Effective resolution requires valid arbitration clauses

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Arbitration and litigation are popular methods of resolving commercial disputes, but the parties usually need to choose one of the two. Effective arbitration clauses within commercial agreements between parties are the premise and basis for dispute resolution by arbitration, which can exclude the jurisdiction of courts. Here, based upon the arbitration cases represented, the authors will explain how to draft valid arbitration clauses in the commercial agreements.

马江涛 Ma Jiangtao
马江涛 Ma Jiangtao

Validity

Valid arbitration clauses should include the following three aspects: i) parties’ manifest intent to submit their matter for arbitration, which should be real, definite, equitable and voluntary. Clauses that go against the parties’ real intent are invalid; ii) matters for arbitration should be legitimate and mutually agreed. The matters should also be within the boundaries of the law and the arbitration clauses; iii) the arbitration committee should be expressly chosen. In case the arbitration clauses do not provide for the arbitration committee, or do so in a vague way, and there is no supplementary agreement afterwards in this regard, the arbitration clauses should be invalid.

Drafting the clauses

Each arbitration institution has its own model arbitration clauses, which can be referred to by the parties in their commercial agreements. For example, the model clauses in the Hong Kong International Arbitration Centre’s (HKIAC) administered arbitration rules stipulate that parties who intend to resolve prospective disputes by arbitration in accordance with the rules can incorporate the following arbitration clause in their contracts: Any dispute, controversy or claim arising out of or relating to this contract, including the validity, invalidity, breach or termination thereof, shall be settled by arbitration in Hong Kong under the HKIAC administered arbitration rules in force when the Notice of Arbitration is submitted in accordance with these rules. As is shown, the valid arbitration clauses should have clear and definite stipulations regarding the above-mentioned three aspects.

Based upon the authors’ understanding of the validity of arbitration clauses, as well as experience of representation in arbitration cases, when drafting arbitration clauses special attention shall be given to the following:

Arbitration clauses shall specify arbitration as the sole recourse to resolve the disputes. Arbitration and litigation are mutually exclusive choices; therefore, an arbitration clause that stipulates that the parties can apply for arbitration, or file a lawsuit in the court, is invalid for lack of indefinite submission to arbitration. However, it is relatively simple to decide on the validity of such arbitration clauses. In practice, there arise conflicting arbitration clauses and litigation jurisdiction ones in related commercial agreements. For example, party A and party B executed a purchase agreement that stipulates that all disputed elements related to the purchase agreement should be submitted to arbitration. Afterwards, party A signed a business co-operation agreement with party B with regard to the goods purchased from party B based upon the purchase agreement, while the business co-operation agreement stipulates that the disputes shall be resolved by the court where party B is located.

When a dispute arose between party A and party B during performance of the business co-operation agreement, party B filed an action in the court where party B is located, while party A raised a jurisdiction objection based upon the arbitration clause in the purchase agreement and contended that their disputes should be resolved by arbitration. The case is about jurisdiction disputes caused by the inconsistent stipulations in terms of dispute resolution within the related commercial agreements

In such a case, full consideration should be given to specific factors like time sequences of the execution of the different agreements, and characteristics of contractual legal relations, so as to define the real intent of two parties in terms of jurisdiction in the business co-operation agreement at issue. The authors represent party B and argue that the stipulation should be invalidated, in that the jurisdiction clause in the business co-operation agreement is the sort of situation of “submission either to arbitration or lawsuit in the court” stipulated by the relevant law, and that the disputes arising out of the business co-operation agreement should be resolved in the court. This opinion has been supported by the court.

毕建伟 Bi Jianwei
毕建伟 Bi Jianwei

The arbitration clause should be definite and clear regarding the selection of the arbitration committee and the application of arbitration rules. The arbitration institution selected shall be sole and exclusive, while the agreed arbitration institution shall be existing. An arbitration clause that provides that“ disputes shall be resolved by the arbitration committee beyond the localities of both parties” or “disputes shall be resolved by the arbitration institution in a certain country mutually agreed by both parties”, and the like will simply render no way to decide on the arbitration institution with jurisdiction over the case.

In practice, parties’ agreement upon submission of disputes to a specific arbitration committee but application of other arbitration rules will apply, for the purpose of fully respecting and guaranteeing the parties’ free-will autonomy. Therefore, if the arbitration clauses provide specifically for the arbitration rules to apply, the arbitration rules prospectively to be applied shall be fully reviewed and checked in advance, to ensure that the mutually agreed arbitration rules will be applied effectively.

Among the arbitration cases this firm has represented, one arbitration clause stipulates that the case shall be submitted to the China International Economic and Trade Arbitration Commission (CIETAC) but that some arbitration rules that have expired shall govern. CIETAC decided to apply its own arbitration rules in that the arbitration rules agreed upon by the parties cannot be enforced, which rendered the parties’ real intent unachievable.

Conclusion

To draft valid arbitration clauses in commercial agreements, requirements of manifested intent for arbitration, legitimate and agreed matter subject to arbitration, and specifically selected arbitration institutions should be well handled to avoid validity issues, and to ensure that the parties’ disputes can be resolved by arbitration.

Ma Jiangtao is a senior partner and Bi Jianwei is a senior associate at Dacheng Law Offices in Beijing. They can be contacted on +86 10 5813 7799 or 5813 7675 respectively, or by email at [email protected] or [email protected] respectively.