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The very recent case of China National Metal Products Import/Export Company v. Apex Digital, Inc. (August 16, 2004) 04 C.D.O.S. 7450 (9th Cir. Ct. of Appeals) demonstrates the troubles a company can encounter when it uses an ambiguous international arbitration clause in its contracting documents.
This case involved Apex, a U.S. importer of electronic equipment and China National, a Chinese manufacturer and exporter of DVD players. The parties entered into a series of written purchase orders for the DVD players. Each of the purchase contracts contained the following arbitration provision:
ARBITRATION: All dispute[s] arising from or in connection with this Contract shall be submitted to the China International Economic and Trade Arbitration Commission ["CIETAC"] for arbitration which shall be conducted by the Commission in Beijing or by its Shenzhen Sub-Commission in Shenzhen or by its Shanghai Sub-Commission in Shanghai at the Claimant's option in accordance with the Commission's arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties.
When Apex began to receive numerous customer complaints about the performance of the DVD players, it notified China National that it was in breach of the purchase agreements and later withheld payments from China National for the defective equipment.
Apex then commenced arbitration proceedings against China National with the CIETAC in Shanghai. Less than a week later, China National filed its own claim against Apex regarding nonpayment with CIETAC in Beijing. Apex objected to China National's initiation of arbitration with CIETAC in Beijing, asserting that China National should have raised its nonpayment action as counterclaims in the pending Shanghai arbitration. CIETAC rejected Apex's objections and ruled that it could entertain the two arbitration proceedings separately on the ground that they were not "entirely the same." The Beijing CIETAC panel conducted its own arbitration hearing on the claims brought by China National and ruled in its favor, after netting the amount of Apex's defect claims against the nonpayment amounts asserted by China National. Appraisals of the Beijing panel's ruling in China and the U.S. followed.
Apex's chief argument on appeal was that the Beijing arbitration award resulted from a proceeding that did not comply with the arbitration provisions agreed to by the parties in the purchase orders. According to Apex's interpretation of the arbitration clause, the first party to file for arbitration had the right to select the forum. Once the forum was selected by the first party to file, Apex argued, then all claims relating to the dispute had to be filed by both parties in that proceeding. Since CIETAC permitted separate arbitration proceedings, Apex argued that it violated Article V, section 1(d) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (The "Convention"). That section provides that: "Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority for the recognition and enforcement sought proof that …. (d) … the arbitral procedure was not in accordance with the agreement of the parties…". China National responded that CIETAC did follow the agreement of the parties because the arbitration clause did not limit the term "Claimant" to one party. Rather, it argued, there were in fact two claimants. Since there were two claimants, it claimed that by the terms of the arbitration provision, it had the right to pick a forum for arbitrating its own claims.
In ruling in favor of China National, the Ninth Circuit noted that the arbitration clause, itself, was not clear on whether there can be one or two claimants. However, the court ruled that the arbitration clause, by its own terms, recognized that the wording might not resolve forum disputes and therefore permitted CIETAC to conduct the arbitration "in accordance with [CIETAC's] arbitration rules in effect at the time of applying for arbitration." In essence, the court reasoned, the arbitration clause provides that CIETAC may apply or interpret its own rules in resolving forum disputes. As a result, CIETAC did conduct the arbitration procedures in accordance with the agreement of the parties and thus did not contravene Article V, section 1(d) of the Convention.
The Ninth Circuit agreed with Apex's argument that having two arbitrations concerning the same purchase orders in different forums was clearly inefficient. However, the court noted that the fault lay with the arbitration clause, itself, and therefore Apex had no grounds to complain. The court also agreed with Apex's contention that such a result would never had occurred if the matter had been litigated within the U.S. court system. However, the court again noted that Apex was stuck with the procedure it had agreed to in the first place. In the final analysis, this case highlights the need for the parties to be especially careful in drafting their international arbitration clauses. Using shortcuts such as wholesale incorporating by reference the rules of the arbitral body without analysis of those rules may often create more problems in the long run than spending the time and expense of negotiating and drafting a more thorough and well-thought-out arbitration clause.
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