Continental Enterprises Ltd. v Shandong Zhucheng Foreign Trade Group Co

A company’s capacity to contract is governed by the legal limits on its constitution and permitted business activities. The absence of a foreign-trade permit did not itself create incapacity, but the company’s articles did not authorise foreign trade and the contract was therefore void for want of capacity. A provision preserving contracts containing unlawful terms could not cure that fundamental defect.

Under the applicable Chinese foreign-trade agency rules, a commissioned foreign-trade operator contracted with the overseas party in its own name and alone acquired the contractual rights and liabilities. The principal could not thereby become a direct party. An arbitration agreement was likewise invalid where the Chinese party lacked capacity to enter it.

Continental Enterprises Ltd. challenged under section 67 of the Arbitration Act 1996 a GAFTA Board of Appeal award concerning its contract claim against Shandong Zhucheng Foreign Trade Group Co. The Board had held that Shandong Zhucheng Foreign Trade Group Co. was not bound by the soybean-meal sale contract and that it lacked jurisdiction over the claim.

The principal issues were whether the Chinese company had capacity to contract without a foreign-trade permit, whether the April 1998 amendments substituted Shandong Zhucheng Foreign Trade Co. as buyer or created an agency arrangement, and whether the arbitration clause survived any invalidity in the underlying contract.

1. The challenge failed. The court upheld the Appeal Award. The July 1997 contract was void because Shandong Zhucheng Foreign Trade Group Co.’s articles did not authorise foreign-trade activities. The absence of a foreign-trade permit was not, by itself, the source of incapacity.
2. Under Articles 8 and 9 of the Foreign Trade Law of the People’s Republic of China, the permit system applied because the parties intended that at least some cargo would be imported into China. The contractual provision placing responsibility for obtaining licences on the buyer did not make the arrangement illegal under English law.
3. Article 9 of the PRC Law on Economic Contracts involving a Foreign Interest preserved a contract containing unlawful terms where those terms were cancelled or modified. It did not save an entire contract void for want of one party’s capacity.
4. The April agreement substituted Shandong Zhucheng Foreign Trade Co. for the original buyer. It did not establish that the substitute company was acting as purchasing agent for the original buyer. Under the Chinese foreign-trade agency rules, the commissioned operator contracted in its own name and bore the contractual rights and liabilities. The principal and overseas seller could not therefore enter direct contractual relations through that commission arrangement.
5. The court accepted that Nelson Cheng had actual authority to conclude the April agreement on behalf of Continental Enterprises Ltd. The subsequent contract was consequently between Continental Enterprises Ltd. and Shandong Zhucheng Foreign Trade Co.
6. The arbitration clause did not survive the incapacity affecting the July contract. Although Article 19 of the Arbitration Laws of the PRC treated an arbitration agreement as independent, Article 17 rendered it void where a party lacked capacity for the relevant civil conduct. The challenge to the Appeal Award therefore failed.

The judgment concerns a first-instance section 67 challenge to a GAFTA Board of Appeal award. The court upheld the Appeal Award and dismissed the challenge.