As the increase of arbitration disputes drags more and more arbitration cases into enforcement proceedings, a view is popular in the market that inaccurate wording of the arbitration clause may lead to total failure to enforce huge arbitration awards. The importance of arbitration clauses to arbitration proceedings is becoming increasingly apparent.
Founder/Senior equity partner
Hengdu Law Firm
Correspondingly, the author keeps receiving more and more inquiries, from fellow non-litigation lawyers and friends in the legal business, about the drafting of arbitration clauses. This article will explain how to draft effective arbitration clauses under Chinese law.
The common contents of an arbitration clause include: Arbitration agency; arbitration rules; place of arbitration; place of hearing; language of arbitration; and arbitrators. How simple or complex an arbitration clause can become mainly depends on whether those (and other relevant elements) are included in it.
The selection of an arbitration agency is also a crucial element – a requirement from article 16 of the Arbitration Law, which states: “An arbitration agreement shall contain the following information: … (3) the selected arbitration committee.” Therefore, under Chinese law, a unique arbitration agency must be specified in the arbitration clause, otherwise, it may be invalid.
It is customary for non-Chinese parties to draft arbitration clauses that contain only the applicable arbitration rules, but omit the arbitration agency, which gave rise to a large number of invalid arbitration agreements in the early years, and hindered the enforcement of huge awards. It is therefore important to ensure that the name of the arbitration agency is accurately quoted when drafting arbitration clauses. Once the draft is completed, the name of the agency can be searched online to find its website before further ascertaining its accuracy.
As important procedural rules for holding an arbitration, arbitration rules can affect the validity of arbitration clauses under Chinese law, mainly because of current Chinese judicial practice and recognition. If no arbitration agency is explicitly stated in the arbitration clauses, but it can be identified through applicable arbitration clauses, then the clauses may be deemed to have selected an arbitration agency and to remain in force. International arbitration agencies, which are accustomed to setting out their rules only in the model rather than general arbitration clauses, have adjusted their rules accordingly. Most of these agencies, such as the ICC International Court of Arbitration, the Hong Kong International Arbitration Centre (HKIAC) and the Singapore International Arbitration Centre (SIAC), now provide in their arbitration rules that the choice of these institutions is deemed to be the same as the selection of their arbitration principles.
Chinese law currently recognises such an approach that the parties specify their arbitration agency through the choice of rules. However, in order to avoid disputes in practice, it is advisable to keep the arbitration agency chosen during the draft, which is key to the drafting of valid arbitration clauses under Chinese law.
The place of arbitration and that of hearing are often confused in practice, and often have a “unified” effect. In legal terms, however, the two are not identical. The place of arbitration is primarily used to determine the nationality of the award, so as to further identify how to enforce the award, and even, under certain conditions, to determine the law applicable to the arbitration agreement.
The place of hearing is more likely to be a choice made for the convenience of the hearing. Once the two concepts are strictly distinguished, the place of hearing will have no effect on the validity of the arbitration clauses under Chinese law, while the place of arbitration will have such effect by influencing the law applicable to the arbitration.
In case that, in a set of international arbitration clauses, it’s provided that the arbitration rules of a non-Chinese arbitration agency shall be applicable, and such rules do not state that the choice of them implies the choice of the corresponding agency, then these clauses are undoubtedly invalid under Chinese law.
However, if the arbitration clauses also state that the place of arbitration shall be in Hong Kong, or France, or other jurisdictions or countries that deem arbitration clauses containing arbitration rules as valid, then, as per Chinese law, a Chinese court, when judging the validity of arbitration clauses, will apply the law of the place of arbitration if the parties have not agreed upon the law applicable to the clauses. With that provision, the invalidity of arbitration clauses is reversed.
The terms to identify the language of arbitration and the arbitrators will not affect the validity of the arbitration agreement, but they are very important for the parties to learn about the basic information and progress of the case, and the composition of the arbitrators. When choosing the language of arbitration, the parties should do their best to make sure that the language of their own country will be used for the arbitration, so as to, through the choice of language, indirectly seek such an advantage that the arbitral tribunal will be composed of arbitrators from their own country.
The number of arbitrators may also be determined in line with the criteria for the specific case. Especially in cross-border arbitrations, the need to bear the costs of a three-member tribunal for cases involving a small subject matter will result in significant costs for the parties to uphold their rights.
It’s also true that there are many other agreed-upon items in arbitration clauses. It is particularly worth noting that alternative methods for dispute resolution should be avoided. In some arbitration clauses, the first half already contains a valid arbitration provision under Chinese law, while the second half suddenly specifies that if either party is dissatisfied with the award, it may file a lawsuit to a court of competent jurisdiction.
That statement will challenge the validity of the arbitration clause, as it may imply that arbitration is no longer the only means of dispute resolution, which would render the arbitration clause invalid. Despite the limited length, it is hoped this article provides some useful reference for relevant parties in drafting arbitration clauses.
Jiang Fengtao is the Founder/Senior equity partner of Hengdu Law Firm. He is also a member of All-China Federation of Industry and Commerce Entrepreneur Committee. He can be contacted on +86 10 5760 0588 or by email at hengdulaw@hengdulaw.com
