Defective Arbitration Clause: Handling Guidelines And Solutions For Enterprises

Authors: Truong Trong Minh – Senior Associate, Tran Thi Bao Tram – Lawyer.

In the entry to and performance of contracts, arbitration agreements are considered as the basis for establishing an outside-court dispute resolution method. However, in practice, not all arbitration clauses are drafted in a complete, clear and enforceable manner. The lack of coherence can lead to defects that the parties only notice when the dispute actually arises.

Defective arbitration clauses often appear in many forms, among which it is worth noting that inconsistent clauses, uncertain clauses, and inoperative clauses. These defects not only create difficulties in determining the true will of the parties, but can also cause enterprises to encounter confusion in determining the competent authority to settle disputes, the organization of arbitration, the method of setting up the Arbitral Tribunal and the applicable procedural rules.

This article analyzes common types of defective arbitration clauses, handling directions for inconsistent, uncertain or inoperative provisions, and provides some practical recommendations to help enterprises limit risks when choosing and applying arbitration mechanisms.

TYPES OF DEFECTIVE ARBITRATION CLAUSES

1. Inconsistent Arbitration Clauses

A inconsistent arbitration clause is an arbitration clause in which the contents of the parties’ agreement are inconsistent or mutually excluded in the same arbitration clause or in the same contract containing the arbitration clause.

Some common inconsistent arbitration clauses when drafting dispute settlement clauses are:

• The clause both defines Arbitration as the competent authority to resolve disputes, but at the same time allows the parties to take disputes to competent courts. According to Article II.3 of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (“New York Convention 1958”), when the parties have reached an arbitration agreement, the Court required to resolve the dispute within the scope of the agreement must transfer the parties to arbitration, except for some exceptions such as invalid or inoperative arbitration agreements. Therefore, in principle, the selection of arbitrators is binding and one party cannot unilaterally bring the same dispute to the Court for settlement. The simultaneous reserve of the right to initiate a lawsuit at the Court makes it unclear whether the Arbitration or the Court is the dispute resolution mechanism that the parties actually choose.
• The clause determines the Arbitration as the dispute resolution authority, but at the same time stipulates that the arbitral award may be appealed or that the dispute may be litigated again in the Court if a party disagrees with the award. This contradicts the general nature of the arbitral award that it is final and binding on the parties.

2. Uncertain arbitration clauses

An uncertain arbitration clause is one in which the content of the parties’ agreement is not specific or accurate enough to determine the arbitration mechanism that the parties have chosen.

In practice, there are many cases in which the arbitration clause is unclear due to technical errors and omissions that are likely to affect the determination of the jurisdiction of the arbitration center for dispute settlement or the establishment of case arbitration, some typical cases can be mentioned such as:

• The Dispute Settlement Clause stipulates that disputes are resolved by Arbitration but does not mention any form of arbitration (Institutional or Ad Hoc), or any arbitration center. This makes it difficult for the parties to accurately determine the arbitration center/case arbitrator who has the authority to resolve disputes when disagreements arise.
• The arbitration clause incorrectly states the name of the Arbitration Center. This case often arises due to technical errors in the process of drafting the Contract, such as the wrong name, incorrect abbreviation, or the use of the old name of the Arbitration Center. The mislabeling of the name may make it difficult to determine which Arbitration Center the parties really intend to choose, especially when the name written in the Contract may lead to multiple interpretations or does not correspond to any arbitration institution.
• The arbitration clause simultaneously selects two different Arbitration Centers. For example, the clause stipulates that “the dispute shall be resolved at Arbitration Center A or Arbitration Center B”. This way of provision does not clearly define which Arbitration Center is the competent authority to resolve disputes, especially if it does not specify which party has the right to choose or the criteria for determining the selected Arbitration Center. This may lead to disputes between the parties over the competent arbitration body and make it difficult to initiate, manage and conduct arbitration proceedings.

3. Inoperative arbitration provisions

According to the Article 4 of Resolution 01/2014/NQ-HDTP, an arbitration agreement that cannot be implemented as prescribed in Article 6 of the Law on Commercial Arbitration is an arbitration agreement in one of the following cases:

• The parties have reached an agreement to settle the dispute at a specific arbitration center but this arbitration center has terminated its operation without a successor arbitration institution, and the parties cannot reach an agreement on the selection of another arbitration center to settle the dispute;
• The parties have reached a specific agreement on the selection of arbitrators to arbitrate the case, but at the time of the dispute, due to force majeure events or objective obstacles that the arbitrator is unable to participate in the dispute settlement, or the Arbitration Center, the Court cannot find an arbitrator as agreed by the parties and the parties cannot reach an agreement on the selection of another arbitrator to replace them;
• The parties have reached a specific agreement on the selection of arbitrators to arbitrate the case, but at the time of the dispute, the arbitrator refuses to be appointed or the Arbitration Center refuses to appoint the arbitrator and the parties cannot reach an agreement on the selection of another arbitrator to replace them;
• The parties have an agreement to settle the dispute at an arbitration center but agree to apply the procedural rules of the arbitration center that are different from the agreed arbitration procedure rules of the arbitration center and the charter of the arbitration center selected by the parties to settle the dispute does not allow the application of the procedural rules of another arbitration center but the parties cannot reach an agreement on the selection of alternative arbitration procedural rules;
• The supplier of goods and services and the consumer have a clause on the arbitration agreement recorded in the general conditions on the provision of goods and services prepared by the supplier, but when a dispute arises, the consumer does not agree to choose arbitration to settle the dispute.

PROVISIONS ON THE HANDLING OF CERTAIN DEFECTIVE ARBITRATION PROVISIONS

1. Inconsistent arbitration clauses on arbitration and court jurisdiction

In case the arbitration clause stipulates both the arbitrator’s dispute settlement jurisdiction and the court’s dispute settlement jurisdiction, the settlement of conflicting arbitration clauses shall be carried out according to the guidance specified in Article 2.4 of Resolution 01/2014/NQ-HDTP, specifically as follows:

• In case a party has requested arbitration to settle the dispute before requesting the Court to settle the dispute: The Court shall return the statement of claim. In case the case has been accepted, the settlement of the lawsuit request shall be dismissed.
• In case the court receives a request for dispute settlement, the Court must verify whether the parties have submitted a request for arbitration for settlement within 05 working days from the date of receipt of the statement of claim:
  • If it is determined that the parties have filed a statement of claim for Arbitration before the Court receives the petition: The Court shall return the statement of claim.
  • If it is determined that the parties have not filed the statement of claim for arbitration: The Court shall consider and accept the settlement according to general procedures.
  • If, after accepting the settlement according to general procedures, the Court detects that the dispute has been requested to be settled by Arbitration before the time the Court accepts the settlement of the case, the Court shall dismiss the settlement of the case.

2. Uncertain arbitration provisions

In case the arbitration settlement mechanism is unclear or two different arbitration centers are selected

According to the provisions of Article 43.5 of the 2010 Law on Commercial Arbitration, in case the arbitration clause does not clearly stipulate the form of arbitration or the specific arbitration center cannot be identified, when there is a dispute, the parties must take the following steps:

Step 1: Re-agree on the form of arbitration or the specific arbitration organization to resolve the dispute;

Step 2: The claimant chooses the form and organization of arbitration to settle the dispute if the parties do not reach an agreement in Step 1.

In case of wrong name of the Arbitration Center

According to the provisions of Article 7.2 of Resolution 01/2014/NQ-HDTP, in case the arbitration agreement has unclear contents and can be understood in many different meanings, the provisions of the Civil Code shall be applied for interpretation. Article 404 of the 2015 Civil Code stipulates the interpretation of contracts as follows:

Quotes

“Article 404. Interpretation of contracts

1. Where a contract contains terms and conditions which are unclear, the interpretation of such terms and conditions shall be based not only on the wording of the contract but also on the mutual intentions of the parties during the process prior to and after the time of establishment and performance of the contract.

2. Where a term of a contract may be interpreted in different ways, it shall be interpreted in the way which, when effective, will best benefit the parties.

3. Where the wording of a contract may be interpreted in different ways, such wording shall be interpreted in the way most appropriate to the nature of the contract.

4. Where a contract contains a term or wording which is difficult to understand, such term or wording shall be interpreted in accordance with the customary practice of the place where the contract was entered into.

5. Where there is a conflict between the mutual intentions of the parties and the wording used in the contract, the mutual intentions of the parties shall be used in order to interpret the contract.

6. Where the party in a powerful position inserts into the contract contents which are disadvantageous to the party in a weak position, the contract shall be interpreted in a manner favoring the party in a weak position.”

End of quote

Thus, in principle, when the arbitration clause incorrectly states the name of the Arbitration Center, the explanation of which Arbitration Center has the jurisdiction to settle the dispute will be based on the intention of the parties expressed in the entire process before and at the time of establishment and performance of the contract. Assuming that the initial intention of the parties agrees that the Vietnam International Arbitration Center next to the Vietnam Chamber of Commerce and Industry (VIAC) is the dispute settlement body but mistakenly states that the International Arbitration Center in Vietnam next to the International Chamber of Commerce, the interpretation will follow the original will of the parties and determine that VIAC has the authority to settle the dispute.

Courts of some countries around the world have accepted arbitration clauses with the name of the Arbitration Center not correctly inscribed. Specifically, German courts have repeatedly expressed their willingness to recognize the validity of arbitration clauses whose content is still very indefinite. In 2006, the Stuttgart Court determined that a clause stipulating that the dispute would be resolved “not in the ordinary court but taken to Stockholm, Sweden” was interpreted as referring to arbitration according to the Stockholm Chamber of Commerce. Also in 2006, the Oldenburg Court held that the reference to the “International Court of Arbitration (Internationales Schiedsgericht) in Austria” was understood to be a reference to the International Arbitration Centre of the Austrian Federal Economic Chamber.

However, in the practice of dispute resolution in Vietnam, the wrong recognition of the name of the Dispute Settlement Arbitration Center has a relatively different handling direction compared to the above countries.

In a dispute over the Goods Purchase and Sale Contract, the People’s Court of Binh Duong province was resolved by the Decision to suspend the settlement of the first-instance commercial business case No. 09/2018/QDSTKDTM dated 27/7/2018. Accordingly, in the Goods Purchase and Sale Contract No. KE6-035A/04-17 and KE6-035B/04-17 dated 13/4/2017, the parties have an agreement to select a specific arbitration institution to settle the dispute as “VN International abritration Center at Chamber of Commerce and industry of Ho Chi Minh City”. The People’s Court of Binh Duong province said that because the purchase and sale contract between the two parties had been agreed upon, if there was a dispute, the Commercial Arbitration would settle it, so the lawsuit did not fall under the jurisdiction of the Court and the settlement of the case was suspended. This decision was later appealed. According to Decision No. 19/2019/QD-PT, the High People’s Court in Ho Chi Minh City said that the two parties had agreed to choose a specific arbitration institution to settle the dispute, now the plaintiff argues that the Arbitration Center no longer exists or does not have such an Arbitration Center, according to the provisions of Article 43 of the Law on Commercial Arbitration 2010, the two parties must re-agree on the form of arbitration or a specific arbitration organization or choose another arbitration center to settle the dispute. Therefore, it is reasonable that the first-instance level determined that the lawsuit did not fall under the Court’s jurisdiction to settle the dispute.

This opinion of the People’s Court of Binh Duong province and the High People’s Court of Ho Chi Minh City is quite similar to the opinion of the People’s Court of Ba Ria – Vung Tau province in Decision No. 02/2023/QD-PQTT issued on August 7, 2023.

However, the Decision No. 09/2018/QDSTKDTM dated 27/7/2018 of the People’s Court of Binh Duong province and Decision No. 19/2019/QD-PT of the High People’s Court in Ho Chi Minh City have been annulled by the Cassation Decision No. 08/2021/KDTM-GDT dated 15/7/2021 of the Council of Judges of the Supreme People’s Court. In accordance with this, the Council of Judges of the Supreme People’s Court said:

Quotes

“[2] Because there is no arbitration center named “Vietnam International Arbitration Center at the Ho Chi Minh City Chamber of Commerce and Industry” as agreed by the parties, the arbitration agreement cannot be implemented. Therefore, Company Q initiated a lawsuit to request the People’s Court of Binh Duong province to settle the dispute over the Goods Purchase and Sale Contract.

[3] In the Minutes dated 05/7/2018 of the People’s Court of Binh Duong province, Company Q and Company S both acknowledged that the arbitration agreement could not be implemented and agreed to request the People’s Court of Binh Duong province (where the defendant is headquartered) to settle the dispute arising from the above contract; that is, the two parties have reached a new agreement to choose the Court to settle the dispute instead of the arbitration agreement specified in the Goods Purchase and Sale Contract. …] “

End of quote

In this case, the Supreme People’s Court has determined that the arbitration agreement with the wrong name of the Arbitration Center is determined to be an inoperative arbitration agreement and the parties all admit that the arbitration agreement cannot be implemented and unanimously request the People’s Court of Binh Duong province to settle the dispute. The judgment in paragraph [2] of the Supreme People’s Court may lead to the interpretation that the arbitration agreement under the wrong name of the Arbitration Center is considered to be an inoperative arbitration agreement.

However, in the above case, the factor that makes the arbitration agreement inoperative is not the case where the arbitration agreement is wrongly named the arbitration center, but in essence, the parties have reached a new agreement on the selection of the dispute settlement court in the minutes of working with the Court on July 5, 2018.

Therefore, with regard to the regulations and solutions of Vietnamese Courts in practice, arbitration agreements with the wrong name of the Arbitration Center can be settled according to Article 43.5 of the 2010 Law on Commercial Arbitration.

3. Inoperative arbitration provisions

For arbitration agreements in the form of inoperative arbitration agreements as prescribed in Article 4 of Resolution 01/2014/NQ-HDTP. The parties should consider carrying out proceedings at the Court to ensure the effectiveness of the final decision, avoiding the case where a party seeks to annul the arbitral award on the grounds that the arbitration agreement cannot be enforced.

SOLUTIONS FOR ENTERPRISES

Firstly, enterprises need to ensure that the arbitration clause is drafted clearly, uniformly and capable of implementation. It is necessary to specify the Arbitration Center or the form of arbitration, the applicable procedural rules, the scope of the dispute and the method of selecting arbitrators. At the same time, avoid using conflicting contents or referring to many different dispute resolution mechanisms.

Secondly, enterprises should use the sample arbitration clause of the selected Arbitration Center and accurately check the name of the arbitration institution, the Procedural Rules as well as the operating status of this organization at the time of signing the contract. This helps to limit technical errors that may make the arbitration agreement uncertain or inoperative.

Thirdly, before signing the contract, the enterprise should separately review the arbitration clause and compare it with all other clauses of the contract to ensure that there are no conflicting provisions on the dispute settlement agency or procedural method. In case the transaction is complex in nature or foreign factors, the enterprise should receive legal advice before agreeing on the arbitration clause to limit the risks arising when a dispute occurs.

Fourth, enterprises should anticipate an alternative mechanism in case the initial arbitration agreement cannot be implemented, for example, the Arbitration Center terminates its operation or the selected arbitrator cannot participate in dispute resolution. Having an appropriate alternative plan will help limit the risk of the arbitration agreement becoming inoperative when a dispute arises.

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You can refer for more information:

• • Validity of Arbitration Agreements: Notes for Enterprises
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  • Handling Capital After Dissolution for FDI Enterprises: Conditions for Closing the DICA Account and Legally Remitting Funds Abroad
  • Abandoning an FDI Legal Entity in Vietnam: The Risk of Exit Suspension and the Liability of the Foreign Director
  • Tax Finalization upon Dissolution of an FDI Enterprise: 4 Cost-Disallowance Risks and Solutions for a Safe Tax Code Closure