In the Matter of the Application of New York State Department of Health, Petitioner, For an Order, Pursuant to Article 75 of the CPLR, staying an arbitration commenced by Rusi Technology Company, Limited, Respondent, 2022 NY Slip Op 50041(U) (Sup. Ct. Albany County Jan. 25, 2022

In a special proceeding brought before a trial level court in New York, the New York State Department of Health (“DOH“) moved for an order and judgment permanently staying an arbitration commenced by a Chinese company, Rusi Technology Company, Limited (“Rusi“), before the China International Economic and Trade Arbitration Commission (“CIETAC“). The court granted DOH’s application to permanently stay the CIETAC arbitration.

Factual Background

Early in the COVID-19 pandemic, DOH had agreed to purchase two million KN-95 masks from Rusi. DOH rejected the tender after a substantial number of masks did not comply with the standard specified in the purchase contract. The purchase contract consisted of three instruments: first, a document titled “Export Contract“; second, a purchase order that reduced the total purchase price and incorporated two appendices that contained standard New York contract terms (the “Purchase Order“); and third, a written amendment to the Export Contract that conformed its pricing terms with the Purchase Order.

The Export Contract was drafted in both English and Chinese. The English text stated that all disputes “shall be settled through friendly consultation“, and that the English text “shall prevail” in the event of “any discrepancies between the two versions.” In contrast, the Chinese text stated that any disputes would be resolved through binding arbitration administered by CIETAC, and that the Chinese text would prevail in the event of any conflict. The Chinese text also stated that the Export Contract was governed by Chinese Law and specified that the Convention for the International Sale of Goods (the “CISG“) would not apply.

The Purchase Order and its appendices were drafted in English and required that all disputes concerning international sales transactions would be resolved through binding arbitration in New York administered by the International Chamber of Commerce (“ICC“). An appendix to the Purchase Order also asserted that the “Contract”—comprised of the Export Contract and Purchase Order appendices—”shall be governed by and construed in accordance with the laws of the State of New York, the United States, except where Federal supremacy clause governs“.

Application to Compel Arbitration

New York Civil Practice Law and Rules (“CPLR“) 7503(b) permits “a party who has not participated in the arbitration and who has not made or been served with an application to compel arbitration” to “apply to stay arbitration on the ground that a valid agreement [to arbitrate] was not made“. DOH made such an application, arguing that the Export Contract did not have the requisite “meeting of the minds” required to refer any dispute between the parties to arbitration, and asserting that Rusi had agreed to DOH’s terms set forth in the Purchase Order attachments requiring the arbitration proceeding to be brought in New York before the ICC. In response, Rusi argued that the dispute should be governed by Chinese domestic law, which provides that, “where the parties concerned have a differing opinion upon the validity of an arbitration agreement, a request may be made for an award to be made by [CIETAC] or a judgment made by the People’s Court at the place of arbitration“.

The Court Decision

The court first determined that the CISG, rather than Chinese domestic law, was applicable to the dispute. The CISG governs the formation of international sales contracts and the rights and obligations of the buyer and seller. While parties may exclude the application of the CISG, the intent to opt out must be set out clearly and unequivocally in the contract and there must be mutual agreement on the law that would displace it. The court found that the Export Contract failed to evince a clear mutual intention to exclude the application of the CISG, particularly in light of the fact that the English and Chinese versions both purported to be controlling. Therefore, the CISG’s principles of contract formation and interpretation were applicable to the dispute.

Applying those principles, the court determined that there was no meeting of the minds as to the Chinese text that purported to require binding arbitration before CIETAC. The court found that DOH’s reliance on the English text was objectively reasonable under the circumstances and was consistent with the parties’ prior course of dealing. Indeed, Rusi had assured DOH that the English text was controlling, and Rusi knew (or must have known) that DOH’s subjective intentions would be formed on the basis of the English text. Therefore, New York cases that enforced arbitration clauses where a party simply failed to read or understand the terms of an agreement were inapplicable here.

Because the court concluded that the Export Contract did not constitute an express, unequivocal agreement to arbitrate before CIETAC, it granted DOH’s application to permanently stay the CIETAC arbitration.

This article was originally published in the North America Newsletter.