Guide to drafting the arbitration clause

The arbitration clause – including the arbitration agreement – is the starting point of arbitral proceedings, but the model wording provided by arbitral bodies generally contains only basic elements such as stipulating which body and what rules the parties agree to use. It makes sense, therefore, for parties to customise the clause.

Such additions could include more procedural rights or other important matters, such as the applicable law, place of arbitration, place of hearing, the constitution of the arbitral tribunal, qualifications of arbitrators, the manner of their appointment and the language of the arbitration.

A well-defined, rigorous and precise arbitration clause can also be effective in avoiding disputes over the dispute resolution clause itself.

This article discusses the key issues in drafting arbitration clauses in light of the current law, the Arbitration Law (Revised) (Draft for Public Comments) and recent judicial cases.

Agreement on arbitral bodies

Unless the nationality or domicile of the parties, the type of transaction, the place of performance of the contract, or the industry involved demand special consideration, a well-known domestic arbitral body is recommended, not only to render an award more quickly and save on arbitration costs, but also to facilitate communication and co-ordination with the Chinese courts for interim measures.

Not only have courts in China become more open to reviewing the agreement on arbitral bodies, but the mandatory requirement that parties should clearly agree on the body in the arbitration clause will be scrapped, according to article 35 of the draft revision to the Arbitration Law. Nevertheless, the arbitration clause should correctly state the name of the arbitral body to avoid disputes arising from unclear agreements.

According to the ruling in RK Global v Shanghai Linxin Trade (2021), an arbitration clause in an international commercial contract that contains no agreement on a specific arbitral body or arbitration rules, but the manner of appointment of arbitrators, may be deemed legally valid if ad hoc arbitration is permitted under the law of the place of arbitration (Swiss law).

Agreement on applicable law

When a dispute arises as to the validity of an arbitration clause concerning foreign matters, the applicable law of the arbitration clause should first be determined. In practice, parties usually agree on the applicable law of the contract but ignore the applicable law of the arbitration clause. The two are different in both concept and in their application in individual cases.

The arbitration clause’s validity is a prerequisite for the legal implementation of arbitral proceedings, and failure to agree on the applicable law of the clause may lead to delays in legal proceedings and dispute resolution. Even if Chinese courts determine that the law which can recognise the validity of the arbitration clause should be drawn the law of the arbitral body’s location and the law of the place of arbitration, it inevitably increases the time needed to learn about the foreign laws. In view of this, an express agreement on the “applicable law of the arbitration clause” should be included in the arbitration clause concerning foreign matters.

Agreement on place of arbitration

The current Arbitration Law does not provide for the place of arbitration. However, according to the Judicial Interpretation of the Arbitration Law and the Revised Arbitration Law, the agreement on the place of arbitration will have a significant impact on the applicable law of the arbitration clause, the origin of the arbitral award, and the court competent to confirm the validity of the arbitration clause, set aside awards, and provide interim measures.

First, according to article 16 of the Judicial Interpretation of the Arbitration Law and article 90 of the revised Arbitration Law, if the parties do not agree on the applicable law of the arbitration clause, the law of the place of arbitration will in principle be applied.

Second, in line with international commercial arbitration practice, the arbitral award will be deemed to be made at the place of arbitration, which will determine the origin of the arbitral award and thus affect the recognition and enforcement of foreign arbitral awards. Therefore, a country or region that is a member of the New York Convention, or has concluded a bilateral agreement, should be chosen as the place of arbitration.

Third, in the future, arbitration cases under judicial review that confirm the validity of an arbitration clause or set aside an arbitral award will probably be uniformly under the jurisdiction of the intermediate court of the place of arbitration. Finally, the court of the place of arbitration may be included as the court of jurisdiction for interim measures.

In summary, a prudent agreement on the place of arbitration will significantly impact the parties’ procedural rights and the course of the arbitral proceedings. Moreover, the clause should be formulated precisely as “the place of arbitration shall be …”, rather than vaguely as “the arbitration shall be conducted in …”, otherwise disputes may arise as to the place of arbitration and the place of the hearing.

Miscellaneous matters

For parties that wish to appoint their own arbitrators, an arbitration clause that provides for the application of general procedure or the agreement on an arbitral tribunal of multiple arbitrators may avoid the court’s application of summary procedure resulting from the low value of the subject matter of the case. Conversely, parties that wish to resolve the dispute as quickly as possible may directly agree on the application of the summary procedure.

If the subject matter of a contract or the transaction mode requires the arbitrator to possess specialist knowledge or experience, or if the arbitrator is required to recuse himself or herself from certain geographical areas or certain employment experience, the parties may also agree in detail on the qualification of the arbitrator in the arbitration clause.

In international commercial contracts, if the language of arbitration is not agreed upon, the arbitral tribunal may determine the language of arbitration combined with the language in which the contractual text and correspondence are written, so the agreement on the language of arbitration may improve the efficiency of the process and save on translation costs.

Wang Jialu is a partner at Commerce & Finance Law Offices. He can be contacted at 86-10-65637181 or by e-mail at wangjialu@tongshang.com

Hu Jian is an associate at Commerce & Finance Law Offices. He can be contacted at +86 10-65637181 or by e-mail at hujian@tongshang.com