Setting aside international commercial arbitral awards

By Jim Qiu, Yao Liang Law Offices
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The possibility that an international commercial arbitral award may be set aside is a major check on the system of such awards.

Arbitral tribunals and arbitrators must not be beyond the law. Where their arbitral awards violate the law and the principles of justice, they should be punished by law. The system of arbitration needs the backing of the court system.

Apart from flexibility and speed, parties that opt for arbitration are most concerned with fairness and whether their interests can be protected. If justice took second place to efficiency and if erroneous arbitral awards could not be set aside until the implementation stage, this would not only be a waste of judicial resources, but would also seriously damage the standing of the arbitration system.

For this reason, although some scholars have argued that it should not be possible to set aside international commercial arbitral awards, we believe that the existence of this possibility remains a necessity.

Scenarios for setting aside awards

邱靖 Jim Qiu 耀良律师事务所 合伙人 Partner Yao Liang Law Offices
Jim Qiu
Partner
Yao Liang Law Offices

According to the Model Law on International Commercial Arbitration drafted by the United Nations Commission on International Trade Law in 1985, there are several different circumstances in which commercial arbitral awards may be set aside.

The first situation is where the parties to the arbitration agreement lack capacity or the arbitration agreement is invalid. International commercial arbitration is based on an arbitration agreement voluntarily entered into by the two parties to the dispute.

The capacity of both parties to act is a precondition of reaching such an agreement. Therefore, if either of the parties does not have sufficient capacity, any arbitration agreement will run contrary to the principle of voluntariness and a court should set aside any ensuing arbitral award.

The second situation in which commercial arbitral awards may be set aside is where procedural errors have occurred. Examples of such errors include where an arbitration has violated due process, where an arbitral tribunal has exceeded its mandate or where an arbitral tribunal or arbitral procedure has breached an agreement or has breached the law. International commercial arbitration must be conducted fairly and properly and must observe certain minimum procedural standards.

These standards are designed to ensure that arbitral tribunals are properly constituted, that arbitral procedures are in line with the agreement of the parties concerned and that these parties are properly informed as to the procedures and receive a proper hearing.

At the same time, the mandate of an arbitral tribunal is bestowed by these parties. The tribunal has no authority to arbitrate on matters that are outside the scope of the mandate the parties have bestowed upon it. Therefore, if there are procedural errors in the arbitral process, the parties should have the right to apply for the setting aside of any resulting award.

The third situation in which commercial arbitral awards may be set aside is where the matter in dispute is non-arbitrable. Whether a matter in dispute is arbitrable is determined by law. It is not a matter which the parties are competent to decide.

However, the definition of matters that are suitable for arbitration differs from country to country, so that a matter that is arbitrable in one country may not be arbitrable in another. When the Model Law on International Commercial Arbitration specifies that the subject matter of an arbitral dispute cannot be resolved through arbitration, it is referring to the position under the law in the jurisdiction in which a court has agreed to hear a related case.

The fourth situation in which commercial arbitral awards may be set aside is where an arbitral award violates public policy. It is a feature of all legal systems that violation of public policy is a ground for setting aside an arbitral award. Essentially, public policy is the ultimate safety valve installed by a sovereign state to safeguard its basic needs in the spheres of society, politics, economy, law, religion and moral values. Therefore, public policy is a factor that many countries may consider when taking the decision to set aside an international commercial arbitral award.

There are also other relevant situations. The grounds for setting aside awards provided in the Model Law on International Commercial Arbitration have been incorporated into the domestic legislation of several countries. However, in the domestic legislation of some countries there are also some grounds for setting aside awards that do not exist in the Model Law, such as where an arbitral award is not accompanied by reasons for the award, is not signed or endorsed with the required chop indicating the place of arbitration, or issues such as fraud, bribery or perjury are involved.

Setting aside cannot be appealed

Once an arbitration award is set aside by a court, the effect of the original award is immediately nullified and is no longer final or binding on the parties. The parties are entitled to reach a new arbitration agreement and can request arbitration on this basis, or they can bring a lawsuit in a people’s court.

Under current PRC law, parties have no right to appeal against a decision to set aside an arbitral award. This is intended to save judicial time and resources. To institute such a right would be detrimental to the convenience and speed which are the hallmarks of the arbitration system.

Intrinsic value

Allowing international commercial arbitral awards to be set aside has intrinsic value.

It allows arbitration to be supervised by the judiciary, helping to ensure that the expectations of the parties are met and that justice is done.

As China’s legal system is young and it is less than 12 years since the enactment of the PRC Arbitration Law, the right of the courts to exercise judicial supervision over arbitration is a significant one. Courts should actively exercise their right of judicial supervision to protect the interests of the parties concerned to the maximum degree and maintain the fairness of arbitration and the entire judicial system.

Jim Qiu is a partner in the Shanghai office of Yao Liang Law Offices

701/702 Huaxia Bank Tower

256 Pudong Nan Road
Pudong New Area

Postal code: 200120

Tel: + 86 21 5155 0338

Fax: + 86 21 5155 0051

www.yaolianglaw.com

E-mail:lilla.guo@yaolianglaw.com

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