In 2017, the First Respondent, Group A (the “Issuer”), engaged the Second Respondent, Bank B (the “Underwriter”), to underwrite an issue of private placement notes. They entered into a Private Placement Agreement (“PPA”), which stipulated: “If the Company (i.e., the Issuer) and the Investor fail to resolve any dispute arising from this Agreement through negotiation, either party shall have the right to submit the dispute to the China International Economic and Trade Arbitration Commission (CIETAC) for arbitration in Beijing in accordance with its arbitration rules in effect at the time. The arbitral award shall be final and binding upon all parties.” Bank B signed and affixed its seal in the “Investor” section of the agreement.

In 2018, the Claimant, Bank C (the “Claimant”), subscribed to the above-mentioned private placement notes by entering into a Standard Distribution Agreement for Debt Financing Instruments of Non-Financial Enterprises with a third-party commercial bank.

In June 2019, the Issuer’s loan default triggered the cross-default clause in the PPA. At the first noteholders’ meeting convened by the Issuer in 2019, the Issuer undertook to provide joint and several guarantees through its legal representative and a subsidiary, with the relevant legal procedures to be completed within 30 business days. In August 2019, the Underwriter issued a notice of default, declaring the private placement notes immediately due and payable on the grounds that the Issuer had failed to implement the resolution passed at the noteholders’ meeting. The Issuer subsequently failed to make payment when due, constituting a material default.

In August 2020, the Claimant sent a demand letter to the Issuer, which went unanswered. In September of the same year, the Issuer and its subsidiary received an Advance Notice of Administrative Penalty and Market Prohibition from the China Securities Regulatory Commission (CSRC) for suspected violation of information disclosure regulations.

The Claimant sought a relief requiring the Issuer to pay the notes principal, interest, and damages. The Claimant further sought a relief requiring the Underwriter to bear joint and several liability on the ground that the Underwriter had failed to perform reasonable and prudent due diligence, and had not adequately verified or disclosed the Issuer’s true operational status, financial condition, and debt repayment capacity.

The arbitral tribunal, after hearing the case, upheld the Claimant’s relief for payment in full against the Issuer but dismissed the relief seeking to hold the Underwriter jointly and severally liable.

1. Jurisdiction: Is the Underwriter bound by the arbitration clause in the Private Placement Agreement?

2. Basis of Liability: In the absence of an express provision in the PPA, does the Underwriter owe a legal duty to a professional institutional investor?

I. The Arbitral Tribunal Has Jurisdiction over the Underwriter

The Underwriter raised a jurisdictional challenge, arguing that the PPA at issue was entered into between the Issuer and the Underwriter, and that the Claimant was not a party to the PPA. It contended that the arbitration clause applied only to disputes between “the Company and the Investor” and that no arbitration agreement existed between the Claimant and the Underwriter.

The arbitral tribunal found the jurisdictional challenge to be unfounded and confirmed its jurisdiction over the case:

First, the arbitration clause in question represents the true intent of the parties, is legally valid and effective, and binds all parties to the PPA. The Underwriter signed and sealed on the “Investor” section of the PPA and is therefore bound by the arbitration agreement.

Second, with reference to Clause 12.3 of the model Private Placement Agreement for Debt Financing Instruments (2017 Edition) issued by the National Association of Financial Market Institutional Investors (NAFMII), when an underwriter signs the agreement as an “investor,” it is deemed to accept the terms of the agreement governing the underwriter’s rights and obligations. The underwriter’s signature cannot be viewed as a mere formality; it substantively binds the Underwriter to the agreement in its capacity as such.

Third, the arbitral tribunal adopted a broad construction of the term “the Company and the Investor” to prevent the dispute resolution mechanism from being rendered ineffective. The model agreement specifies “all parties” as the subjects of dispute resolution, which does not exclude the underwriter. The PPA at issue only listed the “Issuer” and the “Investor(s).” A narrow construction of the contractual terms would leave disputes involving the underwriter without a resolution pathway. In bond issuance, the underwriter is typically the primary drafter of the agreement and owes a duty of due diligence. Where the meaning of a term is ambiguous, it should be construed contra proferentem, i.e., against the drafter (the underwriter in this case). Including the underwriter within the scope of the arbitration clause aligns with commercial reality, facilitates a balance of rights and obligations among the parties, and leads to efficient dispute resolution.

II. Basis and Legal Grounds on the Underwriter’s Liability owed to the Investor

The Claimant argued that the Underwriter breached its duty of due diligence and prudent verification, acted with fault, and caused the Claimant’s investment loss. The Claimant sought to hold the Underwriter jointly and severally liable based on tort.

The Underwriter countered that the PPA did not stipulate any direct obligation owed to investors, and therefore the Claimant’s claim lacked a contractual basis. It further argued that it had performed its due diligence obligations as required and submitted its due diligence report and working papers as evidence.

The arbitral tribunal held that, even in the absence of any express contractual terms, the Underwriter may still bear liability to a professional institutional investor in tort and under the doctrine of quasi-contract, based on the following:

1. Basis in Tort

Pursuant to Article 10 of the Measures for the Administration of Debt Financing Instruments of Non-Financial Enterprises in the Inter-bank Bond Market, professional institutions and personnel, including underwriting institutions, must act with due diligence. If documents they issue contain false records, misleading statements, or material omissions, they shall bear legal liability for the portion for which they are responsible.

Under Article 29 of the Securities Law of the People’s Republic of China (the “Securities Law”), underwriters of securities offerings owe a duty to exercise due diligence in prudently examining issuance documents. Breach of this duty resulting in losses to investors gives rise to tort liability.

Although the Securities Law does not explicitly state whether it applies to debt financing instruments issued by non-financial enterprises, the arbitral tribunal, guided by the reasoning set forth in the Summary of the National Symposium on the Trial of Bond Dispute Cases, held that bonds sharing the common characteristic of “repayment of principal and interest” should be subject to uniform legal standards based on the fundamental principles of relevant laws and administrative regulations. Accordingly, the arbitral tribunal determined that where the Underwriter in the inter-bank market fails to exercise the degree of prudent verification commensurate with its market position and thereby causes losses to an investor, it breaches a statutory duty and shall be liable in tort.

2. Application of Quasi-Contract and Implied Contract Theories

The arbitral tribunal cited Articles 979 to 988 of the Civil Code of the PRC, which govern quasi-contracts, and took reference of the implied contract theory at common law. It reasoned that, even in the absence of an explicit written agreement, a meeting of minds to form a contractual relationship may be inferred from the parties’ conduct, the pattern of their dealings, and the nature of their performance.

In this case, the Underwriter accepted the Issuer’s engagement, received compensation, took responsibility for the issuance, reviewed documents, and communicated with investors. These actions effectively constituted a professional endorsement to investors of the Issuer’s qualifications and debt repayment capacity. Accordingly, an implied-in-law or quasi-contractual relationship was entered into between the Claimant and the Underwriter, giving rise to a duty of diligence. To deny the Underwriter’s duty of due diligence to investors solely because of the absence of a written agreement would create a significant imbalance in the rights and obligations among the three parties and would fail to effectively regulate the Underwriter’s conduct.

In summary, the arbitral tribunal found that the Underwriter owes a duty of diligence to investors. Breach of this duty may give rise to liability in both tort and contract.

Having established the basis of the Underwriter’s liability, the arbitral tribunal conducted a comprehensive review of the evidence, including due diligence work papers, supplementary reports, verification records, and interview notes. It ultimately found that the Underwriter had fulfilled its obligations to conduct reasonable due diligence and to act in good faith and with prudent verification as required. Therefore, the Underwriter bore no joint and several liability.