BAC Newsletter Issue 23
BAC News
New Laws

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 of the ruling of second instance
Based on the above analysis, it was inevitable for the defendant to appeal against the ruling of first instance. The system of four level courts whereby the second instance is final in the PRC does not differentiate fact judgment from legal judgment. Therefore, the ruling methods of second instance still cover both the method of fact finding and the method of law application. Focusing on the appeal and defense between the two parties, the second instance holds a comprehensive review on the ruling of first instance. Beginning with the contents copied from the ruling of first instance, the ruling of second instance succinctly sums up the views and reasons of both parties in the appeal. The court considers the legal opinion of Lawyer Nigel John Binnersley, defines the case in its entirety, before givinge reasons for the ruling and reaching a conclusion. The idea expressed is clearer than the ruling of first instance, but there is still room for improvement in the application of ruling methods.

1.First, let’s consider the finding of facts. The facts that the second instance should review are only those relevant to the appeal.1In this case, both parties have not produced any new facts in the second instance. They have only given new opinions on the details of the case. The ruling of second instance improves upon the ruling of first instance in the following respects: (1) it accurately quotes the disputed arbitration clause; and (2) it responds to the plea of the appellant. However, like the ruling of first instance, the ruling of second instance does not clarify the true meaning of the disputed clause. That is, the true intent of the parties is the choice of arbitration. The seat of arbitration is Hong Kong, and the governing law of the substantive issues of arbitration is English law. This indicates that the judge of second instance is not aware of the methodology in the finding of facts either.

2.Then, let’s look at the application of law. The judge of second instance is aware of neither the concept of dual finding of laws, nor the sequence of law finding, interpretation of law, and application of law. He did not find an applicable rule of conflict, nor did he find the governing law of the disputed arbitration clause. According to the ruling of second hearing, “According to the relevant provisions of English laws, the disputed arbitration clause is valid”. Obviously, the governing law of the arbitration clause is English law –a conclusion without argumentation; “according to the provisions of the Hong Kong Arbitration Ordinance, the disputed arbitration clause is also valid and implementable”, it seems that Hong Kong law is also the governing law of the arbitration clause; “the Hong Kong law applicable to this case shall be the Hong Kong Arbitration Ordinance” once again affirms that the Hong Kong Arbitration Ordinance should be applied to this case (the recognition of the validity of the disputed arbitration clause). This is contradictory with the “According to the relevant provisions of English laws, the disputed arbitration clause is valid” recognized above.

The contents of the ruling of second instance on law application is mainly based on the legal opinion of Lawyer Nigel John Binnersley which is quite clear: English law should be applicable to the disputed arbitration clause, Hong Kong law should be applicable to the arbitration procedures, and English law should be applicable to substantive disputes. Although it is not expressly indicated, the legal opinion is, in fact, the basis for the court of second instance to find out English and Hong Kong laws. As it is, the contents of the legal opinion should be correctly understood. Moreover, the point of contention in this case is whether the arbitration clause in the voyage charter is effective. The rules of conflict in the relevant arbitration agreements in our country are selective, and the court does not have to find both Hong Kong and English laws. A major premise with an excessive application scope is a waste of resources. In short, it is not difficult to see from the ruling of second instance that the judge does not understand the theoretical concepts of the governing law of arbitration clause, the governing law of arbitration procedures, and the governing law of substantive arbitration issues. This indicates that the judge of second instance is not aware of the methodology of law application either.

The reason for the second instance to recognize that the disputed arbitration clause is valid is not a victory for the proper use of ruling method. The reason for the conclusion contrary to the first instance mainly lies in the influence of the legal opinion of Lawyer Nigel John Binnersley, the homogeneity between English and Hong Kong arbitration laws and the intuition of the judge in supporting the arbitration. In fact, the legal basis of that legal opinion is worth questioning: according to the rules of conflict in our country, why does the court have to find English law instead of Hong Kong law? If the first instance did not provide or prove the foreign (legal territory) law due to the absence of a special circumstance, will the parties be able to perform this obligation in the second instance?

iii. Conclusion

Adjudicative documents are the legal carriers of the processes and results of rulings. They are the objective reflections and reasonable summaries of entire trial processes of cases and may embody the judges’ case handling qualities, judicial levels and ability to decide cases. The ruling of foreign-related civil and commercial cases is also an important channel for the international community to get a direct feel of the domestic judicial environment. Neither of the two rulings measure up to these standards. Although the ruling of second instance is better than the ruling of first instance, it happens to be legally correct. The conclusion of ruling is important, but the justification of ruling is more important. Without a justified process, the impartiality of ruling will be accidental and runs against the rule of law.

Through analyzing and comparing the rulings of both instances, we may find that they have three common defects. First, imprecise statements such as quoting legal titles by mistake and fabricating the basis for jurisdiction (the court of first instance holds that Shanghai enjoys the jurisdiction because it has the closest and the most practical connection with the substantive disputes). An adjudicative document is not a piece of literary work and must be precise and normative. Second, judicial trials must be conducted according to law, but both the courts ignored the “reporting system”, and the court of second instance did not explain the reason for recognizing the legal opinions newly provided by the parties. Third, and perhaps most important, the rulings of both instances failed to demonstrate how ruling methods were used, lacked clarified argumentations supporting the rulings and had formalistic tendencies. Since both the courts are located in the most developed international metropolises in China and the qualities of their judges rank among the top of their colleagues in the whole country, such deficiencies has provided more food for thought. This also sufficiently shows that the judges in our country still lack adequate legal training. The law circle should waste no time in reforming the teaching contents, and all the legal trainings should provide a special focus on the training of ruling methods. Of course, this does not mean that the only purpose of law schools is to cultivate judges. In fact, ruling methods may be of use for anyone who is a legal professional. In this case, for example, the winning of a lawsuit in the second instance and the unsuccessful plea in the first instance of the defendant has something to do with the fact that it underwent the first instance without a lawyer but retained a lawyer in the second instance. The lawyer has to make use of the ruling methods in its case handling skills and when predicting the result of the case.

III. Enlightenment: Incomplete Induction

Arbitration clauses such as “the arbitration shall be conducted in Hong Kong, and English Law shall be applied” are representative clauses in the foreign-related contracts in our country, and the recognition of the validity of such arbitration agreements often cause controversies. The analysis of the rulings of both instances in this case indicates that it is possible to ensure current rulings in such cases from the through the application of methodology. Assuming that a court is entitled to accept a case, the ruling process of the judge may be broken down step by step as follows:

1.Affirming the existence of the arbitration agreement. This is usually out of question, like in the present case. However, whether the arbitration agreement is tenable or not occasionally constitutes a problem. This is often because the parties have negotiated through a number of letters, or the contract has been assigned or the arbitration agreement in another document is quoted. This problem may be solved with appropriate evidence. What needs to be pointed out is that an arbitration contract is a consensual contract which generally takes effect upon being entered into, except otherwise provided for in laws or where the parties have stipulated a condition on validity. Besides, according to the principle on the independence of arbitration agreements, the inexistence or ineffectiveness of the master contract does not affect the effectiveness of an arbitration agreement.

2.Determining the true meaning of the arbitration agreement. This requires the use of contract interpretation. As mentioned above, this is also the basis for the recognition of the validity of the arbitration agreement.

3.Determining whether there is an overriding substantive law that may be applied to the arbitration agreement. Such laws are usually not common, like the compulsory provisions on arbitration of the country in the locality of the court. Bilateral investment and trade treaties also often include arbitration arrangements.

4.Determining the rule of conflict that may be applied to the arbitration agreement and defining its meaning. The court only applies the rule of conflict depending on the locality of the hearing. In the modern legislative trend, selective rules of conflict are prescribed for arbitration agreements so as to maintain their validity as much as possible: the laws chosen by the parties should be applied first. If the parties have not selected such laws, other compulsory rules of conflict should be applied. 2 The interpretation of rules of conflict requires the use of general legal interpretation methods, and may involve the identification, definition of connection points and other specific issues in private international law. What is worth noting is that, in practice, few parties specifically select governing laws for arbitration agreements. As mentioned above, the governing laws of arbitration clauses are generally determined independently. In some countries like the UK, however, the disputed clause in this case may also be understood in such a way that the governing laws of both the master contract and the arbitration clause are English laws.

5.Determining the governing law of the arbitration agreement under the guidance of the rule of conflict. This may involve the finding of foreign laws.

6.Clarifying the meaning of the governing law. This requires the general method of legal interpretation which will not be repeated here.

7.If there is a legal loophole in either the rule of conflict or the governing law, the judge may make corrections by adopting transnational law or other concepts.

8.Making a judgment on the disputed point based on established legal rules. Usually, few disputed points may involve the maintenance of public order or other problems.

The above analysis proves once again that the key for the ruling of such cases lies in contract interpretation and the application of law. It is a matter of ruling method application. The methods of natural science intend to explain cause and effect, and the methods of rationality and normative science intend to justify the relations between cause and effect. The aim of judicial ruling is justification but not interpretation.3The judge has the obligation to explain the true reason for a ruling. Compared with contents without reasoning things out, the argument of ruling is a great step forward, of course. However, in argument, the judge has to pay attention to the problem of degrees: resorting to sophistry is no different from arbitrariness and recklessness, being perfunctory is contrary to professional ethics, and common sense, moral and legal intuitions can only provide support for the reasons for ruling. Only the conscious use of ruling methods during the ruling process is the road to the justification of rulings. The more justified a ruling is, the greater the possibility the same ruling for the similar cases will be used and impartiality will be met. Currently, the research on the methodology of law (mainly ruling methods)4 in the law circle in the PRC has just begun. Most of the law schools are still unable to provide qualified training for the students in this field. They have not noticed the gravity of the problem yet. For now, the judges have to study the methodology of law and ruling methods by themselves in quite a long period of time in the future. This is not surprising, though, since the legal profession itself is a profession which requires lifelong learning, and the schools cannot do everything for them. On the other hand, judicial impartiality may only have technical guarantee when the judges have grasped and applied the methodology of law, and only by then may the proposition of “all thinking legal professionals must strive to understand the methods applied by judges in the ruling of cases” 5 be tenable. The reason why there is this current deficiency in education is that something has gone wrong in legal education which legal research and legal practice are connected. Under the current situation, it is biased for the theorists to blame the practitioners for despising theories, but practitioners must also recognise they have missed the point in mocking theorists’ divorce from practice.

It is indeed a question of whether theory follows practice or vice versa.

* 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. Article 151 of the Civil Procedure Law of the People’s Republic of China (Revised in 2007).
2. The second paragraph of Article 178 of Switzerland’s Federal Code on Private International Law, December 18, 1987 (January 1 2010 text).
3. [US] Surya Prakash Sinha, Arbitration: Legal Philosophy, Law Press, 2004 Edition (Photocopy), Page 269.
4. Discussions on legal methodology, Shu Guoying, Wang Xiahao, Liang Yingxiu et al: Research on the Methodology of Law, China University of Political Science and Law Press, 2007 Edition, Page 22 – the end.
5. Quoted from Shu Guoying, Wang Xiahao, and Liang Yingxiu et al: Research on the Methodology of Law, China University of Political Science and Law Press, 2007 Edition, Page 85.

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