The independence of arbitration agreements is a widely recognised legal principle. It establishes that arbitration clauses within a contract are autonomous and operate as separate agreements, distinct from other provisions. Their existence, validity and governing law are independent of the main contract. Even if the main contract is not concluded, has not taken effect, or is deemed invalid, the arbitration clause can still independently come into effect and remain enforceable.
A case in point
Under Chinese law, as long as an arbitration agreement contains the essential elements prescribed by the Arbitration Law, courts generally adopt a pro-arbitration stance, striving to affirm the validity of arbitration agreements. A notable example is Supreme People’s Court guiding case No. 196: Luck Treat Limited v Shenzhen Zhongyuancheng Commercial Investment (2019), which involved a dispute over the validity of the arbitration agreement.
Dennis Deng
Partner
Anli Partners
Arbitrator
BIAC and SCIA
Luck Treat listed its equity in a company for transfer on the China Beijing Equity Exchange (CBEX), with Zhong Yuan Cheng qualifying as the sole transferee. The parties entered negotiations over the transaction documents for the equity transfer. During this process:
(1) Luck Treat provided Zhong Yuan Cheng with two standard templates from the CBEX, namely the equity transfer contract and the debt settlement agreement, both of which included arbitration clauses. Zhong Yuan Cheng responded with proposed revisions to the contracts, including changes to the designated arbitration institution, ultimately leading to revised arbitration clauses.
(2) Luck Treat responded to Zhong Yuan Cheng’s proposed revisions, incorporating them into draft contracts and sending them back for review. It also stated: “The contracts confirmed by your company and ours will be submitted to CBEX and our internal approval processes. Only after final confirmation by CBEX and our group company can the contracts be signed (if there are any further modifications, we will consult with your company again).” However, Luck Treat did not object to the revised arbitration clauses.
(3) Zhong Yuan Cheng signed the draft contracts and returned them to Luck Treat, with the arbitration clauses reflecting its proposed revisions.
Subsequently, Luck Treat applied to the court, seeking a declaration that the arbitration clauses in the two contracts were invalid. Its primary argument was that arbitration clauses cannot exist independently of the main contracts, and that there was no clear mutual intention between the parties to establish arbitration agreements separate from the main contracts.
Arbitration clauses’ independence
Arbitration clauses, as the primary form of arbitration agreements, are typically embedded alongside other contractual provisions within the same document. Granting arbitration clauses their own independence is therefore of greater practical significance than merely emphasising the autonomy of arbitration agreements in general. In essence, the independence of arbitration agreements primarily refers to the separability of arbitration clauses from the main contract.
Article 10(2) of the Interpretation of the Supreme People’s Court concerning Some Issues on the Application of the Arbitration Law of the People’s Republic of China further clarifies: “If the parties conclude an arbitration agreement when entering into a contract, the validity of the arbitration agreement is not affected by the failure of the contract to be established.”
This legal principle enables arbitration clauses to be examined separately from the main contract when determining their validity and enforceability. Only when necessary should the validity or formation of the main contract be reviewed. This case follows the same principle, prioritising the determination of the arbitration clause’s validity based on the specific circumstances.
In this case, both contracts at issue contain arbitration clauses, and both parties consistently agreed to resolve disputes through arbitration. Further, the parties negotiated and adjusted the arbitration institution to be designated in the clauses.
The above-mentioned action in (2) constitutes Luck Treat’s offer to Zhong Yuan Cheng, which incorporates Zhong Yuan Cheng’s proposed revisions to the arbitration clauses, including the designation of the arbitration institution. The point in (3) constitutes Zhong Yuan Cheng’s acceptance of the arbitration clauses, finalising the formation of valid arbitration clauses in both contracts, with the designated arbitration institution being the one revised by Zhong Yuan Cheng. Although the parties continued to negotiate other aspects of the contracts, the arbitration clauses remained uncontested.
Although Luck Treat and its representatives did not affix their seal or signatures to the final contract documents, which is a formal requirement for the contracts to become effective under Chinese contract law, article 10(2) of the interpretation provides that the validity of the arbitration clauses remains unaffected by the non-establishment of the main contracts. Since the parties had already reached an arbitration agreement, the question of whether the contracts themselves were established does not require further adjudication, and should instead be resolved during arbitration proceedings.
China’s Arbitration Law stipulates that a valid arbitration agreement must include the following elements:
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- An expressed intention to submit to arbitration
- The matters to be arbitrated
- The chosen arbitration commission
In this case, both contracts contained arbitration clauses that satisfied these requirements. During negotiations, Luck Treat raised no objections to Zhong Yuan Cheng’s revision of the arbitration institution, implicitly confirming the selection of the arbitration commission.
Luck Treat argued that “arbitration clauses cannot exist independently of the main contract, and there was no clear mutual intention between the parties to establish an arbitration agreement separate from the main contract”. However, it is inconsistent with the relevant provisions of the Arbitration Law and its interpretation.
Luck Treat did not claim that its statement: “The contracts confirmed by your company and ours will be submitted to CBEX and our internal approval process. Only after final confirmation by CBEX and our group company can the contracts be signed (and we will consult with your company again if further modifications are necessary)” extended to the arbitration clauses in the two contracts.
The central issue in this dispute, therefore, is not whether the arbitration clauses required final approval by the CBEX and Luck Treat’s parent company, but whether the non-establishment of the main contract affects the validity of the arbitration agreement. Under the pro-arbitration approach embedded in Chinese law, courts are inclined to affirm the validity of arbitration agreements wherever possible.
Dennis Deng, a partner at Anli Partners and an arbitrator of BIAC and SCIA
Anli Partners
35-36/F, Fortune Financial Center
5 East 3rd Ring Middle Road
Chaoyang District, Beijing 100020, China
Tel: +86 10 8587 9199
E-mail: dengyongquan@anlilaw.com
www.anlilaw.com
