Mar 21, 2023
China’s Supreme People’s Court (“SPC”) recently released a Guiding Case indicating, inter alia, that the existence of an arbitration clause is not affected by non-establishment of the contract in which it is contained.
The case, Luck Treat Ltd. v. Shenzhen Zhong Yuan Cheng Commercial Investment Co., Ltd., was adjudicated by a part of the SPC itself, specifically, the China International Commercial Court (“CICC”), with the ruling issued on 18 September 2019. On 27 December 2022, the SPC selected the case as Guiding Case No. 196.
The core of the case concerns the prominent principle of the “separability of an arbitration agreement”, i.e., an arbitration clause in a contract has a certain legal status independent of the contract. Ultimately, the SPC ruled that the arbitration clause in this case was (validly) formed and effective without needing even to consider whether the contract in which it was contained was itself formed.
Factual and Procedural Background
On 29 March 2017, Luck Treat Limited (“Luck Treat”), a company incorporated in the British Virgin Islands (“BVI”), publicly listed its wholly-owned subsidiary Newpower Enterprises Inc. (“Newpower”), another company incorporated in the BVI, for sale via the China Beijing Equity Exchange (“CBEX”). After a kind of bidding process administered by the CBEX, and including (as one of the final steps of that process) the payment of a “security deposit” (of RMB 270 million), the CBEX appears to have “confirmed” the “qualification” of Zhong Yuan Cheng Commercial Investment Holdings Co Ltd. (“Zhong Yuan”), a company incorporated in the PRC, as the buyer of Newpower.
On 9 May 2017, Luck Treat sent to Zhong Yuan an email in which was written:
“Attached are the two contracts and the attachments previously provided to your company. We will supplement the contracts based on the terms negotiated at today’s meeting and submit them to CBEX for review as soon as possible. At the same time, please note your proposed amendments on the version of the contracts previously provided as comments and send over to us the comments in writing as soon as possible. For the next step, we will make final amendments based on CBEX feedback.”
Among the attachments to the above was an “Equity Transfer Contract” in which was written, inter alia: “This Contract shall take effect upon signature and seal by the legal representatives or authorized representatives of [Luck Treat] and [Zhong Yuan]”. The Equity Transfer Contract also included a clause specifying that any dispute between the parties in connection with the interpretation or performance of the Equity Transfer Contract shall, if not resolved by the parties through negotiation, be submitted to the Beijing Arbitration Commission for arbitration (as amended, “Arbitration Clause”).
On 10 May 2017, Zhong Yuan sent to Luck Treat an email in which was written:
“The attachment is our company’s proposed amendment to the Contract. Please consider carefully and confirm it based on the principles of equality, fairness, and validity after the signing of the Contract.”
In the version of the Equity Transfer Contract attached to the May 10 email, the Arbitration Clause was amended only insofar as the arbitration institution was changed to the Shenzhen Court of International Arbitration.
On 11 May 2017, Luck Treat sent to Zhong Yuan a response email in which was written:
“[W]e hereby send the initialed version of the revised contract to your company. Please reply as soon as possible upon receipt of the attachments. The contracts confirmed by your company and us will be submitted to CBEX and for our company’s internal review and approval process, and can be signed only after final confirmation by CBEX and our group companies (we will confirm with you if there is any change)”.
In the version of the Equity Transfer Contract attached to this May 11 email, the Arbitration Clause was the same as that in the above-mentioned May 10 email from Zhong Yuan.
Later that same day, Zhong Yuan sent to Luck Treat an email in which was written:
“Please find attached the scanned copies of the Equity Transfer Contract (initialed version) and the Debt Settlement Agreement (initialed version) signed by our side and the instruction letter for signing in the project and so on. Please check and acknowledge.”
In the version of the Equity Transfer Contract attached to this later May 11 email, the Arbitration Clause was the same as that in the May 10 email (from Zhong Yuan) and in Luck Treat’s May 11 email. It appears that Zhong Yuan also delivered to Luck Treat a hard copy of the Equity Transfer Contract signed by Zhong Yuan’s representative and stamped with Zhong Yuan’s seal.
On 17 May 2017, Luck Treat sent to Zhong Yuan an email in which was written:
“Our Group is currently undergoing the final review and approval process for the Shenzhen Project. If it goes well, the plan is to hold a signing ceremony at the Grand Metropark Hotel Beijing on Friday morning. The particular circumstances will be notified to your company after our company’s confirmation. We hereby send the versions pending signature of the Equity Transfer Contract and the Debt Settlement Agreement to your company in advance for verification.”
In the version of the Equity Transfer Contract attached to the May 17 email, the Arbitration Clause was the same as that in the May 10 email, in Luck Treat’s May 11 email, and in Zhong Yuan’s May 11 email (and the hard copy version sent by Zhong Yuan to Luck Treat on or after May 11).
On 27 October 2017, after several other emails between the parties concerning terms related to payment of the purchase price but apparently not concerning the Arbitration Clause, Luck Treat “formally provide[d] notice” to Zhong Yuan “of cancellation of the transaction”.
On 4 April 2018, Zhong Yuan filed an application for arbitration with the Shenzhen Court of International Arbitration, but Luck Treat (apparently timely) applied to the Shenzhen Intermediate People’s Court of Guangdong Province for confirmation that no arbitration agreement existed between the parties.
On 11 September 2018, the Shenzhen Intermediate People’s Court accepted the case, but the case was subsequently transferred to the CICC, specifically, the First International Commercial Court (“Court”).
While the Court focused on several issues, including the nature of Luck Treat’s application to the Court and the Court’s jurisdiction, the core issue of the case was whether the parties had agreed to arbitration in the context of the Equity Transfer Contract and in particular whether the Arbitration Clause was formed (or “established”).
Luck Treat maintained that neither the Equity Transfer Contract nor the Arbitration Clause was established.
Regarding the Equity Transfer Contract, Luck Treat argued, inter alia:
Further, regarding the Arbitration Clause, Luck Treat argued that no arbitration clause can be established separately from the matrix contract, the parties had no express intention to enter into an arbitration agreement separately before entering into the Equity Transfer Contract, and therefore no arbitration agreement was established.
Zhong Yuan maintained that both the Equity Transfer Contract and the Arbitration Clause were established.
Regarding the Equity Transfer Contract, Zhong Yuan argued variously based on the bidding and purchase process administered by the CBEX (and several “legal documents”, other than the Equity Transfer Contract, involved in the process) that the parties had completed the offer-and-acceptance process and the Equity Transfer Contract was established.
Further, regarding the Arbitration Clause, Zhong Yuan argued:
Zhong Yuan also referred to an argument putatively raised by Luck Treat, that the Arbitration Clause did not exist on the grounds that the texts of the transaction contracts had not been internally approved within its group, and Zhong Yuan argued that “forced” on Zhong Yuan “the effect of “Luck Treat’s internal approval” and “confused internal management relations with external legal relationships”.
Findings and Rulings
On the core issue, the Court expressed the following positions regarding relevant law:
Based on the above positions regarding relevant law, the Court made the following findings in this case:
Based on the above findings, as well as the Court’s treatment of some other issues not core to the case (or this case insight), the Court dismissed Luck Treat’s claim that no arbitration agreement between the parties existed.
This case involves several issues worth deep consideration, but by far the most interesting and consequential is the position, put simply in the “Main Points of the Adjudication” of the Guiding Case in which the Court’s ruling was packaged (No. 196), that the formation and validity of an arbitration clause are not affected by whether or not the contract containing the arbitration clause has been formed.
Put even more simply, if two parties are negotiating a contract, one of whose terms provides for all disputes to be submitted to arbitration, even if the parties ultimately do not enter into the contract, the provision for arbitration may be deemed established and bind the parties to submit disputes to arbitration (including a dispute over whether they entered into the contract).
The SPC’s position is based on the fundamental principle – relatively widely accepted internationally – of the separability of an arbitration agreement, as well as on fundamental principles of contract formation, such as offer and acceptance. However, this case does not necessarily follow all major international practices in this regard.
Just weeks before Guiding Case No. 196 was released, the English Court of Appeals ruled on a formation issue under the principle of separability. In DHL v. Gemini, charterers had been negotiating with a shipowner’s broker on the terms of a voyage charter when the latter circulated a kind of term sheet (a “fixture recap”, common in shipping practice) that included an arbitration clause but also the stipulation “sub[ject to] shipper/receivers approval” at the top of the term sheet. Approval not being obtained, the charterers notified the shipowner that the transaction would not proceed, but the shipowner initiated arbitration based on the arbitration clause in the term sheet. When the charterers challenged the resulting award on the ground that the arbitrator did not have jurisdiction, on the underlying basis that there was no arbitration agreement, the English High Court supported the charterers, and the Court of Appeals affirmed.
Specifically, DHL v. Gemini (like other cases before it) distinguished between claims that a matrix contract was never concluded and claims that a matrix contract was void, voidable, or otherwise invalid: the principle of separability may be said to “insulate” an arbitration clause against the second kind of claim (unless the claim goes directly to the validity of the arbitration clause itself) but not the first kind of claim. Ultimately, the principle of separability does not mean an arbitration clause is entirely distinct from the matrix contract for all purposes; the formation of an arbitration clause should be determined based on usual contract formation principles, and issues affecting the formation of the matrix contract may affect the formation of the arbitration clause. In the case before them, the English courts found that the “sub shipper/receivers approval” indicated that the parties did not have any intention to contract at all, including regarding arbitration, until the “subject was lifted” (approximately, though not exactly, until the condition was fulfilled or waived).
The SPC recognized the two kinds of claims, formation versus validity, but seems to have drawn them together in several respects, most notably in its core holding: claims that a matrix contract was not formed, just like claims that it is invalid, “do not affect” the arbitration clause. On the other hand, at one level, the approach of the SPC and that of the English courts were similar: both appeared to boil the determination down to the question of whether the arbitration clause itself was established, according to principles of contract formation.
For parties wondering whether they may be deemed to have agreed to arbitration in situations similar to that of Guiding Case No. 196 or DHL v. Gemini, e.g., incomplete negotiations of a contract containing an arbitration clause, the Guiding Case (and underlying ruling) leave much to be desired.
First, the SPC does not clarify when, if indeed ever, should the matrix contract’s formation be considered in determining whether an arbitration clause in it has been formed. This lack of clarification encompasses the issue of contracts subject to preconditions, examined at length in DHL v. Gemini, but extends beyond it, to any and all reasons a matrix contract may be deemed not formed.
Second, the SPC’s analysis of relevant contract law is scant – almost non-existent itself – and raises numerous questions. For example, the SPC does not explain why it deems Luck Treat’s May 11 email and its attached (“initialed”) version of the Equity Transfer Contract as the offer (and Zhong Yuan’s response on the same day as acceptance), rather than any earlier or later exchanges. Presumably, Luck Treat’s May 9 correspondence could also be deemed an offer; apparently, Zhong Yuan’s response on May 10, by changing the arbitration institution, could not constitute acceptance, but then was it a counter-offer, and if so, why was Luck Treat’s May 11 correspondence not deemed acceptance (rather than an offer)?
Further, what is the significance of the SPC’s finding that the parties subsequently, though negotiating other matters of the Equity Transfer Contract, did not have “any dispute over the Arbitration Clause”? How would the determination of the formation of the Arbitration Clause have changed if, e.g., after Zhong Yuan’s May 11 correspondence, either party sought to amend the Arbitration Clause? The lack of clarity is exacerbated by the enigmatic statement in the Court’s ruling (but not replicated in the Guiding Case) that “[i]n light of the circumstances of negotiation in this case, both parties have always jointly agreed to submit the dispute for arbitration” (emphasis added).
The problem, in practical terms, is how parties negotiating contracts are to know whether and when arbitration clauses contained therein may be deemed formed and binding under PRC law: the SPC does not give many indications in this case, but rather leaves open the (perilous) possibility that an arbitration clause may be deemed formed as soon as parties have one back-and-forth exchange of draft versions of the contract in which the arbitration clause is not amended.
Finally, there is the question of signing/stamping, which has traditionally been a major component of PRC contract law – and which one could even try to take as a way to moderate the above view that parties may be deemed to have agreed to arbitration upon one back-and-forth exchange of draft contracts with an unchanged arbitration clause. The problem is that the SPC on the one hand did emphasize, though more in the ruling than in the Guiding Case, the fact that Zhong Yuan signed/stamped a version of the Equity Transfer Contract (and delivered it to Luck Treat), and even emphasized that the lack of signing/stamping by Luck Treat meant the (PRC Contract Law’s) requirement for the Equity Transfer Contract to be formed was not fulfilled, yet on the other hand the SPC did not find the formation of the Arbitration Clause affected by that lack of signing/stamping.
If, as the SPC holds, the formation of an arbitration agreement is to be determined independently according to contract law, and given PRC contract law in principle requiring both parties to sign/stamp a (written) agreement for it to be formed, how was the Arbitration Clause formed even without Luck Treat’s signing/stamping? Is signing/stamping by one party sufficient – or even relevant? Unfortunately, neither the Court’s ruling nor the Guiding Case appear to provide clear answers: therefore, to be on the safe side, parties who wish to avoid being deemed to have agreed on arbitration should assume that such a determination may be made by a PRC court regardless of any signing/stamping (or lack thereof).
In sum, for a party (like Luck Treat) who wishes to avoid being bound by an arbitration clause in a contract that has not been agreed, PRC legal advice should be sought on how best to protect its position.
 The CICC consists of two “courts” established by and within the SPC in June 2018, one in Shenzhen and another in Xi’an, staffed with judges of the SPC who have particular experience adjudicating cases involving international trade, treaties, etc. See, e.g., Provisions on Several Issues regarding the Establishment of the CICC (最高人民法院关于设立国际商事法庭若干问题的规定), issued by the SPC on 27 June 2018, effective as of 1 July 2018.
 Guiding Cases are selected by the SPC and, according to Article 7 of the Provisions of the Supreme People’s Court Concerning Work on Case Guidance, are cases that “courts at all levels should refer to when adjudicating similar cases”, especially for lower courts. Provisions of the Supreme People’s Court Concerning Work on Case Guidance (最高人民法院印发《关于案例指导工作的规定》的通知), passed by the Adjudication Committee of the SPC on 15 November 2010, issued on and effective as of 26 November 2010. The Chinese of “refer to” is “参照”, which under a more liberal translation may be “consult and follow”. Article 1 also stipulates that Guiding Cases “have guiding effect on the adjudication and enforcement work in courts throughout the country”.
 By way of brief explanation, without going into details, this method of sale appears to have been required under PRC law because Luck Treat’s (and therefore also Newpower’s) ultimate parent was a PRC state-owned entity.
 The email correspondence involved in this case was carried out by a number of the parties’ representatives, in at least some instances apparently employees not of the respective parties but rather of their respective affiliates.
 Alongside the Equity Transfer Contract was repeatedly circulated a “Debt Settlement Agreement”, which contained an arbitration clause that mirrored the Arbitration Clause in original content and amendment, and the parties regularly referred to both legal instruments during this case, but the Debt Settlement Agreement was subject to an additional complication (regarding the identity of the parties to it), and because the Arbitration Clause was sufficient for adjudicating the core issue of this case, the Debt Settlement Agreement is not dealt with in this case insight.
 Another attachment to the May 11 email from Zhong Yuan was a “Instruction Letter for Signing for the Transfer of 100% Equity in Newpower Enterprises Inc.”, in which was written: “We can sign the Equity Transfer Contract (initialed version) and the Debt Settlement Agreement (initialed version) with your company on 11 May 2017; we understand that the Equity Transfer Contract (initialed version) and the Debt Settlement Agreement (initialed version) are subject to compliance review by CBEX and then submission to CTS for approval, and the final signed version of the Equity Transfer Contract and the Debt Settlement Agreement shall prevail; we will accept your company’s arrangement regarding the formality of signing of the Equity Transfer Contract and the Debt Settlement Agreement.”
 The reason for the transfer was given as follows: “[T]his Court considered that this case and the connected cases have great legal significance, and the hearing conducted by the China International Commercial Court will be conducive to consistent application of the law and improvement of efficiency of dispute resolution, so this Court ruled that this case shall be heard by the First International Commercial Court of the Supreme People’s Court in accordance with of Paragraph 1 of Article 38 of the Civil Procedure Law of the People’s Republic of China and Paragraph 5 of Article 2 of the Provisions of the Supreme People’s Court on Several Issues Regarding the Establishment of the International Commercial Court.”
 The version of the PRC Contract Law (中华人民共和国合同法) in effect at the time of this case’s adjudication was the one promulgated by the Standing Committee of the National People’s Congress on 15 March 1999 and effective as of 1 October 1999. However, the PRC Contract Law was abrogated upon the coming into effect, on 1 January 2021, of the Civil Code of the People’s Republic of China (中华人民共和国民法典), promulgated by the Standing Committee of the National People’s Congress on 28 May 2020. The principle rules of contract in China currently in effect are those contained in the PRC Civil Code, which while based on the provisions of the PRC Contract Law, are somewhat different.
In place of PRC Contract Law Article 32, PRC Civil Code Article 490 provides: “Where the parties conclude a contract in the form of a written agreement, the contract is formed at the time when the parties all sign, stamp, or put their fingerprints on the memorandum. Prior to signing, stamping, or putting their fingerprints thereon, where one of the parties has already performed the principal obligation and the other party has accepted the performance, the contract is formed at the time of such acceptance. Where a contract is required to be concluded in writing in accordance with laws or administrative regulations or agreed by the parties and the parties fail to make the contract in writing, if one of the parties has already performed the principal obligation and the other party has accepted the performance, the contract is formed at the time of such acceptance.”
 Most of the below text appears, word for word, in both the Court ruling and Guiding Case No. 196.
 PRC Contract Law Article 25, the law in effect at the time, provides: “A contract is executed at the time when the acceptance becomes effective.”
In its place, PRC Civil Code Article 483 provides: “A contract is formed at the time when an acceptance becomes effective, unless otherwise provided by law or agreed by the parties.” When the PRC Contract was in effect, if parties to a contract had separate agreements relating to contract formation, the courts would normally accept the terms of the separate agreements, regardless of whether the contract was signed or sealed. This practice was codified into law when the PRC Contract Law was integrated into the PRC Civil Code.
PRC Contract Law Article 26, the law in effect at the time, provides: “The acceptance becomes effective when the acceptance notice reaches the offeror. If an acceptance needs no notice, it becomes effective when an act of acceptance is performed in light of trade practices or as indicated by the offer. Where a contract is made in the form of text in electronic data, the provisions of Paragraph 2, Article 16 of this Law shall be applicable to the time of arrival of the acceptance.”
In its place, PRC Civil Code Article 484 provides: “Where an acceptance is made by means of notice, the time when the acceptance becomes effective shall be governed by the provisions of Article 137 of this Code. Where an acceptance notice is not required, the acceptance becomes effective when an act of acceptance is performed according to the parties’ course of dealing or as indicated by the offer.”
PRC Civil Code Article 137 provides: “An expression of intent made in a real-time communication becomes effective from the time the person to whom the intent is expressed is aware of its content. An expression of intent made in a form other than a real-time communication becomes effective from the time it reaches the person to whom the intent is expressed.”
 DHL Project & Chartering Ltd v Gemini Ocean Shipping Co Ltd  EWHC 181 (Comm),  EWCA Civ 1555.
 UK Arbitration Act 1996 sets out the principle of separability as follows: “Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.”
 Note, however, that though the SPC did write (in both the ruling and the Guiding Case) that “the requirement for a contract to become effective upon signature and seal by the legal representatives or authorized representatives of the parties was not fulfilled” (“不符合合同经双方法定代表人或授权代表签字并盖章后生效的要求”), in the very next paragraph, the SPC wrote that “it is unnecessary to determine whether or not the contracts in this case are established”.
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