Drafting lesson from Chinese-U.S. contract case: Be explicit that a master agreement controls

It’s quite common for vendors and customers to enter into “master” agreements that are intended to govern subsequent sales orders, statements of work for services, etc.  It’s best for the subsequent contracts to state expressly that the master agreement’s terms are to control.

Consider CEEG (Shanghai) Solar Science & Tech. Co. v. LUMOS LLC, No. 15-1256 (10th Cir. Jul. 19, 2016), affirming No. 14-cv-03118 (D. Colo. May 29, 2015). In that case:

• A Chinese manufacturer of solar-panel products entered into a co-branding agreement with a U.S. retailer. That agreement called for the retailer to order solar-panel products from the manufacturer at stated prices.
• The retailer’s CEO testified, and the U.S. trial court accepted, that the parties had intended that the co-branding agreement would be a “master” agreement that would govern all sales contracts.
• The co-branding agreement contained an arbitration provision, which expressly required that arbitration proceedings be in English.
• The retailer also entered into specific written sales contracts with the manufacturer; the sales contract contained an arbitration provision, but that provision did not require English-language arbitration.
• Apparently, neither the co-branding agreement nor the sales contract in question said anything about a master agreement. (The courts’ opinions were not specific on this point.)
• The manufacturer and the retailer communicated exclusively in English.
• One shipment of goods had quality problems; the retailer refused to pay.
• After negotiations went nowhere, the manufacturer filed a demand for arbitration with the Chinese arbitration institution designated in the earlier, co-branding agreement.
• The Chinese arbitration institution sent the U.S. retailer a notice of arbitration, in Chinese. The U.S. retailer did not realize what the notice of arbitration was. Consequently, the retailer did not realize that under the agreed arbitration rules, a 15-day clock was ticking on the retailer’s right to participate in selecting the members of the arbitration panel. That deadline passed, and the panel members were selected without input from the retailer.
• The arbitration panel ruled that the so-called master agreement did not apply and that the sales contract controlled. The arbitration panel awarded damages to the manufacturer, which then sought to enforce the award against the retailer in a U.S. court.

The Colorado district court ruled that, contrary to the decision of the arbitration panel, the testimony of the retailer’s CEO established that the co-branding agreement had indeed been a “master” agreement; this meant that the Chinese-language notice of arbitration had been insufficient, and that in turn meant that, under the New York Convention, the court could decline to enforce the damages award.

The Tenth Circuit reached the same result, but used a different route to get there. The appellate court noted that arbitration awards are virtually unreviewable by courts, even if the arbitral tribunal “gets it wrong.”  So, the Tenth Circuit focused instead on whether the notice of arbitration, which was in Chinese, met the standard set out in the New York Convention. The court concluded that the notice standard had not been met, and that the U.S. retailer had been prejudiced as a result.  See id., slip op. at 10 & n.2.

DRAFTING LESSONS:

1. When drafting a purchase order, statement of work, etc., that’s to be governed by a “master” agreement, it’s best for the draft to expressly identify the “master” agreement and state that its terms apply.
2. When drafting a multi-national contract, consider specifying the language in which notices must be sent, especially notices concerning arbitration (and service of process for litigation, if applicable).

I’ll be updating the Common Draft annotation about master agreements with a discussion of this case.

(A different question is: What should happen if the master agreement and the subsidiary agreement were to differ in some material respect?  Should the master agreement control, or the subsidiary agreement?  One approach might be to have the master agreement prevail unless the subsidiary agreement expressly and conspicuously states otherwise in the top half of its front page; that gives the parties flexibility while still alerting whoever signs the statement of work that there might be problems.