EFFECTS OF UNAUTHORIZED AGENCY ON ARBITRATION AGREEMENT

By Weiwei Gu | Yin Wu

 

1. Case Summary

 

Case Background

 

Petitioner A was a controlling shareholder of a public company.  The third party B was a director of the said public company, and a relative of A.  Though the Shares Transfer Agreement at issue indicated that A intended to transfer his shares of the public company to company C, what occurred at the signing part of the Agreement was B’s signature.  Furthermore, as indicated by the Agreement at issue, where a party breaches the Agreement, the other party can submit the case for arbitration at the arbitral institution where the public company is located (Changsha, Hunan).  A subsequently stated that he didn’t perform the duties under the Shares Transfer Agreement because it didn’t authorize B to sign it.  Consequently, on the basis of this Agreement, company C initiated an arbitration proceeding against A at Changsha Arbitration Committee.  After Changsha Arbitration Committee heard the case, A requested the Intermediate People’s Court in Changsha Municipality (“Changsha Intermediate Court”) to determine the aforementioned arbitration clause as invalid.

 

Arguments of Parties

 

A believed he should not be bounded by the arbitration clause under the Shares Transfer Agreement because in this case that relates to the system of civil agency, company C didn’t provide evidence to prove that B signed the Agreement with prior authorization or post confirmation from A.  The Shares Transfer Agreement as well as the arbitration clause included, as a result, did not create any legal biding effect on A (NOTE: We represented A in this case; elaborate analysis and comments on this case will be provided in the second part of this article in detail, and therefore is not explicated here).

 

Company C proffered records of messages exchanged between B and relevant persons in charge at company C, in order to prove for B’s authority; or to say the least that the B’s words and behaviors, by themselves, constituted apparent authority in regards with A, thereby making the arbitration clause binding on both parties.

 

Focus of Disputes

 

After hearing all parities’ opinions, Changsha Intermediate Court concluded the focus of disputes in this case lies on whether the arbitration clause under the Agreement at issue had binding effect on A and company C, and determined the validity of the arbitration clause at issue in this case, given the specific circumstances of this case, hinged on whether B could express intention on A’s behalf.

 

Court’s Opinion

 

Eventually, Changsha Intermediate Court adopted our opinion and held that:

 

An arbitration agreement is an agreement entered into by parties on both sides before or after the occurrence of disputes where both parties agree to voluntarily submit their disputes to an arbitral institution to be resolved.  In accordance with Clause 1 of Art.19 of the Arbitration Laws of the People’s Republic of China (“Arbitration Laws”) which provides that “Given its independent existence, the validity of an arbitration agreement is not affected by any change, rescinding, termination and invalidity of the contract,” this case is related only to the validity of an arbitration clause.  Pursuant to Art.16 of the said laws, “An arbitration agreement should include the following contents: (1) an expression of intention for arbitration……”  Accordingly, an intention expressed for arbitration should be genuine and unambiguous.

 

In this case, the Shares Transfer Agreement was signed by company C and B in the name of A.  However, in order to express intention for arbitration on someone else’s behalf, an express authority rather than an implied or apparent authority must be obtained.  The evidence proffered by company C was not sufficient enough to establish that A had given express authority to B on the matter of expressing the intention for arbitration.  Besides, A clearly denied that he had ever made prior authorization or post confirmation.  As a result, the arbitration clause at issue was not proved to be A’s genuine expression of intention for arbitration, and it therefore had no binding effect on A.  Thus, the Court deemed the arbitration clause at issue invalid.  

 

2. Analysis and Suggestion

 

2.1. Whether A can submit a petition requesting the Changsha Intermediate Court to determine the arbitration agreement as invalid?

 

2.1.1. The Question—whether the matter on the existence of an arbitration agreement falls within the hearing scope of cases where a court can adjudicate the validity of an arbitration agreement?

 

According to Art.20 of the Arbitration Laws, a party can request an arbitration committee to decide or a people’s court to adjudicate, when parities have disputes over the validity of an arbitration agreement.  However, as to the interpretation of “the validity of an arbitration agreement” in this clause, Arbitration Laws provide no further clarification.  The resulting question would be: when disputes over the existence of an arbitration agreement arise between parities, can this provision above be used as a basis for requesting a court to determine the said arbitration agreement’s validity?

 

We have noted that certain conditions, which have the effect of causing an arbitration agreement to be invalid, are stipulated in Art.17 and Art.18, apart from Art.20, of the Arbitration Laws, including:(1) where matters agreed upon for arbitration are beyond the scope of arbitration prescribed by law; (2) where an arbitration agreement is concluded by persons without capacity for civil acts or with limited capacity for civil acts; and (3) where one party forces the other party to sign an arbitration agreement by means of duress; and (4) where the matters for arbitration or the arbitration commission are not agreed upon by parties in the arbitration agreement or agreed upon equivocally, and parties fail to reach an supplementary agreement.

 

Based on the provisions above, it seems that a precondition for a party to request a court to determine the validity of an arbitration agreement is limited merely to a pre-existing arbitration agreement between parties, i.e., parties have no disputes over the fact that they have entered into an arbitration agreement in spite of the circumstances where the legal effect of such arbitration agreement is directly affected by certain deficiencies.  However, speaking of this case, the focus of disputes between A and company C hinged on whether an arbitration agreement existed between them, or given A’s assertion that he was not subject to the arbitration agreement for he didn’t sign it, would it be possible for the Court to dismiss the case on the ground that such circumstances exceeded the hearing scope of cases as stipulated in Art.20 of the Arbitration Laws where a party is entitled to request a court to determine the validity of an arbitration agreement. 

 

2.1.2. Opinion in Practice

 

(1) Changsha Intermediate Court inclines to hold that the existence of an arbitration agreement falls within the hearing scope of cases where a court can adjudicate the validity of an arbitration agreement.

 

Based on the cases we searched in the area of Hunan (primarily focusing on cases ruled by Changsha Intermediate Court), we noticed that the Changsha Intermediate Court tends to hold the view that the existence of an arbitration agreement falls within the hearing scope of cases where a court can adjudicate the validity of the arbitration agreement, as demonstrated in cases like (2015)长中民五仲字第0363号 and (2015)长中民五仲字第01749号.

 

In case No. 01749, Hunan Provincial People’s Government, the petitioner, argued that not being a signatory party of the Franchise Contract at issue, it had no relations of civil authorization or empowerment, or succession of rights and/or duties with the Hunan Provincial Transportation Bureau that signed the contract, and it was therefore not subject to the arbitration clause at issue.  As to whether this case fell within its jurisdiction, the Changsha Intermediate Court held the view that as the petitioner in this case requested a people’s court to determine whether an arbitration agreement had binding effect on the him and the petitionee, this case should be heard as a case for determining the validity of an arbitration agreement.

 

After clarifying the mainstream opinion held by the Changsha Intermediate Court, we suggested A to directly file a petition to the Changsha Intermediate Court, a judicial organ independent from the Changsha Arbitration Committee, requesting it to determine the validity of the arbitration agreement.

 

(2) The Supreme Court also inclines to hold that the existence of an arbitration agreement falls within the hearing scope of cases where a court can adjudicate the validity of an arbitration agreement.

 

As we noticed, the Supreme People’s Court (“Supreme Court”) also tends to believe that the matter of “the validity of an arbitration agreement” mentioned in Art.20 of the Arbitration Laws, should include the disputes over the existence of an arbitration agreement, which is demonstrated in detail as below:

 

a. In the Letter from the Supreme Court Responding to the Request for Instructions as to the Case Where Andre Juice Co., Ltd (the Petitioner) and Qingyang Municipality Hengsheng Juice Co., Ltd. (the Petitionee) Requested for Determining the Validity of an Arbitration Agreement, the Supreme Court held that: the six sales contracts at issue were prepared by Qingyang Municipality Hengsheng Juice Co., Ltd. without being confirmed by Andre Juice Co., Ltd.  Thus, the parties lacked consistent expressions of intention for submitting the disputes arising from the six sales contract at issue for arbitration, and the arbitration clause thus should be deemed invalid.

 

b. In the Letter from the Supreme Court Responding to the Request for Instructions as to the Issues regarding the Arbitration Clause in the Confirmation Lawsuit between Shenhua Coal Transportation and Sales Company and Marinic Shipping Company (〔2013〕民四他字第4号), the Supreme Court held that: Tianjin Maritime Court should hear this case in which Shenhua Coal Transportation and Sales Company requested the Court to determine whether an arbitration agreement existed between it and Marinic Shipping Company.

 

(3) Most courts, however, hold that the existence of an arbitration agreement exceed the hearing scope of cases where a court can adjudicate the validity of an arbitration agreement.

 

Nevertheless, it should be particularly observed that there are still many courts with the viewpoint that the issue of the existence of an arbitration agreement is beyond the hearing scope of cases where the validity of an arbitration agreement can be adjudicated.  Cases for reference include(2017)沪01民特186号 ruled by the No.1 Intermediate People’s Court in Shanghai Municipality and (2015)三中民(商)特字第10138号 ruled by No.3 Intermediate People’s Court in Beijing Municipality.  In both cases, the petitioners requested the courts to determine the arbitration clauses as invalid on the basis that the petitioner was not a party of the contract.  Petitions in both cases were dismissed by courts as they exceeded the scope of judicial review where a people’s court has jurisdiction to hear cases regarding the validity of an arbitration agreement.

 

2.1.3. Risk Warning

 

Taking into account the aforementioned opinions in practice, under the circumstances where in practice one party seeks a court’s adjudication on disputes over the parities’ entering into an arbitration agreement, or an arbitration agreement’s binding effect on one party, there still exists the risk that such request for adjudication would be dismissed.  Therefore, it is suggested that prior to submitting petition, attitudes of courts with jurisdiction on such issues should be further studied.

 

2.2. Whether A is bound by the arbitration agreement?

 

2.2.1. The Question—under agency system, how to make definite the expression of intention to request for arbitration?

 

The specialty of arbitration, one of the mechanisms for resolving disputes, relies on that its availability is based on both parties’ mutual choices, or in other words, conditioned on a clear arbitration agreement entered into by and between both parties.  In the absence of such an arbitration agreement, an arbitral institution loses the basis to hear the case.  Clause 1 of Art.19 of the Arbitration Laws provides that “Given its independent existence, the validity of an arbitration agreement is not affected by any change, rescinding, termination and invalidity of the contract,”and Clause 1 of Art.16 of the said laws further stipulates that an arbitration agreement should contain an “expression of intention to request for arbitration.”  We accordingly believe that as a party’s expression of intention for arbitration is relatively independent, it should be made severally and expressly.  Then, under the system of civil agency, how to make definite a party’s expression of intention for arbitration?

 

2.2.2. Opinion of Our Side—An agent with authority should be expressly authorized to sign an arbitration agreement while an agent without authority or with apparent authority should not be bounded by an arbitration agreement.

 

If an agent signs a contract containing an arbitration clause in the name of his principal, for such arbitration agreement to reflect the “expression[s] of intention to submit for arbitration” of both contract parties, the principal must have clearly authorized the agent to sign such arbitration agreement on behalf of him, or give subsequent confirmation thereafter. 

 

In terms of this case, given the materials submitted by company C and the factual background known by us, company C failed to proffer evidence to prove that A had previously empowered or subsequently confirmed B’s authority to sign the contracts at issue in the name of A.  Therefore, B’s act of signing the contract at issue on behalf of A constituted unauthorized agency, and couldn’t demonstrate that A had made an expression of intention for arbitration.

 

Although company C further claimed that B’s act constituted apparent agency, without taking into account company C’s inability to proffer sufficient evidence to establish elements required for apparent agency in this case, apparent agency, from the perspectives of its nature alone, is nevertheless a form of unauthorized agency.  In the situation of apparent agency, an agent’s act of agency produces an objective appearance that he has authority, and the counterparty of the contract as a result believes in good faith and without negligence that the agent has authority.  For the purpose of protecting the interests of the counterparty of such contract, apparent agency requiring the principal to be bound by such contract is therefore “created” by laws.  Thus, apparent agency in fact cannot reflect A’s expression of intention for arbitration.

 

2.2.3. Opinion in Practice—It is disputed whether an agent with apparent authority should be bounded by an arbitration agreement.

 

In practice, whilst it is not in dispute among courts that a party is not bound by an arbitration clause in cases of unauthorized agency (excluding apparent agency), differences in approaches taken by courts begin to occur when apparent agency is taken into consideration.

 

Although the Changsha Intermediate Court supports our opinion above, other courts consider that when an unauthorized act of agency by an agent establishes the elements required for apparent authority, the principal should be bound by the arbitration clause.  Cases for reference include(2016)川07民特字第1号ruled by the Intermediate People’s Court in Mianyang Municipality in Sichuan Province.  In this case, the petitioner based its claim that the arbitration clause at issue was invalid on the ground that the stamp in the contract at issue was in fact not its stamp.  The Court held that although the agent had no authority to enter into the contract at issue on behalf of the petitioner, the agent’s act constituted apparent authority according to regulations relating to apparent agency in Art.49 [1] of the Contract Laws.  Under such circumstances, the petitionee had reasons to believe it was with the petitioner that it entered into the sales contract and agreed upon the arbitration clause.  Similar cases include (2017)陕01民特92号 ruled by the Intermediate Court in Xian Municipality.

 

2.2.4. Risk Warning

 

Given the disputes in practice over whether an arbitration clause binds the principal in the system of apparent authority, we suggest that under circumstances where an agent enters into a contract (including arbitration agreement) in the name of his principal, the counterparty of the contract should request the principal to provide an express empowerment, specifying that he gives a clear authorization to the agent on the matter of concluding an arbitration agreement.  Besides, after entering into a contract, we suggest the counterparty of the contract to notify the principal in time and at the meanwhile preserve relevant evidence.

 

[1] Art.49 of the Contract Laws: If an actor enters into a contract in the principal’s name when he lacks authority of agency, or does so by exceeding the scope of or in spite of the expiration of his authority of agency, such act of agency shall be effective, provided that the counterparty has grounds to believe in the actor’s authority.




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