It is common for international sales contracts to have a choice-of-language provision designating an official language for the agreement. However, when preparing the contract one should consider both the enforceability of the choice-of-language provision and its application to related activities, such as arbitration. This comment briefly discusses a single judicial decision. Always consult an experienced attorney in international business transactions.
A recent decision by the U.S. Court of Appeals for the Tenth Circuit refused to enforce a Chinese arbitration award because the notice of the arbitration proceeding was in Chinese [CEEG (Shanghai) Solar Science & Technology Co., LTD v. LUMOS LLC]. In brief and incomplete overview, the U.S. purchaser made a warranty claim against the Chinese manufacturer. After two years of communications and negotiations in English, the Chinese manufacturer sent the U.S. purchaser a Chinese-language notice of an arbitration proceeding to be conducted in China in Chinese. The U.S. purchaser missed a deadline to participate in the selection of arbitrators. Ultimately, the Chinese manufacturer sought enforcement of an arbitration award in a U.S. court.
The parties had entered into a "Co-Branding Agreement" stating that "all documentation, notices, judicial proceedings, and dispute resolution and arbitration entered into, given, instituted pursuant to, or relating to, this Agreement be drawn up in the English language." It additionally provided that any disputes would be subject to arbitration by the China International Economic and Trade Arbitration Commission (CIETAC). This agreement contained warranty language.
A separate "Sales Contract" entered into approximately one year later did not contain an English language arbitration provision but stated that arbitration "shall be conducted in accordance with [CIETAC's] arbitration rules." The Contract did state that if the Chinese and English versions conflicted, the English version would govern. The Contract did not contain warranty language but did provide that the purchaser could file a "quality discrepancy" claim within thirty days of receiving the goods.
CIETAC rules state that while the parties may agree upon an arbitration language, in the absence of such a provision, the arbitration language will be Chinese or another language that CIETAC might designate. Hence, the arbitration was conducted in Chinese.
The purchaser argued in the arbitration proceeding that the Co-Branding Agreement and Sales Contract should be read together. However, the Chinese arbitration panel declined to do so, citing inconsistencies in the agreements, concluding that the warranty provisions in the Co-Branding Agreement were not binding in the Sales Contract. Additionally, the arbitration panel stated that it had authority only to review the Sales Contract.
After obtaining a favorable Chinese arbitration award, the Chinese manufacturer sought enforcement in a U.S. federal District Court under the Federal Arbitration Act and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"). The District Court refused to enforce the arbitration award, finding that the Chinese-language notice of arbitration was insufficient and that the provisions in the Co-Branding Agreement were a "master agreement" that served as an "umbrella" and should have controlled.
The Tenth Circuit upheld the District Court's decision, indicating that while an arbitrator's decisions are subject to "maximum deference," the New York Convention specifies that an arbitration award may not be upheld if a party did not receive proper notice of the arbitration proceedings. Citing previous cases, the Tenth Circuit stated that "notice must be reasonable calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Furthermore, the previous communications between the parties had been in English, English was specified in the agreements, and it would have been easy for the Chinese manufacturer to have included an English-language notice with the Chinese-language notice of arbitration. This ease was demonstrated by an English-language email concerning the arbitration sent by the Chinese manufacturer one month after the Chinese-language notice of arbitration. Ultimate prejudice to the U.S. purchaser resulted from both the loss of the right to participate in the selection of the arbitral tribunal that the Court found to be "not a minor procedural misstep" and the "surprisingly" complicated task of obtaining Chinese legal counsel to represent it in the arbitration.
There are several noteworthy takeaways from this decision:
1. Be certain that multiple agreements have standardized provisions and that each one appropriately references and incorporates the others' provisions.
2. Understand the culture, business customs, and expectations of the nation where you are conducting business.
3. The routine manner of doing business between the parties, in this situation conducting the transaction in English, will be given considerable weight by courts.
4. Plan ahead for translators and foreign legal counsel to be available as potentially needed under the agreement and business relationship.
5. Be very careful how a choice-of-language provision is written and be clear that it applies to all situations and will be legally enforceable in the nation where the transaction occurs.
6. When referencing an external body's rules (in this case, CIETAC) specify any provisions contained in those rules that do not apply to this agreement.
7. Have an internal business protocol for each transaction that will result in promptly reviewing and responding to situations and correspondence.
8. Realize that fundamental fairness dictates that appropriate notice and right to participate in arbitration be given.
9. While arbitration awards are typically enforced, it is not true that courts will simply rubber stamp an arbitration.
10. The New York Convention references a number of situations in which enforcement of a foreign arbitration award may be denied. In brief, enforcement may be denied based upon: a party being incapacitated; the agreement being unlawful where made; the lack of proper notice to a party or a party's inability to present his case; the subject or award was beyond the scope of the arbitration agreement; the arbitration panel or procedure was not in accordance with the agreement of the parties; the award was not final or was overturned in the country where it was created; or recognition or enforcement of the award would be contrary to public policy.
This comment provides a brief and incomplete educational overview of a single judicial decision and is not intended to provide legal advice. Always consult an experienced attorney in specific situations.