Validity of Arbitration Agreements: Notes for Enterprises

Authors: Truong Trong Minh – Senior Associate.

In the context of increasingly vibrant commercial business activities in Vietnam with the participation of many international organizations, Commercial Arbitration is gradually becoming the method of dispute resolution chosen by many enterprises, instead of relying only on the Court as before. The advantages of information confidentiality, flexible procedures, fast settlement time, finality, and the ability to recognize and enforce awards in many countries under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention“), make Arbitration a suitable choice for the characteristics of commercial transactions of high value or foreign partners. This trend is even more obvious when the legal regulation system on Commercial Arbitration continues to be improved, along with the development of reputable Arbitration Centers in the country. However, the effectiveness of this method depends greatly on the terms of application of Arbitration that the parties have agreed upon since the signing of the Contract.

In many commercial business dispute cases that are resolved by Commercial Arbitration, what takes the most time and cost for the parties is not always the content of the dispute, but the dispute settlement clause on the Contract that the parties have signed. A dispute settlement clause in the form of arbitration that is not strict, informal or exists in parallel with other forms of dispute resolution, can cause the entire settlement process between the parties to stagnate, even cause the Arbitral Award – which is final, to be annulled by the Court even though the content of the dispute settlement is correct.

In fact, most enterprises see the dispute settlement clause as a formal clause, often drafted based on the available form but not really derived from the will of the parties in the Contract. When a dispute arises, this clause becomes the first content invoked by the parties to dispute the jurisdiction to settle.

The article presents the conditions for a separate arbitration agreement or agreement between the parties on the settlement of disputes by Commercial Arbitration (hereinafter referred to as the “Arbitration Agreement”) to take effect, common drafting errors, the connection between the Arbitration Agreement and the risk of annulment of the arbitral award, in order to help enterprises apply to draft contracts as well as review potential legal risks in the contracts they are performing.

1. Validity of the Arbitration Agreement

The Arbitration Agreement is not merely a formal clause in the Contract, but a mandatory legal basis for an Arbitration Center to have the right to accept the case. In a claim documents filed with any Arbitration Center, the Arbitration Agreement is usually the document to be considered first, in addition to the statement of claim and relevant evidence.

When the Arbitration Agreement does not exist legally or falls under invalid circumstances, the consequences will not only stop at the fact that the case is not accepted, if the Arbitral Tribunal still proceeds with the arbitration and render the award, which may lead to the risk of the Court annulling the award in accordance with the request of one party. An Arbitration Agreement is carelessly drafted, which may waste the time of the parties and cause material damages to the business during the dispute resolution process.

2. Validity Conditions of the Arbitration Agreement

According to the provisions of Vietnamese law, in order for an Arbitration Agreement to be effective and enforceable, enterprises need to simultaneously ensure the following groups of conditions:

In terms of form, the Arbitration Agreement must be established in writing, which may mainly be a clause in the Contract, or a separate agreement signed before or after the occurrence of a dispute or other forms permitted by law. The Arbitration Agreement should be fully archived, with a valid original or copy, as this is the first document that the Arbitration Centers will check when receiving the claim documents. A common formality error is when the parties to the Contract with General Conditions (Term & Condition) vaguely reference the Arbitration Agreement in these documents or the other party is unaware of the existence of the General Conditions that contain references to the Arbitration Agreement. This is also a situation that makes the Arbitration Agreement potentially invalid.

In terms of the principle of establishment and content, the Arbitration Agreement must be established on the basis of the voluntary will of the parties, without being deceived, threatened or coerced. At the same time, the content of the arbitration agreement must not violate the prohibitions of the law; in case the agreement is established because one party is deceived, threatened, coerced and that party requests to be declared invalid, or the agreement violates the prohibitions of the law, the arbitration agreement may be declared invalid.

In term of the jurisdiction of the Arbitration, disputes brought to arbitration must be within the scope permitted by law to be settled by commercial arbitration, that is, disputes arising from commercial activities or having at least one party having commercial activities. In addition, the parties to the Contract need to clearly define that the only dispute resolution method approved by the parties is Arbitration, avoiding the parallel of having both an Arbitration clause and a settlement clause at a competent Court. The practice of dispute resolution has recorded many cases where the parties argue about choosing a place to settle disputes because both forms on the contract exist in parallel due to unintentional or intentional reasons, although the law has a fairly clear settlement mechanism in this situation, it also costs the parties money, time and the risk of other unexpected procedures. In addition, the parties should avoid arbitration agreements for disputes that fall under the exclusive jurisdiction of the Court or other competent authorities as prescribed by law, such as some disputes in labor and land (except for disputes between the parties arising from commercial activities related to land use rights or land transactions and are permitted by law to be settled by arbitration). The inclusion of disputes not under the Arbitration within the scope of the arbitration agreement may lead to disputes over jurisdiction and affect the enforceability of the arbitration agreement.

In term of the signatory, the representative signing the Arbitration Agreement must have full civil act capacity and legal representation authority at the time of signing. This is a point to note when the Contract is signed through a branch, representative office or authorized person, as any defect in the validity of the authorization may also become the reason for the Arbitration Agreement to be declared invalid. The practice of dispute settlement also often records the situation where the authorized representative is not legally qualified to represent to sign in accordance with the provisions of law, the parties also often ignore the step of checking the content of the authorization document as well as the validity of the authorization. This situation leads to not only invalidity of the Arbitration Agreement but also invalidity of the entire Agreement.

Note on the independence of the Arbitration Agreement: A point that enterprises should note is that the Arbitration Agreement is independent of the Contract on which the Arbitration Agreement is recorded. Accordingly, the change, extension, cancellation, invalidity or unenforceability of the Contract does not invalidate the Arbitration Agreement in principle. Therefore, if the Arbitration Agreement is valid and falls under the jurisdiction of the Arbitration, the Arbitration Tribunal still has the right to consider and resolve disputes arising from or related to the Contract, even if the Contract has problems with validity or has been cancelled or terminated.

3. Common Errors in Drafting Arbitration Agreements

The majority of Arbitration Agreements that are invalid or controversial in jurisdiction do not stem from the parties’ unwillingness to resolve disputes by Arbitration, but from the wording of the Arbitration Agreement that does not comply with the provisions of the law. Some common drafting errors include:

• Incorrectly or unclear the name of the Arbitration Center, misleading abbreviations, or references to an organization that no longer exists, causing the parties to fail to identify the competent authority to settle the dispute.
• Formally inappropriate, referencing the Arbitration Agreement to another Subcontract for which the other party is not made aware of the existence of that Subcontract.
• There exist in parallel in both forms of Arbitration and Court. According to regulations, the Arbitral award is final, but there is an agreement that allows a party to appeal in the Court if they disagree with the arbitral award.
• Leaving open the applicable law, language, venue of arbitration, and number of arbitrators, making the litigating procedures protracted and prone to claims.
• Using references that are not accurate or using automated editing tools without reconciling them with applicable laws.

4. The Connection of the Arbitration Agreement to the Risk of Annulment of the Arbitral Award

According to the provisions of the Law on Commercial Arbitration, an arbitral award can be annulled by the Court if a party requests and proves one of the legal basis, in which the most commonly legal basis is the absence of an Arbitration Agreement or an invalid Arbitration Agreement. Therefore, drafting an Arbitration Agreement should not be considered as a formal stage of completing the Contract, but should be made an effort to and recognized from the perspective of legal risks when disputes arise right from the stage of negotiating the Contract.

Conclusion

From the above analysis, enterprises can consider a number of principles when drafting or reviewing the Contract to avoid falling into drafting errors that invalidate the Arbitration Agreement as well as carefully consider the factors that satisfy the validity conditions of an Arbitration Agreement.

The validity of the Arbitration Agreement is a fundamental factor, determining the legal value of the entire dispute resolution process, if any. It is most important that the parties to the Contract need to recognize the dispute settlement clause as a risk that should be considered and should be drafted strictly, as well as a way for enterprises to protect their time, money and legitimate interests.

Consultation with lawyers and experts is also an effective option in case enterprises still face many concerns and embarrassments when reviewing issues related to contract dispute resolution, especially when enterprises choose to apply the form of Commercial Arbitration.

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You can refer for more information:

• • Estimating the Cost of Closing an FDI Enterprise – Why a Legal & Tax Health Check Is Needed Before Filing for Dissolution
  • 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
  • Termination of Operations of an FDI Enterprise in Vietnam — Dissolution Procedure and Tax Code Closure