Web alert: Arbitration Agreements with Chinese Counterparts

Ensuring arbitration agreements and awards are upheld and enforceable in mainland China is a minefield. But there are ways of reducing the risk. When negotiating charterparties or contracts of carriage with Chinese counterparts, steps can be taken to help ensure an arbitration agreement is considered valid by Chinese courts.

According to Arbitration Law of the People’s Republic of China:

• “A [Chinese] court shall not accept an action initiated by one of the parties if the parties have concluded an arbitration agreement, unless the arbitration agreement is [considered] invalid”.
• “An arbitration agreement is invalid if it does not specify an arbitration institution unless both parties can reach a supplemental agreement”.

So for example, if the parties stipulate “English law, London arbitration”, a Chinese court will not consider that enough to be a valid arbitration agreement than one arbitration institution in London capable of determining the dispute, then the parties must specify which institution. For London this will invariably be the LMAA. If an institution is not specified, the parties are still free to supplement the agreement at a later stage and agree an institution. However, by this point, when a claim will invariably have arisen between the parties, it may be too late. If a member has reached a stage where they wish to arbitrate they might find it difficult to have their Chinese counterparty agree to the identity of the arbitration institution when that party is about to face a claim.

When negotiating with Chinese counterparts, therefore, the club recommends that the LMAA (or another named institution) is expressly referred to in every arbitration agreement incorporated into the relevant contract. Furthermore, for bills of lading, general words incorporating the terms of the charterparty are not considered sufficient by Chinese courts, even if the charterparty arbitration agreement refers to the LMAA (or another named institution). To be considered a valid arbitration agreement the bill of lading must contain its own (valid) arbitration agreement and not merely incorporate another.

Finally, often a time charter contains an express provision permitting charterers to order an Owner to deliver cargo without production of the original bills, in return for a letter of indemnity (LOI). Such clauses often refer to the International Group LOI’s (which can be found here). Those LOIs make reference to English law and the jurisdiction of the High Court. English High Court decisions are unenforceable in China however. For this reason, whenever negotiating with Chinese counterparts the LOI should include a valid arbitration agreement instead.

This article intends to provide general guidance on the issues arising. It is not intended to provide legal advice in relation to any specific query. The law is also not static. If in doubt, The Standard Club is always on hand to assist.

The Standard Club would like to thank James Cottrell for his contributions to this article.

Source: International Energy Law Review (I.E.L.R.) 2015, 5, 199–201