Tips on drafting arbitration clauses

Arbitration clauses are the basis for commercial disputes to be resolved through arbitration. Article 16 of the Arbitration Law stipulates three elements of a valid arbitration clause: the expressions of intent to apply for arbitration; arbitrable matters; and selected arbitration commission.

The law does not prohibit the parties from agreeing on other procedural matters in the arbitration clauses, and the arbitration rules of arbitration institutions usually show respect to such special provisions.

In the process of drafting arbitration clauses, commercial entities are increasingly paying attention to embedding other personalised content in the clauses. Combined with the current legal provisions in China and the cutting-edge practice of the judicial review for arbitration, the following reminders of several practical issues involved in drafting arbitration clauses are given.

Specify the institution

There are instances where the designation of the arbitration institution is inaccurately stated in practice. When the court examines whether an arbitration clause clearly prescribes an arbitration institution, it generally tends to uphold the validity of the clause.

For example, in Beijing Morse Investment, et al v Hangzhou Yixing Investment Partnership, the arbitration clause involved stipulated that the case shall be “submitted to the Shanghai International Economic and Trade Arbitration Commission/Shanghai International Arbitration Centre (HKIAC) for arbitration,” where the Chinese name and the English abbreviation of the arbitration institution did not match. The court determined that the arbitration clause was valid based on the principle of respecting the parties’ will to arbitrate.

Even so, it is recommended that parties clearly and accurately describe an agreed-upon arbitration institution and check its website in advance to avoid unnecessary disputes. Particularly, avoid designating an arbitration committee in one party’s location since there may be more than one arbitration institution in that location, or none, potentially leading to the clause being deemed invalid.

Agreeing on tribunal composition

The arbitration rules of mainstream arbitration institutions allow the parties to make additional agreements outside the standard arbitration rules regarding arbitrator selection and tribunal composition.

For example, requirements can be made concerning the occupation, expertise or nationality of the arbitrators; agreements can be made on the number of members of the arbitral tribunal; special agreements can be made on the method to select the chief arbitrator, etc.

Where an agreement on the composition of the tribunal is different from the provisions of the arbitration rules, it may bring unconventional communication and co-ordination to the arbitration institution, which affects the efficiency of the procedures.

The arbitral tribunal shall be formed in accordance with the arbitration rules unless special agreements have been made. To this regard, the commercial entity drafting the agreement shall also have gained some understanding of the arbitration rules, because there are differences between the arbitration rules among different institutions.

In simpler contractual relationships, where parties wish to enhance efficiency and reduce costs, they can agree to adopt the expedited procedure, allowing a sole arbitrator to preside over the dispute, regardless of the amount of the dispute subject matter.

Selecting arbitration rules

Arbitration rules are the basis for conducting arbitration proceedings. Conventional arbitration clauses generally stipulate the application of the current and effective arbitration rules of the selected arbitration institution.

In addition, the arbitration rules, as specified in the arbitration clauses in international commercial contracts, are sometimes inconsistent with the arbitration rules of the selected arbitration institution.

The arbitration rules of major Chinese institutions generally allow parties to agree to apply other arbitration rules, except in cases where this is impractical or contradicts mandatory local laws. However, it should be noted that if the agreed arbitration rules do not correspond to the arbitration institution, it will increase the difficulty of the operation at the specific level and lead to an increase in procedural costs.

In addition, some international commercial arbitration institutions, such as the Singapore International Arbitration Centre (SIAC), explicitly state that submitting a request for arbitration to them, or arbitrating in accordance with their rules, implies the parties’ consent to adopt their rules and entrust case management to the institution, limiting the mismatch between institutions and rules in the agreement.

Agreeing on litigation procedures

In practice, parties sometimes include provisions related to litigation procedures within arbitration clauses. For example, stipulating that “disputes may be submitted to arbitration or brought before a court” renders the arbitration clause invalid, as per article 7 of the Judicial Interpretation of the Arbitration Law.

If an agreement states that “disputes shall be submitted to arbitration, and if not resolved, may be brought before a court”, this does not fall within the circumstances where the arbitration agreement is invalid as prescribed in article 7, which is clearly provided in article 94 of the Conference Summary of the National Court’s Symposium on Foreign-Related Commercial and Maritime Trials, since the invalidity of the agreement on litigation will not affect the validity of the arbitration agreement.

As for the agreement that “disputes shall be submitted to arbitration, and no application shall be raised to the court for the cancellation or non-enforcement of the arbitral award after the award”, the arbitration-related portion of the agreement remains valid, but the part concerning the exclusion of judicial review is rendered invalid due to violation of the mandatory legal provisions. It is recommended to avoid such superfluous provisions when drafting arbitration clauses.

Conclusion

Drafting arbitration clauses is a professional and intricate task, and the issues and considerations involved are difficult to exhaustively list in this article. Commercial entities should tailor the clause’s content to their specific needs and seek guidance from legal experts or use model arbitration clauses provided by arbitration institutions for complex or unfamiliar matters.

Chen Cong is a partner at Tiantai Law Firm. He can be contacted at +86 10 6184 8000 or by e-mail at chencong@tiantailaw.com.
Liu Wenpeng is a counsel at Tiantai Law Firm. He can be contacted at +86 10 6184 8322 or by e-mail at liuwenpeng@tiantailaw.com.