A Judicial Methodological Perspective on the Validity of Transnational Arbitration Agreements
“Arbitration in Hong Kong and English Law to Apply” as an example
Song Lianbin^*

Abstract: “Arbitration in Hong Kong and English law to apply” - such a simple and concise arbitration provision is rather common in practice; nevertheless, many different methodologies are used to identify its validity. Analyzing cases in practice from the perspective of judicial interpretation is helpful to identify clearly what method of judicial interpretation should be adopted in such cases，so as to maintain consistency of judgment. In terms of fact finding, the method of contractual interpretation is mainly adopted for the purpose of defining the meaning of arbitration agreements, and clarifying whether the parties involved did in fact hold a true intention to arbitrate in the case a conflict arising. As for applicable laws, it is common that the judge will face the issue of choosing between two different laws, namely finding the applicable conflict rules and confirming the applicable law for arbitration agreement through rules of conflict. While confirming the governing law, special attention should be paid to investigation issues of foreign laws.?

Key words: arbitration agreements; transnational; governing law for arbitration; judicial interpretation, method,

II. Analysis: Vision of the Justification Process
The recognition of the validity of foreign-related arbitration agreements does not need a set of special ruling methods different from those applied in other civil and commercial cases concerning foreign interests. However, what should be noted is the significant difference in the application of ruling methods between judges and arbitrators. The specific characteristics of the latter may be discussed in another article; this article proceeds only from the angle of judges. By referring to the standard procedures of civil and commercial cases concerning foreign interests,¹ the recognition of the validity of foreign-related arbitration agreements has the following judicial process:

Dispute on the validity of a foreign-related arbitration agreement→Jurisdiction→Fact finding→Application of law→Arbitration

The formation of conclusion is also based on the syllogism of juridical logic:

T→R (R is applicable in any cases referred to by T, the major premise, namely, laws applicable to foreign-related arbitration agreements)
S＝T (S is one of the cases referred to by T, the minor premise, namely, the existence and true meaning of foreign-related arbitration agreements)
————
S＝R (R is applicable to S, namely, the conclusion)

Among them, application of law means law finding (finding laws), interpretation of law (clarifying the meaning of law) and use of law; the syllogism formula establishes subsumption relationships between a legal norm, the meaning of which has been determined, and a fact that has been recognized, so as to evaluate the fact with the norm and draw a conclusion on whether the expected consequence referred to by the legal norm has been produced. Dual findings of law have been found in the recognition of the validity of most of the foreign-related arbitration agreements. That is, the conflict rule is found first and then the governing law is determined based on it. In most domestic cases, law finding means the determination of substantive laws that may serve as the basis of ruling. What needs to be noted is that the above description does not intend to cover all the ruling methods used in recognizing the validity of foreign-related arbitration agreements. It only serves as a fundamental framework for analysis.

i. Analysis of the ruling of first instance
The parties to this case did not have objections to the existence of the arbitration clause in the Voyage Charter and its representation, the point of difference lay in the opinions on the legal evaluation of the clause: the plaintiff considered that the arbitration clause was invalid, so it filed a lawsuit with the court on the substantive dispute. The defendant argued that the arbitration clause was valid, that the court had no jurisdiction over this case and, according to the provisions of relevant laws of our country, this case should be arbitrated by Hong Kong International Arbitration Centre, the only arbitration body in Hong Kong. The details of this case and the controversial points are relatively straightforward. Here, the judge is required to do two things: determine the material facts and apply the relevant laws. That is to say, in order to reach the ruling conclusion, the minor premise should be determined before the major premise. The conclusion may only be correct with a correct premise. The main reason for determining the minor premise here is that only once the lawsuit has been filed by the parties may we find laws more effectively and then determine the major premise. This is not only consistent with the laws of logic, but also the limitation on the judge’s choice of law. That is, the judge should not be dogmatical and must proceed from the details of the case.

1. With respect to the minor premise, the judge must determine the true meaning of the disputed arbitration clause. In this case, the judge should differentiate facts from opinions, because what the parties provide are not all facts. For example, the existence of the arbitration clause of “the arbitration shall be conducted in Hong Kong, and English Law shall be applied” is a fact, and the different views of both parties on whether it is valid or not are the subjective opinions of the parties. Fact fixing is only in initial step in recognition of fact, clarification of its meaning is the key step. An arbitration clause is one type of arbitration agreement. It is also a contract. Thus contractual interpretation shall be adopted to determine its meaning. According to the general principles of contract interpretation,² (1) the primary purpose of contract interpretation is to find the contractual intention of both parties. Of course, the intention is not the subjective mentalities of the parties but the intent expressed through contract clauses and words. (2) Literal interpretation is the preferred method in contract interpretation. In other words, a contractual term should be understood by good faith according to its usual meaning by taking into account the context. When a contract term has more than one literal meaning, the judge may also give a new definition based on the parties’ contracting purposes, by referring to negotiation materials and commercial contracts and, in particular, by taking into account the usage of trade so as to find the most reasonable meaning. Article 125 of the 1999 Contract Law of the PRC also stipulates that in case of any dispute between the parties concerning the construction of a contract term, the true meaning shall be determined according to the words and sentences used in the contract, the relevant provisions and the purpose of the contract, and in accordance with the relevant usage and the principle of good faith.

By taking into consideration the above principles, it is easy to find that, with respect to the disputed arbitration clause, the parties’ intention in the choice of arbitration are unmistakable, and the seat of arbitration is Hong Kong is also unambiguous, and in this regards neither party raised any objections. The difference in understanding mainly lies in the latter half of the sentence. That is, is English Law applicable to the dispute in the Voyage Charter, or the arbitration clause, or both This involves not only the interpretation of the contract, but also the application of law. Literally speaking, there is no single answer. If the judge has grasped this ruling idea in practice, he will guide the parties in the trial to resolve it by themselves. If they fail to resolve it, the judge should recognize it by referring to the parties’ arbitration purposes and the usual practices in such clauses. In fact, in arbitration and judicial practices, parties rarely select governing laws for arbitration clauses. In the international community, when the parties have not selected the governing law, although the governing law may be applied to a substantive disputed issue (e.g. the governing law of the master contract) upon presumption under certain circumstances, the governing laws of arbitration clauses are usually separately determined.³ With respect to the latter half of the disputed clause of “English Law shall be applied”, according to English case laws (see XL Insurance v Owens Corning [2000] 2 Lloyd’s Rep 500), English law should apply to both the dispute in the Voyage Charter and the arbitration clause.⁴ This may be substantiated by the legal opinions produced to the court by Hong Kong lawyer Nigel John Binnersley as recognized by the ruling of second instance. However, there has been a change in recent practices in the UK. The Court of Appeal of England and Wales considered in the C v D [2008] 1 Lloyd’s Rep 239 case that the law selected by the parties was the governing law of the substantive contract, and the governing law of the arbitration clause was the law of the seat of arbitration.⁵

This coincides with the trends in the practices in the PRC compared to some other countries. In the case on the validity of the arbitration agreement between Panyu Chu Kong Steel Pipe Co., Ltd. and the Respondent ShenZhen Panapond International Forwarding Co., Ltd., the voyage charter arbitration clause is similar to this case: “Seat of arbitration: Beijing, Chinese law shall be applied.” The Supreme People’s Court recognizes that the clause “does not stipulate the law applicable to the review of the validity of the article clause”.⁶

Therefore, strictly speaking, the disputed arbitration clause should be caused a legal term, with the first half of the sentence being an arbitration clause, and the latter half of the sentence being a choice of law clause. In this case, of course, no matter which law is applied to the disputed arbitration clause, the parties have clear intention to arbitrate. Contract interpretation is aimed at not only finding the parties’ intention to enter into an agreement, but also realizing the parties’ lawful intent. Thus it can be seen that the so-called policies in support of arbitration are neither justice’s concession or benefaction for arbitration nor the discretion of the court. They are the prerequisites for the principle of respecting party autonomy and obeying the express provisions of civil laws.

If we look back at the ruling of first instance, we may find that the recognition of facts is unclear and the disputed arbitration clause is not completely quoted. The ruling does not contain the minor premise, and we cannot find the use of contract interpretation. Thus, the ruling is relatively subjective and dogmatical. After confirming that “the plaintiff is a Hong Kong company, and the contract involved is a voyage charter entered into between the plaintiff and the defendant for the shipment of 5,000 tons of steel from Shanghai China to Iran” – in fact, this recognition does not have any direct relation to the ultimate ruling – it cites the judicial interpretation of arbitration promulgated by the Supreme People’s Court in 2006 and the provisions of the Arbitration Law, and maintains that the two parties have failed to produce evidence to prove Hong Kong or English Law, and the defendant has failed to provide evidence based on which Hong Kong Arbitration Centre may accept the case. It is obviously implausible to reject the defendant’s objection. Moreover, since the ruling of first instance has failed to cite the provisions on the finding of foreign laws of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in Trials of Foreign-related Civil and Commercial Contract Disputes (FS (2007) NO. 14) promulgated in 2007, and the disrupted argumentation also reduced the persuasion of its ruling.

2. As for the major premise, what the judge should do is to determine the law applicable to the disputed arbitration clause. In private international law, the court is required to apply local rules of conflict.⁷ The disputed arbitration clause has a foreign-related element, and neither the parties nor the judge have different opinions on this point. That is to say, unless there is an overriding international treaty or domestic substantive law – but as there is not such a law on the application of laws concerning foreign-related arbitration agreements in our country, the rules of conflict of our country should be applied first. The first instance judge proved well aware of this process: “The law agreed upon by the parties should apply to the review on the validity of a foreign-related arbitration agreement; if the parties have agreed upon the seat of arbitration but not an applicable law, the law of the arbitration seat should apply; if the parties have agreed upon neither the applicable law nor the seat of arbitration or the agreement on the seat of arbitration is not clear, the law at the locality of the court should be applied”.⁸ Second, the judge should determine the true meaning of this conditional and selective rule of conflict. Similar to contract interpretation, the primary principle of legal interpretation is also literal interpretation. Only when a clause has more than one literal meanings may a purposive approach to interpretation, historical interpretation and sociological interpretation be required.⁹ Luckily, this particular article has a clear meaning and does not require a specific definition. Thus we may proceed to step three. By taking into account the above details of the case, the provision of “if the parties have agreed upon the seat of arbitration but not an applicable law, the law of the arbitration seat should apply” meets the application conditions. Based on this, it is very easy for the judge to complete the initial task of law finding and find the applicable rule of conflict.

With the rule of conflict alone, the judge still cannot make a judgment on the substantive issues in dispute. In other words, the judge should also find the governing law applicable to the disputed substantive issues based on the rule of conflict, and only then complete the task of law finding which is common in foreign-related civil and commercial cases.

First, the judge should clarify the meaning of the rule of conflict found through legal interpretation. In terms of the theory of conflict of laws, it mainly involves identification and the definition of connecting points. The former is aimed at determining whether the applicable scope of the rule of conflict may cover the case details identified, and the latter is aimed at leading the case covered in the scope into the specific legal system. Second, while the meaning of the rule of conflict is determined, the legal system to which the governing law that shall be applied to the disputed substantive issue may be determined by taking into account the details of the case. Of course, this refers to common circumstances in which factors such as preliminary issues, renvoi and legal avoidance need not be taken into account. Here, if the governing law is the law at the locality of the court, the completion of the task in law finding will be similar with that in a domestic case; if the governing law is a foreign law, the judge still needs to determine and define that foreign law and thus enters the final step: finding the foreign law.

There are two important issues that must be taken into account here: who should prove the foreign law, the parties or the judge, and how should the judge interpret the foreign law. Being unable to find out the foreign law, the incorrect application of the foreign law and its remedy, and the maintenance of public order are the problems that require special attention. The governing law cannot be applied without solving these problems. With respect to this case, according to the rule of conflict quoted above, it is not difficult to recognize that the law of the seat of arbitration - ?Hong Kong - should be applied to the disputed arbitration clause. Since Hong Kong is a legal territory independent from the mainland China for the purposes of jurisdiction in arbitration disputes, the domestic courts should handle Hong Kong-related cases according to the relevant provisions of private international laws.¹⁰

It is not difficult to see from the above that the judge of first instance should have found an applicable rule of conflict based on the clear identification of the details of the case, and then clarified the meaning of the rule of conflict and found the governing law of the disputed arbitration clause. In practice, a judge should particularly pay attention to the interpretation of the determination of the foreign law during this process. If the judge cannot determine which foreign law is to be applied, he should determine a replacement measure such as an applicable law at the locality of the court. In this case, the judge of first instance should, while recognizing that the point of dispute in this case is the recognition of the validity of the foreign-related arbitration agreement, decide to apply the rule of conflict in the judicial interpretation of arbitration of the Supreme People’s Court in 2006 (Article 16) in light of its functions and powers — the defendant actually implied the problem of foreign (legal territory) law by requesting to receive arbitration in Hong Kong.

After determining that a Hong Kong law should be applied to the disputed arbitration clause, the judge should lawfully find out the specific contents of relevant Hong Kong laws. According to Article 193 of the Opinions of the Supreme People’s Court on Implementing the General Principles of Civil Law of the People’s Republic of China (Trial) promulgated in 1988 and Article 9 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in Trials of Foreign-related Civil and Commercial Contract Disputes (FS (2007) NO. 14) promulgated in 2007, the court should find the Hong Kong law in the light of its functions and powers, or may require the parties to provide or prove the Hong Kong law.¹¹

However, the judge of first instance does not appear to have adhered to the correct method of law finding, and even lacks the experience in trying foreign-related cases. The determination of the details of the case was not correct. Moreover, although the judge correctly found the selective rule of conflict quoted above, he failed to define it. That is to say, he failed to find the rule of conflict that ultimately applied, and this made him mistakenly believe that the governing law of the disputed arbitration clause was either a Hong Kong law or an English law, and consequently he did not have the basis for the final ruling. Following this, the judge reasoned that a domestic arbitration law should apply to the disputed arbitration clause on the grounds that the parties had failed to prove the relevant contents of Hong Kong laws and English laws. If unable to find an applicable foreign law, the judge may, of course, replace it with the law of the locality of the court. However, the problem is that this domestic judicial practice has not adopted the “fact” theory of foreign laws which holds that a foreign law should be proven by the parties. The court of first instance did not set a time limit for the parties to find the foreign (legal territory) law, and as such the court did not consider foreign (legal territory) laws as general evidence. The court of second instance recognized the legal opinions provided by Lawyer Nigel John Binnersley but did not mention the reason for requiring the proving of procedures and acceptance of new evidence produced by the parties during the second instance, as per Article 11 of the Several Rules of the Supreme People's Court on Evidences Referring to Civil Procedure [FS (2001)NO. 33]. This also shows that the court did not regard foreign (legal territory) laws as facts. On the contrary, except for the circumstances in which the parties of a contract case provide or prove the foreign law when choosing it, the court should take responsibility for finding the relevant foreign law: it should find out the law in the light of its functions and duties and may request the parties’ assistance. The ruling of first instance ignored the court’s task in finding the foreign (legal territory) law and incorrectly held that the arbitration law of the PRC should be applied and ruled that the arbitration clause was invalid. This ruling could neither convince the defendant nor enable others to be convinced by justice. Thus it can be seen that the method of applying the relevant law was not adopted by the judge of first instance.

Another point to be added is that, although the court of first instance held that it has jurisdiction over this case and both the parties indeed did not raise objections to the jurisdiction, the jurisdiction of the court of first instance is doubtful and the case acceptance procedures seem to be sub-standard. According to the provisions of Article 1 of the Notice of the Supreme People’s Court on the Disposal of the Relevant Issues about the Foreign-related Arbitration and Foreign Arbitral Matters by the People’s Court (FF[1995]NO. 18) promulgated in 1995: “In the event that a foreign-related, Hong Kong or Macao-related or Taiwan-related economic, maritime or maritime dispute case is brought to a people’s court, if the parties have stipulated an arbitration clause in the contract or reached an arbitration agreement afterwards, and the people’s court deems that the arbitration clause or arbitration agreement is invalid, no longer in force or has obscure contents and cannot be implemented, the people’s court must, before deciding to accept the prosecution submitted by one of the parties, report to the higher people’s court to which the jurisdiction belongs for review; if the higher people’s court agrees to accept the prosecution, it shall submit its review comments to the Supreme People’s Court. The prosecution may temporarily not be accepted before the Supreme People’s Court gives a reply.” There is reason to infer that the court of first instance has violated the “reporting system”, as it is otherwise difficult to understand the view point of the court of second instance.

* LLD, International Law Research Institute, Wuhan University, tutor of a Ph.D. student
This article is one of the achievements of Wuhan University’s scientific research project (Humanities and Social Sciences) （09ZZKY021）.
1. Liang Xi, Song Lianbin: Law Education Methodology, Wuhan University Press, 2009 Edition, Page 154~157.
2. Yang Liangyi: Construction of Contract, Law Press, 2007 Edition, Page 4, 15, 27 and 30.
3. Wang Changxin: A Study on Cross-Straits Arbitration Laws —— Governing Laws Centered, November 2004, Page 53~55.
4. [UK] Alan Redfern, Martin Hunter et al, Law and Practice of International Commercial Arbitration (4th Edition), translated by Lin Yifei and Song Lianbin, Peking University Press, 2005 Edition, Page 132~138.
5. See Ardavan Arzandeh, Jonathan Hill, “Ascertaining the Proper law of an Arbitration Clause under English Law”, 5 Journal of Private International Law 425, 435, Dec. 2009.
6. Letter of Reply of the Supreme People's Court to the Request for Instructions on the Case of Application for Determining the Validity of the Arbitration Agreement by the Applicant Panyu Chu Kong Steel Pipe Co., Ltd. and the Respondent ShenZhen Panapond International Forwarding Co., Ltd. [(2009)MST NO.7], May 5 2009. Fourth Civil Division of the Supreme People’s Court: Guidance on Foreign-related Commercial and Maritime Trials (Vol. 1, 2009), People’s Court Press, 2009 Edition, Page 85.
7. It implies a problem in the sequence of law application. Since this case does not involve the application of compulsory rules, uniform substantive laws or uniform conflict norms, we will not conduct an in-depth discussion about it here.
8. Article 16 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Arbitration Law of the People's Republic of China [FS (2006) NO. 7)].
9. Yang Renshou: Methodology of Legal Science, China University of Political Science and Law Press, 1999 Edition, Page 101 – the end.
10. This is the consistent judicial policy of our country. For example, Article 11 of Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in Trials of Foreign-related Civil and Commercial Contract Disputes (FS (2007) NO. 14) promulgated in 2007 prescribed that “The application of laws involving the civil or commercial contracts of Hong Kong Special Administrative Region or Macao Special Administrative Region shall be implemented in accordance with these Provisions.”
11. After Hong Kong returned to China in 1997, the laws of Hong Kong Special Administrative Region should fall within the knowledge of mainland judges and should not be provided or proven by the parties, and vice versa.

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