, the Hunan High Court of China (2013) Xiang Gao Fa Zhi Jian Zi No. 14 said that “the supplementary agreement does not stipulate the method of resolving disputes. Therefore, the construction costs of water and electricity installation and decoration in the supplementary agreement do not belong to the arbitration agreement. The Arbitration Commission rendered an award on the cost of this part of the project, which is beyond the scope of the arbitral award” is incorrect and should be corrected.

This book argues that the focus of the dispute in this case is whether the supplementary agreement is bound by the arbitration clause stipulated in the principal contract and whether the part of arbitral award on the supplementary agreement exceeds the scope of the arbitration agreement if the supplementary agreement does not stipulate the method of dispute resolution. Generally, the principal contract can be understood as a contract that includes the names of the parties, the subject matter, and the quantity and does not depend on other contracts and exists independently; the supplementary agreement can be divided into supplementary agreement for refinement, modified supplementary agreement or related supplemental agreement according to different situations. After the signing of the principal contract, if there is no agreement or unclear agreement on the quality, price or compensation, place of performance, etc., of the principal contract, the two parties shall supplement it through a supplementary agreement, which is a supplementary agreement for refinement. Changes to the original agreement in the principal contract, such as adjustment of quantity, price, etc., are supplementary agreements of modified type. Supplementary agreements on the rescission of contracts can also be classified into this category. Due to the lack of a clear definition of “supplementary agreement”, in practice, the parties may regard other agreements signed during the performance of the principal contract and have a certain relationship with the principal contract as “supplementary agreements”, that is, related supplementary agreements. Although the title is “Supplementary Agreement”, its purpose is not to improve the principal contract. Its contents are different from the subject matter and quantity of the principal contract. Its establishment does not depend on the principal contract and is independent of the principal contract. The Construction Contract in this case has the necessary elements for the establishment of the contract, is not based on other contracts and is an independent principal contract. The purpose of the Supplementary Agreement is to improve the Construction Contract. The principal content is to stipulate the project budget that is not specified in the Construction Contract. It does not include the necessary requirements for the establishment of the contract such as independent subject matter and quantity, but is a supplementary agreement for refinement that is attached to the principal contract and cannot exist independently. Therefore, the arbitration clause contained in the Construction Contract in this case is applicable to the Supplementary Agreement, which is part of the principal contract. Since the Supplementary Agreement stipulated the cost of water and electricity installation and decoration, the award on this part did not exceed the scope of the arbitration agreement.

7 Application of the Applicable Law of the Arbitration Agreement

Article 16, Section 2 of China's Arbitration Law stipulates: “an arbitration agreement shall contain the following elements: (1) an expression of the intention to apply for arbitration; (2) matters for arbitration; and (3) a designated arbitration commission.” Article 18 stipulates: “If an arbitration agreement contains no or unclear provisions concerning the matters for arbitration or the arbitration commission, the parties may reach a supplementary agreement. If no such supplementary agreement can be reached, the arbitration agreement shall be null and void.” The above provisions stipulate the legal requirements for the validity of the arbitration agreement. Among them, an expression of the intention to apply for arbitration and matters for arbitration are the necessary contents of an effective arbitration agreement. Without an expression of the intention to apply for arbitration, there will be no arbitration agreement, and there can be no valid arbitration agreement. Without matters for arbitration, there will be no specific disputes, and without disputes, of course, there will be no arbitration. However, a valid arbitration agreement must have a selected arbitration committee is a unique provision of China's Arbitration Law, and it is also different from the legal provisions of most countries on the issue of the validity of the arbitration agreement.

However, in practice, from the perspective of the manifestation of the arbitration agreement, many arbitration agreements do not specify an arbitration institution, that the agreed arbitration institution does not exist, or the expression of the arbitration institution is inaccurate. Under the above circumstances, how to determine the applicable law concerning the arbitration agreement is crucial to the determination of the validity of the arbitration agreement. If China's law is applied, an arbitration agreement without an arbitration institution shall be deemed invalid. If the laws of other countries are applied, the arbitration agreement will not be considered invalid just because the arbitration institution is not stipulated. For example, in countries with ad hoc arbitration system, the validity of the arbitration agreement does not depend on the agreement of the arbitration institution.

Article 16 of the Judicial Interpretation of the Arbitration Law stipulates: “The review of the validity of a foreign-related arbitration agreement shall be governed by the law agreed upon by the parties. Where there is no agreed applicable law but the place of arbitration is agreed, the law of the place of arbitration shall be applied; if there is no agreed applicable law and no agreement on the place of arbitration or agreement on the place of arbitration is unclear, the law of the place of court shall be applied.” This judicial interpretation establishes the basic principle of applicable law of the arbitration agreement, that is, the arbitration agreement shall firstly be governed by the applicable law of the arbitration agreement agreed upon by the parties; if the parties have not agreed on the applicable law of the arbitration agreement but have agreed on the place of arbitration, the law of the place of arbitration shall be applied; the parties have neither agreed on the applicable law of the arbitration agreement, nor if the place of arbitration is not agreed upon, the law of the court shall be applied.

Question: In foreign-related arbitration and judicial review, the validity of an arbitration agreement is a common focus of controversy. A typical clause is “The place of arbitration in Hong Kong shall be subject to UK law”. The first half of the sentence is an arbitration clause, and the second half is a choice of law clause. Although brief, the legal issues involved are more complicated. If the China's court accepted the case, how should the validity of such arbitration clauses be determined? From the content of the above clauses, it can be seen that the parties’ agreement on choosing arbitration is clear, and the place of arbitration in Hong Kong is also clear. Since the choice of arbitration is a manifestation of the parties’ autonomy of will, and the place of arbitration is the result of mutual agreement, according to Article 16 of the Judicial Interpretation of Arbitration Law, if the parties have not agreed on the applicable law of the arbitration agreement but have agreed on the place of arbitration, the law of the place of arbitration shall be applied. The applicable law for judging the validity of this arbitration clause shall be the law of the place of arbitration, namely, the Hong Kong law. According to the Hong Kong Arbitration Ordinance, the disputed arbitration clause should be valid and enforceable.

Obviously, the arbitration clause mentioned above does not specify a clear arbitration institution. Such an arbitration clause is generally regarded as invalid under China's law because a clear arbitration committee is not selected. However, according to Hong Kong law, ad hoc arbitration is legal and valid as opposed to institutional arbitration. The arbitration institution without a clear agreement is not of course invalid. The arbitration clause precisely reflects that the arbitration form agreed upon by the parties is ad hoc arbitration.

The theory and practice of determining the validity of an arbitration agreement by the law of the place of arbitration originates from the principle of closest connection on confirming the applicable law of contract. On the issue of determination of the applicable law of contract, if the parties fail to agree on the law that should be applied to the contract, the law of the country that has the closet relationship with the contract shall be applied according to the principle of closest connection. Similarly, for the special contract clause of the arbitration agreement, if the parties fail to make a clear agreement on the applicable law of the arbitration agreement, the law of the country most closely related to the arbitration agreement shall be applied. It is generally believed that the place of arbitration and the arbitration agreement are most closely related.

In the theory and practice of international commercial arbitration, the term “place of arbitration” has two meanings: the place of arbitration in the geographical sense; and the place of arbitration in the legal sense. The place of arbitration in the geographical sense refers to the place where the arbitration proceedings actually take place, and the place of arbitration in the legal sense refers to the place where the connection between the arbitration and a specific legal system is established. In some cases, the place of arbitration in the geographical sense and the place of arbitration in the legal sense may be the same. If the parties agree on a place of arbitration in the legal sense and all the arbitration proceedings are conducted in that place, then the arbitration in the geographical sense is consistent with the place of arbitration in the legal sense. However, sometimes, the two do not match. The place of arbitration in the geographical sense and the place of arbitration in the legal sense may be different places. That is, even if the parties agree or the arbitral tribunal determines a legal place of arbitration in accordance with relevant rules, it does not mean that all arbitration proceedings must be conducted there. That is, there is only one place of arbitration in the legal sense, but there can be multiple places of arbitration in the geographical sense. The place of arbitration in the geographical sense is usually variable, and the arbitral tribunal has the right to decide where and what kind of proceedings are to be conducted. However, the place of arbitration in the legal sense is fixed and cannot be changed at will without the parties’ consensus. Therefore, for the determination of the applicable law of an arbitration agreement, the place of arbitration in the legal sense is crucial.

In practice, there are different representations of the place of arbitration agreed upon in an arbitration agreement. If the parties expressly agree that the place of arbitration is a certain place, that the arbitration shall be conducted at a certain place, or that the arbitration procedure shall be conducted at a certain place, such an agreement is generally regarded as an agreement between the parties in the legal sense of the place of arbitration. Of course, it is also possible that the parties agree that the place of arbitration is place A, and the arbitration proceedings shall be conducted at place B. How can the place of arbitration of such an arbitration clause be determined in the legal sense? Still, it should be based on the specific agreement of the parties on the arbitration clause, that is, the parties agree that place A is the place of arbitration, then place A should be regarded as the place of arbitration in the legal sense agreed upon by the parties, and place B is the place where the arbitration proceedings are conducted. However, if the parties only agree that the arbitration procedure will be conducted in two or more countries, how should such arbitration clauses be judged? Obviously, the parties did not agree on the place of arbitration in the legal sense but only agreed on two or more places of arbitration procedures. In this case, the laws of the two or more countries where the arbitration procedure is to be agreed in the arbitration agreement cannot be used as the applicable law to confirm the validity of the arbitration agreement.

In practice, there is also a situation where the parties do not directly agree on the place of arbitration but explicitly incorporate the arbitration rules of an arbitration institution into the arbitration agreement, and the arbitration rules determine the place of arbitration when the parties do not agree. Accordingly, the incorporation of the arbitration rules into the arbitration agreement provides a basis for the determination of the place of arbitration, and it should be deemed that the parties have agreed on the method of determining the place of arbitration, and it is naturally not difficult to determine the place of arbitration in the legal sense.

There are several special situations in which foreign law is applied as the applicable law to determine the validity of an arbitration agreement:

Firstly, apply Swiss law to determine the validity of the ad hoc arbitration clause. In this case, the parties agreed that the place of arbitration was in Switzerland but did not agree on a specific arbitration institution. The court recognized the validity of the arbitration clause involved on the grounds that Swiss law recognized ad hoc arbitration in accordance with the Swiss law identified. The applicant COFCO Wine & Spirits Co., Ltd. (hereinafter referred to as COFCO Wine) signed the Sales Contract with the respondent GLORIA VINO (hereinafter referred to as G.V.). Article 13 of the Sales Contract stipulated: “Arbitration: (a) All disputes that arise are resolved through friendly negotiation. If no consensus is reached, the dispute will be referred to arbitration. (b) Arbitration will be conducted in Switzerland. (c) The arbitration award is final and binding on both parties. d) The cost will be borne by the losing party.” After the signing of the contract, COFCO Wine paid all the purchase price to G.V. as agreed upon, but G.V. never delivered the goods to COFCO Wine, which violated the contract. COFCO Wine believes that although the Sales Contract stipulates that disputes between the two parties should be resolved through arbitration, the arbitration will be conducted in Switzerland, since there is no arbitration institution and the agreed place of arbitration is Switzerland, which is the name of the country, and there is no agreement on which arbitration institution in Switzerland to conduct the arbitration, the place of arbitration is unknown. Therefore, it is requested to confirm that the arbitration clause in the abovementioned sales contract is invalid.

After hearing, the court found that the Swiss Federal Code of Private International Law, Chapter 12 International Arbitration, Article 176 provides that “I. Scope of application: Place of arbitration. 1. The provisions of this chapter shall apply to all arbitrations in which the arbitral tribunal is in Switzerland and at least one of the parties has neither domicile nor permanent residence in Switzerland at the time of conclusion of the arbitration agreement. 2. If the parties expressly state in the arbitration agreement or later by agreement exclude the application of this chapter and agree to apply Part III of the Swiss Civil Code. 3. The place of arbitration shall be determined by the parties to the arbitration or the appointed arbitral institution, or by the arbitrator (in the absence of the former).” Article 179 states that “The composition of the arbitral tribunal: 1. The parties may appoint, revoke or replace arbitrators by agreement. 2. If the parties do not agree, a request may be made to the judge of the court of the place of the arbitral tribunal. The judge will apply by analogy the provisions of the Swiss Civil Code regarding the appointment, revocation or replacement of arbitrators. 3. When a judge is authorized to appoint an arbitrator, unless a brief review shows that there is no arbitration agreement between the parties, the judge shall make the appointment.”

The Beijing No. 3 Intermediate Court of China held thatFootnote 20 the Sales Contract clearly stipulates that the dispute resolution method is arbitration, and the arbitration is conducted in Switzerland, but it does not stipulate the application of law and the arbitration institution. According to Article 18 of the Law of the People's Republic of China on the Laws Applicable to Foreign-related Civil Relations, the parties may choose the law applicable to the arbitration agreement by agreement. If the parties do not choose, the law of the place where the arbitration institution is located or the law of the place of arbitration shall apply. Although the Sales Contract involved in the case did not stipulate the applicable law, it agreed to conduct arbitration in Switzerland. Therefore, Swiss law was applied in this case to confirm the validity of the relevant arbitration clause. Chapter 12 of the Swiss Federal Code of Private International Law stipulates that “international arbitration” should meet two conditions: one is that the place of arbitration is in Switzerland, and the other is that at least one party's domicile, habitual domicile or place of business is not in Switzerland when the arbitration agreement is signed. The Sales Contract involved expressly stipulates that arbitration shall be conducted in Switzerland. Meanwhile, neither COFCO Wine nor G.V.’s domicile, habitual domicile or business offices are located in Switzerland. The arbitration stipulated in the involved Sales Contract complies with the above provisions. This case is a dispute arising from the Sales Contract involved, which is a property dispute between the parties and is arbitrable. Although the arbitration clause involved in the case does not specify an arbitration institution, Chapter 12 of the Swiss Federal Code of Private International Law stipulates that if the parties have not agreed on the composition of the arbitral tribunal, they may, in accordance with the provisions of Article 179, request the court of the place of arbitration to appoint arbitrator, that is, Switzerland recognizes ad hoc arbitration. Therefore, the arbitration clause involved does not violate the mandatory provisions of the Swiss Federal Code of Private International Law and should be deemed valid. COFCO Wine's request to confirm the invalidity of the arbitration clause in the Sales Contract it signed with GV is not supported.

The parties in this case did not agree on the applicable law of the arbitration agreement in the arbitration clause, so the law of the place of arbitration shall be Swiss law. According to the provisions of the Swiss Federal Code of Private International Law identified by the court, the court held that Swiss law recognizes ad hoc arbitration. Therefore, although this case only agreed on the place of arbitration and did not agree on the arbitration institution, the arbitration clause involved should still be considered valid. It can be seen that for ad hoc arbitration whose place of arbitration is outside China, as long as the applicable law of the arbitration agreement recognizes ad hoc arbitration, the arbitration agreement should be deemed valid, which also reflects the attitude of friendly arbitration and judicial practice of China's courts.

Secondly, the “arbitration or trial” arbitration agreement shall be deemed valid under the laws of California, USA. The applicant Water Solutions (Hong Kong) Limited, (hereinafter referred to as Water Solutions) and the respondent China Hongbo (Shenzhen) Co., Ltd. (hereinafter referred to as H.B. Company) applied for confirmation of the validity of the arbitration agreement in a case.Footnote 21 This case is a rare case in which a China's court applies American law and employs external legal experts to provide intellectual support to confirm the validity of an arbitration agreement.

Water Solutions requested confirmation of the validity of the arbitration clause signed between it and H.B. Company. The main reason is that the two parties signed a Manufacturing and Supply Agreement on September 11, 2007. Article 21.10 of the Agreement reads: Choice of Law; Disputes. This agreement shall be construed and enforced in accordance with the laws of the State of California, USA, without regard to its conflict of laws or choice of law rules. This agreement shall be deemed to be performed in Los Angeles, California. The parties irrevocably submit to the jurisdiction of the state or federal courts in Los Angeles, California, for any litigation or legal proceedings with respect to this agreement, and the parties waive any right to object to the jurisdiction or trial of the courts in Los Angeles, California based on forum non-conveniens or other arguments. In any action brought to enforce this Agreement, the prevailing party shall be awarded all costs and reasonable attorneys’ fees incurred by it. If the parties disagree on the rights and responsibilities or obligations of the parties under this agreement, the parties shall first resolve the dispute through informal consultations. If necessary and appropriate, the parties shall submit the dispute to arbitration. Arbitration proceedings may be commenced by either party upon written notice to the other party, and subsequent proceedings will be conducted in accordance with the arbitration rules and procedures of the American Arbitration Association. Any such arbitration shall be conducted with only one arbitrator in Los Angeles, California. Any such arbitration shall be governed by the applicable laws of the State of California (including the “discovery” provisions of the California Civil Code and the California Code of Civil Procedure), and the rules of the American Arbitration Association shall prevail. The arbitrator's award in any such arbitration shall have final binding force, and an award made pursuant to such arbitration may be enforced by any court of competent jurisdiction. The arbitration clause clearly stipulates that the place of arbitration is Los Angeles, California, USA, and the American Arbitration Association is the arbitration institution. Accordingly, the laws of the United States and the State of California are the laws applicable to the arbitration clause in this case. The above arbitration clause is valid and legally binding on the parties under the laws of the United States and the State of California. The applicant, Water Solutions filed an arbitration claim with the American Arbitration Association on November 11, 2014, and on November 17, 2014, sent the arbitration claim to the respondent by fax and FedEx. In a letter dated November 19, 2014, the American Arbitration Association confirmed receipt of the plaintiff's application for arbitration and set November 12, 2014, as the commencement date for the arbitration proceedings.

The main reasons for China H.B. Company's defense are as follows: Article 21.10 of the agreement stipulates that the jurisdiction should be governed by the Los Angeles court or federal court in California, USA, and the agreement also indicates that the arbitration procedure will be conducted in accordance with the American Arbitration Rules. The applicant, Water Solutions, has filed for arbitration in the United States on the dispute in this case. Therefore, the company's application to confirm the validity of the arbitration agreement has exceeded the jurisdiction of the Shenzhen Intermediate Court of China in Guangdong Province. Article 21.10 of the Agreement stipulates that the content of jurisdiction clause includes both litigation and arbitration. The abovementioned agreement is obviously in conflict, and the agreement on the jurisdiction of arbitration is unclear. This clause shall be invalid.

The main contents identified by the Shenzhen Intermediate Court are as follows: In the case of a contract dispute (claim for breach of contract) between Water Solutions and H.B. Company applied for an arbitration on November 11, 2014, according to the arbitration clause in the Manufacturing and Supply Agreement. The American Arbitration Association has accepted the case, and the case number is 01-14-001-9307.

Article 21.10 of the Manufacturing and Supply Agreement stipulates the dispute resolution method and applicable law, and the content is consistent with the representation of Water Solutions.

The arbitration agreement stipulates both litigation and arbitration. Whether the arbitration agreement is valid or not is one of the main issues of disputes between parties. After trial, the Shenzhen Intermediate Court held that:

  1. (1)

    Article 41 of the Law of the People’s Republic of China on the Laws Applicable to Foreign-related Civil Legal Relations stipulates that the parties may choose the law applicable to the contract by agreement. This case is a foreign-related contract dispute, and both parties expressly chose the law of California, USA, as the applicable law. The laws of the State of California in the United States include statutes and related precedents. Therefore, the parties have agreed on both litigation and arbitration regarding the dispute resolution method and whether the arbitration agreement is effectively applicable to the U.S. Federal Arbitration Act, the California Code of Civil Procedure, and the precedents of the U.S. federal courts and state courts shall be determined.

  2. (2)

    U.S. statutes on the validity of arbitration agreements. Article 2 of the Federal Arbitration Act titled “Validity, Irrevocability and Enforcement of Arbitration Agreements” stipulates that “A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Article 202 of the Federal Arbitration Act titled “Agreement or Award falling under the Convention” provides that “an arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract, or agreement described in section 2 of this title, falls under the Convention. An agreement or award arising out of such a relationship which is entirely between citizens of the United States shall be deemed not to fall under the Convention unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states. For the purpose of this section a corporation is a citizen of the United States if it is incorporated or has its principal place of business in the United States.” Article 1281 of the California Code of Civil Procedure provides that “a written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract”. Although the above US statutes do not directly stipulate how to determine the validity of the arbitration clause when both court litigation and arbitration are agreed upon in the dispute resolution clause, it is expressly stated that unless there are grounds for rescission provided by law, the arbitration agreement is valid, irrevocable and mandatory.

  3. (3)

    The Supreme Court of the United States applies the principles established in the interpretation of the disputed arbitration agreement by the precedents of the Federal Arbitration Act. The Supreme Court of the United States has established the principle of supporting arbitration in its precedents, including three aspects: firstly, a liberal federal policy should favor arbitration agreements; secondly, a clear federal policy should favor arbitration dispute resolution methods; thirdly, the resolution of any doubts regarding the scope of arbitrability shall be in favor of arbitration.

  4. (4)

    Precedents on how to determine the validity of an arbitration agreement in the case of both litigation and arbitration in the United States federal courts and state courts. Firstly, according to Precedents 1 to 8 of the U.S. Federal Court and State Court found by experts, the arbitration agreement is valid if the parties agree to both litigation and arbitration. For example, in the case of Internet E., Inc. v. DuroComm., Inc. heard by the North Carolina Court of Appeals in Precedent 2,Footnote 22 the License Agreement signed by the parties in this case includes both arbitration clause and choice of forum clause, the content of which is substantially the same as Article 21.10 of the Manufacturing and Supply Agreement signed by Water Solutions and H.B. Company in this case. Article 17.01 of the License Agreement sets forth the choice of forum clause, which reads as follows: The parties herewith stipulate that the State courts of North Carolina shall have sole jurisdiction over any disputes which arise under this agreement or otherwise regarding the parties hereto, and that venue shall be proper and shall lie exclusively in the Superior Court of Pitt County, North Carolina. Article 21.10 of the Manufacturing and Supply Agreement in the instant case is basically the same as the foregoing license agreement, except that the court of choice is a state or federal court in Los Angeles, California. Article 17.04 of the License Agreement in Internet E., Inc. sets out the arbitration clause, which reads as follows: “Unless the parties shall agree otherwise, all claims, disputes and other matters in question between the parties that arise out of or are related to this Agreement or the breach hereof, shall be decided by arbitration in accordance with the Commercial Rules of the American Arbitration Association then obtaining. The foregoing agreement to arbitrate shall be specifically enforceable under the prevailing arbitration law. The award rendered by the arbitrators shall be final……” The arbitration clause in Article 21.10 of the Manufacturing and Supply Agreement in the instant case is generally consistent with the arbitration clause in the License Agreement. In Internet E., Inc., the licensee of the license agreement took the dispute to the court, and the competitor filed a motion for compulsory arbitration under the license agreement. The motion was denied by the Superior Court of Pitt County. The contender then appealed to the North Carolina Court of Appeals. The Court of Appeal held that both the arbitration clause and the choice of court clause in this case were valid and that their effects were not in conflict. An appeals court overturned the Superior Court of Pitt County's decision.

Secondly, in Precedent No. 9 identified, that is Thiokol Corp. v. Certain Underwriters at Lloyd's, London heard by the Utah District Court,Footnote 23 the Utah District Court held that the choice of court clause and the arbitration clause in the insurance contract coexist, and they gave either party the right to waive arbitration and require the other party to submit the dispute to the court. It negates the validity of an arbitration agreement when both a choice of court clause and an arbitration clause exist in the contract. Comparing Precedent 9 with the instant case, there are substantial differences in the content agreed upon by the parties. Firstly, in the precedents, the service of suit clause is clear, which is more specific than the arbitration clause. The parties to this case, Water Solutions and H.B. Company, have the same choice of dispute resolution methods as arbitration and litigation, and the litigation method is not preferred. Secondly, in the precedents, the parties have different intentions to conclude the contract. The court in the precedent held that the insurance policy can be interpreted as follows: if the dispute arises from or is related to the insurance policy, arbitration may be conducted; if the defendant breaches the contract that not paying the due payment, the defendant should be required to submit the dispute to the court. In this case, Water Solutions and H.B. Company only made a general agreement on the disputes and did not specify which kind of disputes to apply for arbitration and which kind of disputes to litigate. Thirdly, in the precedent, the plaintiff chose to file a lawsuit with the court according to the service of suit clause. In this case, Water Solutions chose to apply for arbitration to the American Arbitration Association. Based on the above reasons, Precedent 9 of the U.S. District Court of Utah is significantly different from the situation in the instant case, and Precedent 9 cannot be applied to deny the validity of the arbitration agreement signed by Water Solutions and H.B. Company.

In summary, Water Solutions’ claim that the arbitration agreement is valid is consistent with the U.S. statutes chosen by both parties, the judicial principles of the U.S. Supreme Court and the principles established in the precedents of other U.S. courts, and its claim should be supported. The objection of the H.B. Company has no factual and legal basis and cannot be established. In accordance with the provisions of Article 41 of the Law of the People's Republic of China on Laws Applicable to Foreign-related Civil Legal Relations and Article 154 Paragraph 11 of China’s Civil Procedure Law (2012), the Manufacturing and Supply Agreement Article 21.10 titled “The arbitration agreement” is valid.

8 Arbitration Agreement in Standard Contracts

In recent years, in e-commerce activities, most e-commerce companies have drawn up arbitration clauses in the standard contract texts they provide. Standard clauses refer to clauses pre-drawn by the parties to regulate the rights and obligations of both parties for repeated use. Whether the arbitration clause in the standard contract is valid, it is generally necessary to check whether the e-commerce company has made a special reminder and whether it respects the autonomy of consumers. Party autonomy is the cornerstone of the arbitration system, and the jurisdiction of arbitration institutions depends on legal and valid arbitration clauses. This online arbitration agreement should also be in a statutory written form, that is, if the information contained in it can be retrieved for future reference, then it satisfies that the arbitration agreement is a written document reached based on the agreement of the parties.

In the case of the applicant Tianhui Holding Group Co., Ltd. (hereinafter referred to as T.H. Company) and the respondent Xiamen Bank Co., Ltd. Fuzhou Branch (hereinafter referred to as Fuzhou Branch) confirming the validity of the arbitration agreement,Footnote 24 the basic facts are: On July 15, 2015, T.H. Company and Fuzhou Branch signed the Xiamen Bank Line of Credit Agreement, which stipulated: “any disputes arising from or related to this agreement, both parties should be settled through negotiation; if the negotiation fails, both parties agree to resolve the matter in the following ways: submit the dispute to the Xiamen Arbitration Commission for arbitration.” Fuzhou Branch then applied to the Xiamen Arbitration Commission for arbitration on the grounds that T.H. Company had defaulted on the principal and interest of the loan. According to the applicant, T.H. Company, in accordance with Article 39 of China’s Contract Law (1999) (hereinafter referred to as the Contract Law): “[w]here a contract is concluded through the use of standard clauses, the party proposing the standard clauses shall observe the principle of fairness in defining the rights and responsibilities of the parties, and the said party must take reasonable steps to draw the other party’s particular attention to those clauses which eliminate or limit the other party’s liabilities, and must, where requested by the other party, explain the effect of the said clauses.” The litigation agreement in this case was a standard contract, but Fuzhou Branch did not remind the applicant of the arbitration clause, only after the staff of Fuzhou Branch completed the filling, and T.H. Company was required to affix a seal at the place of receipt for confirmation. Moreover, the actual business addresses of both parties are in Fuzhou, and Fuzhou Branch resolved the dispute in this case in Xiamen, which obviously increased the burden of litigation for T.H. Company and deprived TH Company of the right to choose litigation to resolve disputes. According to Article 40 of the Contract Law, “where a standard clause possesses one of the characteristics set out in Article 52 or Article 53 of this Law, or where the clause operates to exclude the liabilities of the party proposing the standard clause, or to increase the liabilities of the other party, or to remove important rights enjoyed by the other party, the said clause shall be without effect.” The arbitration clause under the dispute agreement should be invalid, so it is hereby applied to confirm that the arbitration clause stipulated in the dispute agreement is invalid. The respondent, Fuzhou Branch, provided the opinion that the agreement involved in the case provides two dispute resolution methods, litigation and arbitration, for the parties to the contract to choose. Both parties manually choose the arbitration method to resolve the dispute, so this clause is a clause that needs to be selected by both parties when concluding the contract, and does not belong to the standard clause. The arbitration clause in this case is a clause for the settlement of disputes between the two parties, which is applicable to both parties and does not exempt, limit, aggravate, or exclude the rights and responsibilities of a single party, and the arbitration clause is not “exemption or limitation of its responsibility” stipulated in Article 39 of the Contract Law or the “exemption of its responsibility, aggravation of the other party's responsibility, exclusion of the other party's main rights” stipulated in Article 40. Moreover, the evidence provided by T.H. Company shows that the venue of the hearing notified by Xiamen Arbitration Commission is in Fuzhou, and there is no situation in which T.H. Company has increased its litigation burden. Therefore, the arbitration clause in the agreement involved in the case is not invalid as stipulated in the Contract Law.

The facts identified by the court: T.H. Company and Fuzhou Branch signed the Line of Credit Agreement, in which Article 26 stipulates that “Any disputes arising from or related to this agreement should be settled through negotiation; if the negotiation fails, both parties agree to adopt the following methods:

□ File a lawsuit with the people's court where the lender is located.

□ Submit the dispute to the following arbitration committee……

□ Submit the dispute to the arbitration committee where the lender is located for arbitration.

□ Submit the dispute to Xiamen Arbitration Commission for arbitration.”

In the four selection boxes (□), the first and third are handwritten with a cross (×), the second and fourth are handwritten with a tick (√), and the word “Xiamen” is handwritten in the blank of the horizontal line.

After the two parties signed the agreement, no other supplementary agreement was reached on the dispute resolution method.

The Xiamen Intermediate Court of China in Fujian Province held that the dispute agreement was an true declaration of intention of both parties and was legal and valid after both parties signed and sealed. The dispute resolution clause provides a variety of options for selection, and it is a clause that needs to be negotiated and selected by both parties when the contract is concluded. When the two parties signed the contract, they had manually chosen to resolve the dispute through arbitration by the Xiamen Arbitration Commission. The content of the arbitration clause complies with the provisions of Article 16 of China’s Arbitration Law and should be confirmed as valid in accordance with the law. Even if the clause is filled out by Fuzhou Branch in advance, the dispute resolution method is equally applicable to both parties, and there is no situation of “exempting its responsibility, aggravating the other party's responsibility, and excluding the other party's main rights” stipulated in Article 40 of the Contract Law, not an invalid form clause. T.H. Company's claim that the arbitration clause is an invalid standard clause lacks factual and legal basis and should be rejected.

Among the top ten civil and administrative cases in the people's court in 2015, there is a case in which the Tmall jurisdiction agreement was found to be invalid. In this case, the District Court of Haidian in Beijing held that Article 31 of the Interpretation of the Supreme Court of China on the Application of the Civil Procedure Law of the People's Republic of China (hereinafter referred to as “the Interpretation of the Civil Procedure Law”), which came into effect on February 4, 2015, stipulates: “where an operator uses standard terms to conclude a jurisdiction agreement with a consumer but does not prompt the caution of the consumer in a reasonable way, and the consumer claims the jurisdiction agreement is invalid, the court should support such claim.” In this case, the option of “agree to the agreement and register” provided by Tmall directly assume the plaintiff's approval of the content of Taobao Service Agreement. When clicking this option, the content of the “agreement jurisdiction” is not expressly stated, and you need to click the Taobao Service Agreement to view it. The Taobao Service Agreement has much content, and the “agreement jurisdiction” clause contains a great deal of cumbersome information. The court held that “taking a reasonable way to draw the attention of consumers” in the Interpretation of the Civil Procedure Law should mean that, under normal circumstances, common civil subjects can normally obtain information closely related to their rights and interests in a clear and obvious way. As far as this case is concerned, the jurisdiction agreement provided by Tmall in the abovementioned manner failed to meet the abovementioned standards. Article 40 of China’s Contract Law stipulates that “if the party providing standard terms exempts its liability, aggravates the other party's responsibility, and excludes the other party's main rights, the clause is invalid.” As far as online shopping is concerned, the goods purchased by the plaintiff and most consumers are usually not expensive, and their domicile or place of performance is far from the location of Tmall. If the jurisdiction clause is valid, consumers will additionally burden the travel expenses and time costs which are obviously higher than the commodity price, hindering consumers’ reasonable rights and appeals. In conclusion, the court deem that the jurisdiction agreement provided by Tmall was invalid.

With the continuous development of e-commerce, arbitration clauses may be embedded in the standard contracts in network transactions at any time. An arbitration agreement is a written document agreed upon by both parties. The arbitration clause in the standard contract drawn up by one party in advance must also meet the requirements of party autonomy; otherwise, the validity of the arbitration agreement may be affected. The above judgment of the District Court of Haidian provides a groundbreaking idea that can be widely used for solving the issues of jurisdiction and standard clauses in the era of e-commerce, microbusiness, and mass innovation. Although the standard clauses on jurisdiction formulated by Taobao do not directly exclude consumers’ right to sue, they objectively create great obstacles for consumers to realize their right to sue. Affected by the market dominance of Taobao and Tmall in the e-commerce field, it is often difficult for consumers to reject such concealed standard clauses that prevent consumers from realizing their rights. Focusing on protecting the right and interests of consumers and from the perspective of maintaining social fairness and market order the court is correct to deem that the arbitration agreement in this type of standard contract is invalid.

However, standard contracts do not necessarily invalidate the arbitration clause. Not all clauses in standard contracts are standard clauses, nor are the arbitration clauses in standard clauses necessarily standard clauses. As long as the parties are given the right to choose the dispute resolution method, for example, multiple options are listed for the parties to choose or fill in, then such arbitration clauses should be considered to be signed after negotiation between the two parties and generally should be recognized as valid.

For example, both parties stated in the special clause of the Construction Project Contract that “both parties agree to choose one of the following ways to resolve the dispute: apply to the Shuangyashan Arbitration Commission for arbitration; file a lawsuit with the competent court.” In this article, the “Shuangyashan Arbitration Commission” is filled in and written on the horizontal line of the standard contract, and the other contents are the original text in the standard contract. Each option is accompanied with a check box. Then, the core question is whether it can be inferred from the arbitration institution’s name stated in handwriting that the two parties have expressed their intention to choose arbitration only by and whether there is an arbitration agreement.

There is a common dispute resolution clause in the contract text, that is, the litigation and arbitration clauses are separately listed to provide the contract parties with options, such as “If a dispute arises during the performance of this contract, if the parties cannot resolve it through negotiation, it shall be resolved in option ____: A. Lawsuit. It shall be under the jurisdiction of the people's court of the place where Party A resides. B. Arbitration. Submit to the _____ Arbitration Commission for arbitration in accordance with its arbitration rules.” Since such clauses usually require the signatory of the contract to manually check or fill in the specific dispute resolution method, any improper filling, for example you choose the arbitration method but fail to fill in the specific arbitration institution or fail to check in the required way, disputes may arise. In the above case, only the arbitration institution was manually filled in, but the dispute resolution method was not selected. There are two different interpretations. One view is that although the dispute resolution method is not checked, but the name of the arbitration institution is filled in by handwriting, according to the principle that handwritten terms enjoy priority over printed terms, it should be deemed that the parties have made a special agreement to choose arbitration as the dispute resolution method. The other point of view is that the parties did not check according to the agreement of the contract terms. According to textual interpretation, two parties have not reached an agreement on the method of dispute resolution. If there is no arbitration agreement, there is no arbitration clause.

The reason for the conflict between the above two viewpoints is that different contract interpretation rules are applied. The first view is based on that the rationale that handwritten terms enjoy priority over printed terms has its rationality. Handwritten clauses are often determined by the parties through negotiation after the printed clauses are formed. The parties revise or supplement the printed clauses by handwriting, conforming to the principle of party autonomy, so it can be regarded as superior to the printed clauses. The common law rules of interpretation include “unless the parties clearly show the contrary meaning, handwritten terms of a contract take precedence over typed or printed terms.” However, handwritten terms over printed terms are not generally applicable rules of interpretation. China’s law seems to only make clear provisions in the judicial interpretation of insurance law. Article 14 of Interpretation (II) of the Supreme Court of China on Several Issues Concerning the Application of the Insurance Law of the People's Republic of China (hereinafter referred to as Interpretation II of the Insurance Law) stipulates: “If the contents recorded in the insurance contract are inconsistent, the following rules shall prevail: …(2) If the nonstandard terms are inconsistent with the standard clauses, the nonstandard terms shall prevail.… (4) If there is both printed and handwritten content in the insurance certificate, the handwritten part signed and sealed by both parties shall prevail.” The principle that handwritten terms take precedence over printed terms have its applicable conditions, that is, when the content of handwritten terms and printed terms are inconsistent or conflicted. According to Article 14 of Interpretation II of the Insurance Law, the premise of taking handwritten content as the standard is that “the content recorded in the insurance contract is inconsistent”. If the parties in this case handwritten “agree to submit to arbitration in X Arbitration Commission”, in this case, both parties agree that “agree to submit to arbitration” can be understood as the two parties having modified the printed terms and replaced the previously agreed checked requirement, and it should be recognized that both parties’ arbitration agreements were reached. The second view applies the method of textual interpretation. Article 125 of the Contract Law stipulates: “[w]here the parties are in dispute over the interpretation of clauses of the contract, the true meaning of the said clauses shall be determined on the basis of the words used in the contract, other contractual clauses of relevance, the purpose of the contract, trading habits, and the principles of honesty and trustworthiness.” The interpretation rules applicable to exploring the true meaning of the parties in the contract terms include textual interpretation, overall interpretation, purpose interpretation, customary interpretation, fairness and good faith interpretation. In these rules of interpretation, the primary method for judging the true intention of the parties is the method of textual interpretation, that is, the literal expression of the parties declaration of intention. If the precise meaning of the clause cannot be determined by the textual interpretation, other interpretation methods can be used to determine implications of the contract terms and fill gaps in contracts. Ultimately, the Supreme Court of ChinaFootnote 25 believed that the parties in the above cases did not select the dispute resolution method before the options, indicating that the parties did not reach an agreement on the dispute resolution method. In this regard, there are also objections that it is not appropriate to interpret the meaning too mechanically. The so-called text should be judged in the specific circumstance. In the above case, it is obvious that the parties have made a choice, that is, arbitration; otherwise, the name of the arbitration institution will not be filled in by handwriting. Filling in the name of the dispute resolution institution during the negotiation process is equivalent to choosing a method, not just checking the box. From this point of view, simply taking the textual interpretation in this case cannot determine the textual meaning of the clause. It’s supposed to interpret the dispute clause in combination with purpose interpretation and other methods.

Even if the arbitration clause is reached in the form of standard clauses, if it follows the provisions of Article 39 of the Contract Law to “observe the principle of fairness in defining the rights and responsibilities of the parties, and the said party must take reasonable steps to draw the other party’s particular attention to those clauses which eliminate or limit the said party’s liabilities, and must, where requested by the other party, explain the effect of the said clauses”, and there is no circumstance stipulated in Articles 52 and 53 of the Contract Law, there is no such thing as the party who provides the standard clauses exempts its responsibility, aggravates the other party’s responsibility, and excludes the other party's main rights, then it will not be invalid only because it is a standard clause.