In a January 21 decision, a New York federal court denied a motion by Bohai Pharmaceuticals Group Inc. (“Bohai”), a publicly traded Nevada corporation based in China, to compel arbitration of a dispute with Euro Pacific Capital (“EPC”).

In 2010, EPC provided $12 million in financing to Bohai in a transaction that was documented in promissory notes and other agreements.  The transaction agreements each contained a forum selection clause selecting New York courts as the sole forum for resolving any disputes relating to the transactions contemplated by the notes.  The agreements were amended five times between 2011 and 2014, and each amendment also contained a forum selection clause requiring that any dispute related to such amendment be litigated in New York courts.  In 2012, Bohai informed EPC that Chinese regulations prevented it from transferring funds outside of China.  As a result, Bohai, through a subsidiary, placed into escrow the balance owed to EPC under the promissory notes, and guaranteed payment on the notes.  The escrow agreement (which was entered into by Bohai’s subsidiary, and not Bohai) contained an arbitration clause requiring that all disputes related to the escrow agreement be submitted to arbitration before the China International Economic and Trade Arbitration Commission in Shanghai.

In 2015, Bohai defaulted on the notes, and EPC filed suit against Bohai in the Southern District of New York.  EPC moved to compel arbitration based on the arbitration provision of the 2012 escrow agreement.  The court found that the arbitration provision in the escrow agreement was limited to disputes concerning that agreement, and that Bohai and EPC did not have an agreement to arbitrate claims related to the promissory notes.  The judge rejected Bohai’s argument that the financing agreements and the escrow agreement constituted a “single transaction” governed by the arbitration clause in the escrow agreement.  The judge reasoned that the escrow agreement was not signed at the same time as the financing agreements, and that Bohai was not a party to the escrow agreement.

The case demonstrates that while U.S. courts have a strong policy in favor of enforcing arbitration agreements, the terms of an arbitration agreement (and any related agreements among the parties) will be highly relevant in determining whether a dispute is subject to arbitration.  The full text of the case is available here.

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