The Supreme People's Court of the People's Republic of China

Civil Ruling

(2019) Zui Gao Fa Min Te 1

Claimant: Luck Treat Limited. Domicile: Level 1, Palm Grove House, Wickham's Cay 1, Road Town, Tortola, British Virgin Islands. 

Representative: Chen Rong, director. 

Attorney: GuoMeng, Beijing Tiantong (Zhengzhou) Law Firm. 

Attorney: Li Qian, Beijing Tiantong (Shenzhen) Law Firm. 

Respondent: Zhong Yuan Cheng Commercial Investment Holdings Co Ltd. Domicile: Level 1&2, Shangsha Commercial Complex, Binhe Road, Futian District, Shenzhen, Guangdong Province, the People's Republic of China.

Legal representative: Zhou Xiaolin, chairman of the board of directors. 

Attorney: Zhu Lan, Beijing Horizon (Shenzhen) Law Firm. 

Attorney: Wu Xu, Beijing Horizon (Shenzhen) Law Firm. 

On 19 February 2019, this Court accepted an application for the review of the validity of an arbitration agreement between the Claimant, Luck Treat Limited ("Luck Treat"), and the Respondent, Zhong Yuan Cheng Commercial Investment Holdings Co Ltd. ("Zhong Yuan Cheng") . The review is now completed. 

Luck Treat requests confirmation that no valid arbitration clause existed in the Equity Transfer Contract and the Debt Settlement Agreement between Luck Treat and Zhong Yuan Cheng. The facts and reasons are as follows: The contracts themselves have not been established, and therefore the arbitration clause has not been established. (I)The contracts have not been established. The 100% equity in Newpower Enterprises Inc. ("Newpower") held by Luck Treat was listed on the China Beijing Equity Exchange ("CBEX") for sale, and Zhong Yuan Cheng was confirmed as the sole qualified prospective transferee. Thereafter, the parties negotiated the Equity Transfer Contract and the Debt Settlement Agreement over multiple emails and specified that the initialed versions of both documents would only be signed after final confirmation by CBEX and Luck Treat's parent company, China Tourism Group. Luck Treat also requested Zhong Yuan Cheng to complete the overseas investment procedures and pay the contractual price in foreign currency outside China in compliance with the relevant regulations. Zhong Yuan Cheng refused to perform its legal obligations of applying for the approval of overseas investment and carrying out foreign exchange registration procedures. After its requests were refused multiple times, Luck Treat notified Zhong Yuan Cheng to cancel the transaction. Article 32 of the Contract Law of the People's Republic of China ("Contract Law") provides that: "Where the parties conclude a contract in the form of a written contractual agreement, the contract is established upon the signature or seal of both parties."Article 17 of the initialed version of the Equity Transfer Contract provides that: "This Contract shall become effective upon signature and seal by the legal representatives or authorized representatives of Party A and Party B simultaneously with the Debt Settlement Agreement."In accordance with the above legal provisions and the agreement, neither the Equity Transfer Contract nor the Debt Settlement Agreement was established, as Zhong Yuan Cheng refused to perform its legal obligations or fulfill the compliance requirements, the texts of the contracts were not agreed on, and the contracts were not signed. In fact, the parties have not even completed the offer-and-acceptance process for the purpose of entering into a contract. (II) The arbitration clause in the contracts has not been established either. The initialed versions of both documents include the following arbitration clause: The dispute shall be referred to the Shenzhen Court of International Arbitration for arbitration. However, no arbitration clause can be established separately from the main contract, and the parties had no express intention to enter into an arbitration agreement separately before entering into the main contract. Therefore, no arbitration clause has been established, and therefore there is no valid arbitration clause between Luck Treat and Zhong Yuan Cheng in respect of the matters under discussion in the Equity Transfer Contract. (III) Luck Treat is not a party to the Debt Settlement Agreement, and therefore the arbitration clause in that Agreement is not binding on Luck Treat. 

Zhong Yuan Cheng claims that the Equity Transfer Contract and the Debt Settlement Agreement have been established and are effective. The parties had reached an agreement to submit the dispute in this case for arbitration during negotiations of the performance of the Equity Transfer Contract and the Debt Settlement Agreement, and therefore a valid arbitration agreement existed between the parties. (I) The contracts have been established and effective. The equity transfer in this case was administered by CBEX and conducted pursuant to the relevant trading rules. The contracts were established and became effective in accordance with the law. Luck Treat, Newpower, Shenzhen Metropark Hotel Co Ltd("Shenzhen Metropark") and Beijing HK CTS Grand Metropark Hotels Management Co Ltd("Beijing Metropark") (collectively "Luck Treat and Others") should sign the Equity Transfer Contract and the Debt Settlement Agreement with Zhong Yuan Cheng in accordance with the announcements. 1. The parties have completed the offer-and-acceptance process of the equity transfer in this case. Luck Treat entrusted CBEX to release the announcements concerning the transaction in this case, in which it disclosed all the information of the transaction and made relevant commitments. The above announcements constitute an invitation to offer from Luck Treat and Others. Later, Zhong Yuan Cheng made an application to purchase to CBEX. CBEX issued to Zhong Yuan Cheng a Notice of Confirmation of the Qualification for Purchase, requiring Zhong Yuan Cheng to pay the security deposit before 4 May 2017 and stipulating that "the qualification will be confirmed after the payment of the security deposit within the above time limit", which was the offer made by Luck Treat and Others. Zhong Yuan Cheng paid the security deposit of RMB 270 million as required on the same day and obtained the sole qualification for purchase, which constituted the acceptance. The parties hereby entered into this transaction and performed obligations in accordance with the rules of CBEX. Since the contracts in this case do not fall within the circumstances that are subject in accordance with the law and regulations to the completion of the procedures for approval before taking effect, the contracts have been established and are effective in accordance with the law. 2. According to the commitments made in Luck Treat’s listing announcements and the trading rules of CBEX, Luck Treat and Others were obliged to sign and affix their seals to the Equity Transfer Contract and the Debt Settlement Agreement with Zhong Yuan Cheng in accordance with the conditions in the announcements within five business days after Zhong Yuan Cheng was confirmed as the final transferee. 3. After the transaction was confirmed by the parties according to the conditions in the announcements, Luck Treat and Others arbitrarily changed the listed trading conditions, changed the trading rules for settlement in RMB currency, and requested Zhong Yuan Cheng to pay the contract price outside China in foreign currency in violation of their commitments and the trading rules of CBEX. 4. The transaction in this case was conducted at CBEX, and the transaction was concluded and delisted after the parties reached an agreement on the subject matter, price, quantity, method of performance, preconditions and other substantive terms of the transaction. The transaction contracts in writing are not the only legal documents between the parties relating to this transaction. The documents that determine the existence of the equity transfer contracts between the parties also include the application letter, the acceptance letter, the announcements, the notices, security deposit proof, etc., which are binding on the parties as well. The equity transaction in this case does not fall within the overseas investment matters that should be approved by the government departments before taking effect, but it falls within the matters to be filed with the government departments, and the signing of the Equity Transfer Contract was the prerequisite for the completion of the filing procedures of the transaction contracts in this case. (II) The arbitration clause has been established. 1. On 11 May 2017, Luck Treat and Others sent to Zhong Yuan Cheng via email the texts of the transaction contracts entitled "initialed version", in which it made an offer to Zhong Yuan Cheng to submit any dispute to the Shenzhen Court of International Arbitration for arbitration. Zhong Yuan Cheng signed and sealed the transaction contracts on the same day, and replied and notified Luck Treat and Others by way of electronic signature and email as well as EMS courier of the signed and sealed hard copies. The parties have hitherto reached an agreement to arbitrate, and such agreement to arbitrate remains unchanged afterwards. 2. The principle of separability of the arbitration clause stipulates that the existence and validity of an arbitration clause shall not be affected even if the parties have not completed the signing of a written contract. Article 19 of the Arbitration Law of the People's Republic of China ("Arbitration Law") and Article 10 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 ("Interpretation of the Arbitration Law") confirm the separability of the arbitration clause. In accordance with the above provisions, the arbitration clause in this case has been established, in separate existence and effective. Luck Treat and Others eventually asserted "the cancellation of the transaction" but have never requested cancellation of the arbitration agreement. 3. Luck Treat and Others claims that the arbitration clause did not exist on the grounds that the texts of the transaction contracts had not been finally internally approved within its group and had not been signed, in a way forcing on Zhong Yuan Cheng the effect of its internal approval and confusing internal management relations with its external legal relationship. Therefore, the arbitration clause in the initialed version of the contracts in this case shall be binding upon the parties. (III) Although Luck Treat and Others are different entities, all the rights are substantially vested in China Tourism Group. The Equity Transfer Contract and the Debt Settlement Agreement jointly constitute the complete content of the transaction in this case and are inseparable, and Luck Treat and Others shall jointly perform the obligations of the transferor of the transaction contracts and shall be subject to the arbitration clause. In light of the above, the arbitration agreement between the parties in this case has satisfied all necessary conditions stipulated by the Arbitration Law in form and in substance, and it is requested that the arbitration agreement between the parties shall be confirmed as valid and effective in accordance with the law, and Luck Treat’s application be dismissed. 

Upon examination, this Court finds that: China National Travel Service Group Corporation Limited ("CTS"), formerly known as China Tourism Group or China Travel Service (Holdings) Hong Kong Limited, is a wholly state-owned company. China Travel Service (Holdings) Hong Kong Limited("CTS Hong Kong") is a wholly-owned subsidiary of CTS incorporated in Hong Kong. Luck Treat is a wholly-owned subsidiary of CTS Hong Kong incorporated in the British Virgin Islands. Newpower is a wholly-owned subsidiary of Luck Treat also incorporated in the British Virgin Islands. 

On 24 March 2016, CTS issued the Approval Letter Regarding the Transfer of 100% Equity of Newpower Enterprises. Inc, agreeing to Luck Treat’s transfer of the 100% equity of Newpower in compliance with the law and regulations. On 29 March 2017, Luck Treat publicly listed for sale the 100% equity of Newpower it held on CBEX. In the listing announcement, "other conditions relating to the transfer" required the transferee to "sign the Debt Settlement Agreement with the related parties of the transferor at the same time that it signs the Equity Transfer Contract while expressly understanding and agreeing that the debt repayment agreed in the Equity Transfer Contract is an important precondition for equity transfer."In April, Zhong Yuan Cheng and Beijing Jinyang Tai he Investment Consulting Co Ltd. signed the Equity Transaction Entrustment Contract. The former entrusted the latter to provide floor brokerage services for the acquisition of Newpower by Zhong Yuan Cheng in accordance with the trading rules of CBEX. On April 27, CBEX issued to Luck Treat a Letter of Opinion on Confirmation of the Qualification of the Transferee, stating that it had secured two prospective transferees, namely Zhong Yuan Cheng and Xu Yanxing, upon the expiry of the disclosure period of the information of the project in this case. On April 28, CBEX issued a Notice of Confirmation of the Qualification to Purchase to Zhong Yuan Cheng, notifying Zhong Yuan Cheng to make a security deposit of RMB270 million into the settlement account designated by CBEX before May 4 and clarifying that Zhong Yuan Cheng's qualification would be confirmed upon payment of the security deposit within the prescribed time limit, and that if it failed to pay within the prescribed time limit, it would be deemed as giving up the transfer. On the same day, Zhong Yuan Cheng transferred RMB270 million to the settlement account designated by CBEX as the security deposit. On May 3, CBEX issued a receipt in the sum of RMB270 million as security deposit to Zhong Yuan Cheng. As Xu Yanxing did not pay the security deposit within the prescribed time limit, only one prospective transferee remained in the project in this case, namely Zhong Yuan Cheng. 

Subsequently, Zhong Yuan Cheng and Luck Treat and Others carried out negotiations of matters such as the signing of the equity transfer contracts of the project in this case. On May 9, Zhang Ruirui of the Risk Control and Legal Department of Tailong Financial Holdings Group Limited (a parent company of Zhong Yuan Cheng) sent an email to Liu Zhen, who was the Legal Manager of the Legal Department of Hong Kong CTS Hotel Co Ltd. (a wholly-owned subsidiary of CTG) on behalf of Zhong Yuan Cheng. The content of the email was: "Please send the contracts and the attachments to my email address (zhXXX@tljkjt.com)."On the same day, Liu Zhen replied by email that:"the contracts and the attachments will be sent to your designated contact person Manager Li Jun by our designated external contact person, Manager Zhang Xin. "On the same day, Zhang Xin, Manager of Investment Management Department of Hong Kong CTS Hotel Co Ltd, sent an email to Zhang Ruirui, which read: "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."The aforementioned email had the Equity Transfer Contract as attachment, which was the standard form provided by CBEX, stating that Party A is Luck Treat and Party B is Zhong Yuan Cheng, and the parties in accordance with the Contract Law, the Interim Measures for the Administration of Transfer of the State-Owned Equity in Enterprises and the relevant laws, regulations and rules, will enter into the Equity Transfer Contract for the transfer of 100% equity of Newpower held by Luck Treat to Zhong Yuan Cheng. The main content of this contract is as follows: 1. Party A intends to transfer the 100% equity in the subject company lawfully held by it; and Party B intends to acquire the above equity. 2. Party B has completed the relevant approval, authorization or filing procedures in accordance with laws, administrative regulations and the articles of association for the project of receiving the transfer of the subject matter owned by Party A in accordance with this Contract. The contract price shall be RMB900 million. 3. All procedures necessary for the signing of this Contract, including but not limited to authorization, vetting and corporate internal decisions, have been lawfully and validly obtained, and the preconditions for the formation of this Contract and the equity transfer have been satisfied. 4. This Contract shall take effect upon signature and seal by the legal representatives or authorized representatives of Party A and Party B simultaneously with the Debt Settlement Agreement. 5. Article 16 Jurisdiction and Dispute Settlement: 16.1 This Contract and any act in the equity transaction shall be governed by the laws of the People’s Republic of China; 16.2 Any dispute between the parties in connection with the interpretation or performance of this Contract shall be resolved by the parties through negotiation; if such negotiation fails, the dispute shall be submitted to Beijing Arbitration Commission for arbitration. The attachment to the aforementioned email, the Debt Settlement Agreement, specifies that Party A1 is CTS Hong Kong, Party A2 is Beijing Metropark, Party B is Zhong Yuan Cheng, Party C1 is Newpower and Party C2 is Shenzhen Metropark. The contract provides that: 1. Party B agrees to repay the debt and fees for using the funds in the amount of RMB107,886,893.15owedto Party A on behalf of Party C in a lump sum within five business days from the date of taking effect of this Contract. 2. Article 12: The Contract shall be governed by laws of the People’s Republic of China. Any dispute between the Parties in connection with the interpretation or performance of this Contract shall be resolved through negotiation; if such negotiation fails, any Party shall have the right to submit the dispute to Beijing Arbitration Commission for arbitration. 

On May 10, Zhang Ruirui sent an email to Zhang Xin and Liu Zhen, the content of which was as follows: "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 attachment to this email, Article 16 of the Equity Transfer Contract entitled "Jurisdiction and Dispute Settlement" was amended to"16.1 This Contract and any act in the equity transaction shall be governed by the laws of the People’s Republic of China.16.2 Any dispute between the parties in connection with the interpretation or performance of this Contract shall be resolved through negotiation; if such negotiation fails, the dispute shall be submitted to the Shenzhen Court of International Arbitration for arbitration"; Article 12 of the Debt Settlement Agreement was revised to "this Agreement shall be governed by the laws of the People’s Republic of China. Any dispute arising between the Parties in connection with the interpretation or performance of this agreement shall be resolved through negotiation; if such negotiation fails, any Party shall have the right to submit the dispute to [Shenzhen Court of International Arbitration] for arbitration."At 13: 42 on May 11, Zhang Xin sent an email to Zhang Ruirui and Li Jun, a senior executive of Zhong Yuan Cheng, in response to the amendment proposed by Zhong Yuan Cheng on the two contracts, and also stated that "we 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)". Article 16 "Jurisdiction and Dispute Resolution" of the Equity Transfer Contract (initialed version) attached to this email and Article 12 of the Debt Settlement Agreement (initialed version) were the same as the corresponding articles in the aforementioned email attachments sent by Zhang Ruirui to Zhang Xin and Liu Zhen on May 10. At 18: 39 of the same day, Zhang Ruirui sent an email to Zhang Xin, the content of which read: "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." The content concerning jurisdiction and dispute resolution in the Equity Transfer Contract (initialed version) and the Debt Settlement Agreement (initialed version) attached to this email was the same as those in the email attachments sent by Zhang Xin on the same day. Zhong Yuan Cheng affixed its seal on the contracts and delivered the copy to Luck Treat. Another attachment to this email was the Instruction Letter for Signing for the Transfer of 100% Equity in Newpower Enterprises Inc. sent by Zhong Yuan Cheng to Luck Treat, the content of which was: 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.

On May 17, Zhang Xin sent an email to Li Jun, stating that: "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." Attachment 1 to this email was the Equity Transfer Project Equity Transaction Contract (version pending signature) and attachment 2 was the Equity Transfer Project Debt Settlement Agreement (version pending signature). The arbitration clauses in the aforementioned two contracts were still the same as those in the initialed versions.

On June 1, after conducting legal compliance review, Luck Treat sent the Reply Letter to Zhong Yuan Cheng, the main content of which was: 1.Since both the transferor and the target company to be transferred are companies incorporated in the British Virgin Islands outside China, and the transferee, i.e. your company, is a company incorporated in Shenzhen in China, the transaction is an overseas investment, and in accordance with the relevant provisions of the Administrative Measures for Approval and Management of filing of Overseas Investment Projects (Order of the National Development and Reform Commission [2014] No.9), the Administrative Measures for Overseas Investment (Order of the Ministry of Commerce [2014] No.3) and the Administrative Provisions on Foreign Exchange for Overseas Direct Investment by Domestic Institutions (Hui Fa [2009] No.30) issued by the State Administration of Foreign Exchange, your company shall handle the filing or approval procedures for overseas investment of this Project with the National Development and Reform Commission and the Ministry of Commerce in accordance with the law, complete the foreign exchange registration procedures for overseas direct investment with the State Administration of Foreign Exchange and pay the contract price to the transferor, i.e. our company in foreign currency outside China. 2. With respect to Article15.3 of the Equity Transfer Contract attached to your letter, our legal counsel believes that the requirements set out in the listing documents of this Project on CBEX on March 29 are not satisfied. According to the provisions of sub-paragraph (4)of Paragraph 3 of Section IV "Other Conditions Relating to Transfer" of the listing documents, where if a transferee fails to pay the remaining price within the prescribed time limit, the security deposits paid by the prospective transferee shall be forfeited in full. Therefore, we request to amend this clause to read as follows: If Party B fails to make a full payment of the contract price within the prescribed time limit in the Contract, the security deposit of RMB270 million paid by Party B will be forfeited in full and Party B unconditionally agrees that CBEX may transfer the security deposit of RMB270 million in a lump sum to the account designated by Party A. 

Zhong Yuan Cheng sent letters to Luck Treat on June 6, August 29 and October 23 of the same year respectively, urging Luck Treat to sign the Equity Transfer Contract and the Debt Settlement Agreement as soon as possible. On October 27, Luck Treat sent a Letter of Notice to Zhong Yuan Cheng stating that since it had repeatedly notified and urged Zhong Yuan Cheng to complete the legal procedures in accordance with the law, and Zhong Yuan Cheng failed to confirm in a timely manner, Luck Treat hereby formally provided notice of cancellation of the transaction. On November 12, Zhong Yuan Cheng sent a letter to Luck Treat, requesting that Luck Treat should arrange for the signing of contracts as soon as possible and that Luck Treat should cooperate in issuing documents for the filings with the supervising authorities. On November 27, Luck Treat replied Zhong Yuan Cheng by letter, confirming that it had sent a notice of cancellation of the transaction to Zhong Yuan Cheng on October 27 and proposing that the parties should immediately complete the procedures for the return of the security deposit at CBEX. 

On 4 April 2018, Zhong Yuan Cheng filed an application for arbitration with the Shenzhen Court of International Arbitration according to Article 16.2 of the initialed version of the Equity Transfer Contract and Article 12 of the initialed version of the Debt Settlement Agreement, against Luck Treat and Others as co-respondents. Before the hearing before the arbitration tribunal, Luck Treat and Others filed a lawsuit with Shenzhen Intermediate People's Court of Guangdong Province respectively，applying for confirmation confirm that the arbitration agreement does not exist. That Court accepted the case on 11 September 2018, leading to this case and two other connected cases. While that Court was reviewing this case, this 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. When hearing this case, this Court made enquiries with the parties, and the parties agreed to negotiate and mediate on the dispute resolution method. Afterwards, the parties conducted multiple rounds of discussions on the dispute resolution method and substantive issues but failed to reach an agreement. Therefore this Court resumed its review. 

After review, his Court considers that the issue in dispute in this case is whether the arbitration clause has been established.

After Zhong Yuan Cheng applied for arbitration, Luck Treat applied to a people's court to confirm that no valid arbitration clause existed between both parties on the ground that the arbitration clause had not been established. Although this is different from a request for determining the invalidity of an arbitration agreement, whether or not an arbitration agreement exists directly affects the dispute resolution method in the same way validity does. It equally is classified as a threshold question that needs to be resolved. Therefore, a request to confirm the non-existence of an arbitration agreement between the parties is an objection to the validity of an arbitration agreement in a broad sense. Paragraph 1 of Article 20 of the Arbitration Law stipulates that a party who objects to the validity of an arbitration agreement may apply to the arbitration commission for a decision or to a people's court for a ruling. Therefore, a request made by the party for determining the non-existence of an arbitration agreement on the ground that the arbitration clause has not been established is a case of an application to confirm the validity of an arbitration agreement, and thus a people's court shall accept the case and conduct hearing. 

In determining the validity of an arbitration agreement, the governing law shall be firstly determined. Article 18 of the Law of the People's Republic of China on the Law Applicable to Foreign-Related Civil Relationships provides that: "The parties concerned may choose the laws applicable to arbitral agreement by agreement. If the parties do not choose, the laws at the locality of the arbitral authority or of the arbitration shall apply." During this Court’s enquiry, all the parties concerned clearly expressed agreement on the application of the law of the People's Republic of China to determine the validity of the arbitration agreement involved in this case. Therefore, the arbitration agreement in this case is governed by the law of the People’s Republic of China.

Paragraph 1 of Article 16 of the Arbitration Law stipulates that: "An arbitration agreement shall include arbitration clauses stipulated in the contract and agreements of submission to arbitration that are concluded in other written forms before or after disputes arise."Thus, both an arbitration clause in the contract and an independent arbitration agreement are classified as arbitration agreements. The formation and validity of the arbitration clause is determined in accordance with the law applicable to the arbitration agreement.

The separability of arbitration agreement is a widely accepted fundamental legal doctrine, which means that the arbitration agreement and the main contract are separable and independent— their existence, validity and applicable law are all separable. Since an arbitration clause is the principal type of arbitration agreement, the emphasis of the separability of an arbitration clause from other contractual clauses in the same document has more practical significance than stressing the separability of an independent arbitration agreement. It can be even said that the separability of the arbitration agreement mainly refers to the fact that the arbitration clause and the main contract are separable. The separability of arbitration agreement is addressed in the laws of the People's Republic of China and this Court’s judicial interpretation. Paragraph 1 of Article 19 of the Arbitration Law provides that: "An arbitration agreement shall exist independently. The modification, rescission, termination or invalidity of a contract shall not affect the validity of the arbitration agreement."Read in context, that Article [19] stipulates that once a clause is determined to be an arbitration agreement under Article 16, it provides for the separability of the arbitration agreement. Therefore, an arbitration clause is separate from the contract. As to whether an arbitration clause can be established completely independently from a contract, it seems that it is not particularly clearly defined in the Arbitration Law in contrast with the clearly defined provisions that any modification, rescission, termination or invalidity of an existing contract shall not affect the validity of the arbitration clause. In judicial practice, the issues of whether the contract is established or not and whether the arbitration clause therein is established or not are often entangled with each other. However, the statement of "an arbitration agreement shall exist independently" at the beginning of Paragraph 1 of Article 19 of the Arbitration Law is an encompassing and general expression, which shall cover the issue of whether the arbitration agreement exists or not. The statement thereafter further emphasizes on several types of circumstances that shall not affect the validity of the arbitration agreement. Paragraph 2 of Article 10 of the Interpretation of the Arbitration Law further specifies that: "Where the parties reach an arbitration agreement when entering into a contract, the validity of the arbitration agreement shall not be affected even if the contract is not established."Therefore, when determining the validity of an arbitration clause including whether or not an arbitration clause exists, the validity of the arbitration clause itself could be determined first; only when it is necessary, should the validity of the entire contract, including whether or not the contract is established, be considered. The same rule applies to this case, that is the existence of the arbitration clause should be determined first in accordance with the specific circumstances of this case. 

Whether the arbitration clause is established mainly refers to whether the parties have agreed to submit the dispute for arbitration, that is whether they have reached an arbitration agreement. An arbitration agreement is a contract. In judging whether the parties have reached an agreement on arbitration, the provisions on offer and acceptance in the Contract Law shall be applied. In light of the circumstances of negotiation in this case, both parties have always jointly agreed to submit the dispute for arbitration. The earliest version of the Equity Transfer Contract was the standard form provided by CBEX, sent from Luck Treat and Others to Zhong Yuan Cheng together with the Debt Settlement Agreement, both of which contained a clause stating that any dispute shall be submitted for arbitration at the Beijing Arbitration Commission. Subsequently, the parties negotiated about the arbitration institution. The arbitration clause in the initialed version of the contracts sent by Luck Treat and Others had already identified the arbitration institution as the Shenzhen Court of International Arbitration. As far as the arbitration clause is concerned, this is an offer made by Luck Treat and Others. Zhong Yuan Cheng affixed its seal to the initialed version of the contracts expressing its consent and delivered the copy of the sealed contracts to Luck Treat on 11 May 2017. This constitutes the acceptance of Zhong Yuan Cheng. According to the relevant provisions of Articles 25 and 26 of the Contract Law, an acceptance takes effect when it reaches the offer or and a contract is established when the acceptance takes effect. Therefore, the arbitration clause in the Equity Transfer Contract and the Debt Settlement Agreement was established on 11 May 2017 between the parties to the two contracts respectively. Subsequently, the parties negotiated on some other matters in the contracts, but they never had any dispute over the arbitration clause. As Luck Treat and Others do not claim that the arbitration clause is legally invalid, a valid arbitration clause should be deemed to exist between the parties and any dispute between the parties should be submitted to Shenzhen Court of International Arbitration for arbitration. Even though Luck Treat and Others did not affix its seal on the latest version of the contracts, nor did their legal representatives sign the contracts, in violation of the requirements for a contract to become effective upon signature and seal by the legal representatives or authorized representatives of the parties, however, according to Paragraph 2 of Article 10 of the Interpretation of Arbitration Law, even if the contracts are not established, the validity of the arbitration clause shall not be affected. Under the circumstance that the parties have reached an arbitration agreement, it is unnecessary to determine whether or not the contracts in this case are established, which issue shall be resolved in arbitration.

Luck Treat also claims that it is not a party to the Debt Settlement Agreement and that its arbitration clause is not binding on Luck Treat. As the arbitration clause in the Equity Transfer Contract already binds Luck Treat, the dispute between Luck Treat and Zhong Yuan Cheng should be resolved through arbitration. Luck Treat and Others are the co-respondents in the same arbitration case. It is unnecessary for this Court to make a judgment in this case as to whether the arbitration clause in the Debt Settlement Agreement binds Luck Treat. 

In summary, the reasons and requests of Luck Treat cannot be established. In accordance with Articles 16, 19 and 20 of the Arbitration Law of the People's Republic of China, this Court rules as follows:

The application of Luck Treat Limited shall be dismissed. 

The application fee of RMB400 shall be borne by the applicant, Luck Treat Limited.

Presiding Judge Zhang Yongjian

Judge Gao Xiaoli

Judge Xi Xiangyang

Judge Ding Guangyu

Judge Shen Hongyu

September 18, 2019

Assistant: Li Guangqin

Clerk: Xie Songshan

Related Links:

【（2019）最高法民特1号】运裕有限公司、深圳市中苑城商业投资控股有限公司申请确认仲裁协议效力民事裁定书

*The original text is Chinese and has been translated into English for reference only. If there is any inconsistency or ambiguity between the Chinese version and the English version, the Chinese version shall prevail.