[Basic Facts]

On September 23, 2005, Shanghai Golden Landmark Co., Ltd. (“Golden Landmark”) and Siemens International Trading (Shanghai) Co., Ltd. (“Siemens”) entered into a contract for goods supply by means of bidding, in which it was agreed that Siemens should deliver the equipment to the construction site prior to February 15, 2006, and if any dispute arose, it shall be submitted to Singapore International Arbitration Centre (“SIAC”) for settlement by arbitration. Disputes arose between the parties during the performance of the contract. Golden Landmark referred it to SIAC for arbitration and asked to rescind the contract and stop paying for the goods. Siemens counterclaimed in the arbitration procedure by asking for the full payment of the goods price and interests as well as the compensation for other losses. In November 2011, the SIAC dismissed the petition of Golden Landmark and supported the counterclaim of Siemens. Golden Landmark made partial payment and owed outstanding payment and interests under the award totaling CNY 5,133,872.3. Pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitration Award, i.e. the New York Convention, Siemens submitted a petition to No. 1 Intermediate People’s Court of Shanghai asking for the recognition and enforcement of the award made by SIAC. In its defense, Golden Landmark believed that such award should not be recognized or enforced because both parties to the case were Chinese legal persons and the place of contract performance was China as well. Thus, the civil relationship involved in the case had no foreign-related factors and the agreement between both parties on referring the dispute to a foreign arbitration body was invalid. Recognizing and enforcing the award of the case involved would be against the public policies of China. 

[Judgment]

After reporting level by level to the Supreme People’s Court and receiving the reply, No. 1 Intermediate People’s Court of Shanghai ruled to recognize and enforce the arbitration award of the case pursuant to the provisions of the New York Convention. As to whether the arbitration clause in accordance to which the dispute of the case should be submitted to foreign arbitration was valid or not, the key issue  whether the contractual relationship at issue has foreign-related factor. If it does, the arbitration clause is valid; otherwise, it is invalid. Having given a full review of the actual situations as the subjects, performance attributes, etc. involved in the contract under the case, and pursuant to Paragraph 5, Article 1 of the Interpretation (I) of the Supreme People’s Court on Issues concerning the Application of the Law of the People's Republic of China on Application of Laws to Foreign-Related Civil Relations, it can be determined that the contractual relationship at issue is a foreign-related civil legal relationship. This is because first, despite both being Chinese legal persons, the place of registration of both Siemens and Golden Landmark were in China (Shanghai) Pilot Free Trade Zone, their  were both wholly foreign-owned enterprises, and both of them were closely related to foreign investors. Second, the attributes of contract performance in this case involved foreign-related factors. The equipment involved was firstly delivered from a foreign country to the pilot free trade zone for bonded supervision, and then, as needed for contract performance, the formalities for customs clearance and tax payment were handled at appropriate time to enable the equipment involved to be moved from the pilot free trade zone to the outside. Up to this point, the formalities for import of the goods had been completed. Therefore, the circulation of the subject matter of the contract had some characteristics of international sale of goods. The arbitration clause involved was therefore valid. In addition, there was no conflict between the content of the arbitral award involved and the public policies of China. For this reason, it is not violating the public policies of China to recognize and enforce such arbitral award. In the meantime, the ruling also specified that Golden Landmark Company actually participated in the entire arbitration procedure, claimed that the arbitration clause was valid and partially performed obligations as determined in the arbitral award after the issuance of such arbitral award. Under such circumstance, the petition of Golden Landmark Company for refusing the recognition and enforcement of the arbitral award on the ground that the arbitration clause was invalid violated the generally accepted legal principles of estoppel, good faith, justice and reasonableness. Therefore, the claim of Golden Landmark Company should not be supported. 

[Significance]

Pilot free trade zones (PFTZs) play as the fundamental platform, important link and strategic support for China to promote the “Belt and Road” building. It is helpful in boosting the international credibility and the influence of China’s rule of law to keep abreast of the internationally universal practice, to support the development of pilot free trade zones and complete the mechanism for settling the international arbitration and other non-litigation disputes. The case ruled that, against the reform background of promoting investment and trade facilitation in the PFTZ, it is important to recognize the foreign-related factors in any contractual dispute among wholly foreign-owned enterprises inside the PFTZ. The case also confirmed the arbitration provision to bevalid, made clear the principle of “estoppel” , and applied the “pro-enforcement bias” concept provided in New York Convention, which showed China’s fundamental stance of honoring the obligation under international treaties. Meanwhile, this case pushed ahead the breakthrough reform from point to surface for enterprises inside the PFTZ choosing offshore arbitration, making itself a successful example of replicable and promotional judicial experience in the PFTZ. In January 2017, the Supreme People’s Court issued the Opinions on Providing Judicial Guarantee for Building Free Trade Zones in which it stipulates that where the wholly foreign-owned investment enterprises registered in the PFTZ mutually agree to submit the commercial dispute to foreign arbitration, the relevant arbitration agreement shall not be treated as invalid on the ground that there is no foreign factor involved in such dispute; it also stipulates that where one of both parties to a dispute is a foreign investment enterprise registered in the PFTZ and agrees to submit any commercial dispute to foreign arbitration or if either party submits the dispute to foreign arbitration but claims that the arbitration agreement is invalid after an award is made, or if the other party raises no objection to the force of arbitration agreement in the arbitration procedure, but claims that the arbitration agreement is invalid after an award being given on the ground that no foreign-related factor is involved, that will not be supported by the People’s Court. This is beneficial to building a more stable and certain legal business environment for the “Belt and Road”.