Arbitration Agreements

Law on Commercial Arbitration of 2010 specifies in clause 2 Article 3 that “Arbitration agreement means an agreement between the parties to settle by arbitration a dispute which may arise or has arisen”. The New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards to which Vietnam is a member has also indirectly defined arbitration agreements in Article II(1) as an “agreement in writing under which parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship”, whether contractual or not, concerning a subject matter capable of settlement by arbitration”

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Definition of “arbitration agreement” – New York Convention 1958; Law on Commercial Agreement of 2010

At first glance, the scope of the definition in the New York Convention of 1958 might seem broader than the Law on Commercial Arbitration of 2010. Specifically, the definition of arbitration agreement according to this Law is an agreement between the parties to settle by arbitration a dispute which may arise or has arisen. However, different from the New York Convention of 1958, this definition does not clarify which type of legal relationship this “dispute” concerns. For the most part, disputes resolved via arbitration arise out of contractual relationships, however, this does beg the question of whether or not disputes arising out of non-contractual relationships could be resolved via arbitration.

The Guidebook on arbitration and mediation by the Supreme Court does contain the following instruction: “In honor of Article 2(1) Law on Commercial Arbitration, claims for noncontractual damages shall not be resolved via arbitration, unless specialized law specifies otherwise…”[1] According to this instruction, aside from exceptions, arbitration does not hold jurisdiction over disputes arising out of non-contractual relationships. However, it should be noted that the abovementioned Guidebook is only viewed as reference material for domestic Courts.[2]

On the contrary, in a decision on the recognition and enforcement of foreign arbitration awards, the Tribunal of the High Court of Hanoi has implied its rejection of the content of the Guidebook and claimed that arbitration may be used to resolve disputes arising out of non-contractual relationships, provided that the scope of the established arbitration agreement does include this type of dispute.[3]

As such, practical application has demonstrated an inclination to accept the jurisdiction of arbitration over disputes evolving from non-contractual relationships, provided that the requirements listed in Article 2 of the Law on Commercial Arbitration of 2010 pertaining to Arbitration’s jurisdiction to resolve disputes. In other words, similar to the definition of the New York Convention of 1958, “arbitration agreement” is defined in Law on Commercial Arbitration of 2010 as (i) an agreement (ii) on dispute resolution via arbitration (III) that might arise or have arisen (iv) out of noncontractual relations).

The separability of arbitration agreement

Whether it is a clause of the contract or a separate agreement arbitration agreements are completely independent of the contract,. This is commonly accepted in arbitration rules as one of the comprehensive principles (principles of separability).

To be specific, on the international scale, Clause 16.1 UNCITRAL Model Law on International Arbitration specifies that: “The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract is treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause”

Under the perspective of the Law of Vietnam, Article 19 Law on Commercial Arbitration 2010 has also affirmed that “arbitration agreements are completely independent of the contract”.

Aside from the aformentioned legal documents, the rules of arbitration of larger arbitration organizations in the world also affirm the principles of separability, for example: UNCITRAL Rules 2021 (Article 23.1), ICC Rules 2021 (Article 6.9), LCIA Rules 2020 (Article 23.2), SIAC Rules 2016 (Article 28.2) or VIAC Rules 2018 (Article 28.1)

The stipulation of principles of arbitration in legal documents

The stipulation of principles of separability in the rules of arbitration of large arbitration organizations in the world

This principle is established based on the fact that arbitration agreements for the most part are included as a provision in the contract and this provision is the only basis for parties to resolve disputes via arbitration. Meanwhile, arbitration agreements are the most important to parties when either party violates the contract or claims that the contract is null and void.[4] If the validity of the arbitration agreement is linked with the validity of the contract, arbitration agreements are either terminated or annulled along with the contract, thereby disabling the means to resolve the dispute and render the arbitration agreement meaningless as its original purpose is stripped away. To resolve this undesirable outcome, the principle of separability is gradually recognized as a common method to ensure the dispute resolution capabilities of this type of agreement, regardless of the validity of the contract.

The principles of separability are also made with the aim to ensure another principle of the rules of arbitration, which is the principle of competence – competence. This principle allows the Tribunal to decide their own jurisdiction via the assessment of the existence or the validity of arbitration agreement, and obviously, this assessment is completely independent of the contract in which the concerned arbitration agreement is included.

Relationship between principle of separability and principle of competence-competence

Scope of the principle of separability

The next issue being addressed is how could this separability be interpreted?

Scope of the separability of arbitration agreement

The validity of the contract is irrelevant to the validity of the arbitration agreement

Article 19 Law on Commercial Arbitration of 2010 on the separability of arbitration agreements affirmed that “amendments, extensions, terminations, annulments, and impracticability of the contract shall not render an arbitration agreement invalid”. In other words, a party to the contract cannot simply rely on the excuse that “the contract is either invalid or nonexistent” to reject the validity of the arbitration agreement contained within. This principle is strictly adhered to by the Vietnamese Courts.[5] From the perspective of legal science, this principle originated from the thesis that the purpose of an arbitration agreement is to decide the fate of the contract, therefore, having both the contract and the arbitration agreement sharing the same fate would deprive the arbitration agreement of purpose.[6]

This could be seen as the most basic feature of the separability of arbitration agreement that has been stipulated in arbitration laws of almost all member states of the New York Convention of 1958

Consider Singapore, as an example, Article 21(3) Arbitration Act of 2001 and Article 16(1) International Arbitration Act of 1994 have taken inspiration from Article 16.1 UNCITRAL Model Law and stipulated the following: “A decision by the arbitral tribunal that the contract is void does not entail ipso jure (as a matter of law) the invalidity of the arbitration clause”. Or in the case of the United Kingdom, Article 7 Arbitration Act of 1996 also stipulates: “an arbitration agreement shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective.”

Or in the case of the United States, the Federation Arbitration Act of 1925 does not explicitly specify the separability of arbitration agreements. Instead, this principle was first approved by the Supreme Court in the case of Prima Paint Corp. v. Flood & Conklin Mfg. Co. promulgated in 1967[7]. [8]. In subsequent cases, the Supreme Court affirmed the separability of arbitration agreement that has been first established in the case of Prima Paint Corp. v. Flood & Conklin Mfg. Co., to be specific: “The principle from the Prima Paint case allows the court to implement the arbitration agreement of the contract whose validity is later determined by the Tribunal as nil…” [9] With the above-mentioned cases, it could be seen that the law of the United States recognizes the principle of separability, specifically, the part where the validity of the contract is irrelevant to the arbitration agreement contained within.

Validity of the arbitration agreement is irrelevant to the validity of the contract

The stipulation of the separability of arbitration agreement in Article 19 Law on Commercial Arbitration does not mention the impact of arbitration agreement on the validity of the contract. This raises the question whether or not an ineffective arbitration agreement could cause a contract to become null and void? This is a fairly important question that appears to have been neglected by many when the separability of arbitration agreement is brought up.

Considering the wording of the “principle of separability”, this “separability” should be interpreted as the “complete separation” of the arbitration agreement and the contract. Which means (i) the arbitration agreement is not affected by the contract, and vice versa, (ii) the contract is also unaffected by the arbitration agreement. If the principle of separability were to be interpreted as to contain only part (i), while part (ii) is not taken into account, then said principle would fail its original purpose.

Conversely, although neither UNCITRAL Model Law or Law on Commercial Arbitration of 2010 mention the effect of the arbitration agreement on the contract, the Civil Code of 2015 does address this question indirectly. To be specific, by taking Article 130 and Article 407 Civil Code of 2015 on “partial annulment” into account, the arbitration agreement could be considered as part of the contract and could be annulled without affecting the validity of other provisions of the contract.

This interpretation is also consistent with the laws of many countries in the world, especially, countries with a common law system such as the United Kingdom, the United States, and Singapore. This is because the principle of “partial annulment”, stipulated in Vietnam’s Civil Code of 2015, is similar to a common principle called the “Doctrine of Blue Pencil” found in contract laws of countries with a common law system.[10] [11]

Overall, according to the Law of Vietnam as well as international practices, the validity of arbitration agreements is “not affected by” as well as is “not having any influence on” the validity of the contract in which the arbitration agreement is included.

Exclusive “applicable laws”

Exclusive applicable law is also another feature worthy of attention when it comes to the separability of arbitration agreements. This means the applicable laws of arbitration agreements could be different from the applicable laws of the contract. This is a fairly common occurrence in disputes with foreign elements.

For the most part, parties to a dispute with foreign elements do not explicitly specify the applicable laws of the arbitration agreement contained within the contract. Parties may agree on the applicable laws of the contract, but whether or not such laws would be applied to the arbitration agreement is left vague. In these situations, international arbitration practices have shown that the applicable laws of the contract do not apply to the arbitration agreement contained within[12]

Moreover, the current Law of Vietnam has yet to completely recognize the separability regarding applicable laws of the arbitration agreement from the applicable laws of the contract in cases of agreement related to disputes with foreign elements.

Exclusive “Agreement Conclusion Authorization”

Exclusive agreement conclusion authorization is also another aspect worth mentioning regarding the separability of an arbitration agreement. In other words, the entity authorized to sign the contract and the entity authorized to sign the arbitration agreement may be two entirely separate entities.

For instance, in a joint-stock company with the sole legal representative being the Chairman of the Executive Board, the Chairman proceeds to sign a contract to sell to a third party up to 40-percent (40%) of the total assets of the company as recorded in the company’s most recent financial statement, and this contract also includes an arbitration agreement as the means to resolve disputes. The question here is whether or not the Chairman has the authority to sign the above-mentioned contract on behalf of the company (including the arbitration agreement).

According to the Law on Enterprise of 2020[13], contracts to sell a company’s assets with a value equal to or greater than 35-percent (35%)s of the total assets of the company as recorded in the company’s recent financial statement (unless the Company’s charter specifies otherwise) must be consented to by the Board of Shareholders through a vote conducted in the Shareholder Meeting with an approval rating of more than 65-percent (65%). In other words, this sale contract is invalid if the Chairman signs this contract without the decision made by the Board of Shareholders.

However, it should be noted that even if the contract is signed by the Chairman without the approval from the Board of Shareholders, the arbitration agreement is still valid. According to the Law of Vietnam on commercial arbitration, the authorized entity to establish an arbitration agreement is a “legal representative or authorized entity, provided that the authorization is legal and the conclusion of arbitration agreement does not exceed the scope of authorization”[14]. Which means, as the legal representative of the company, the Chairman could sign an arbitration agreement with a third party without the decision made by the Board of Shareholders.

This example shows that the exclusive agreement conclusion authorization contains potential risks for parties to the contracts if no clear and accurate specification is made on the authority to sign a contract and an arbitration agreement contained within the contract.

Reminders for contract drafting regarding the principle of separability

To mitigate the risks of disputes pertaining to the validity of the arbitration agreements in transactions with foreign elements, one of the most essential issues that should be taken into account when drafting contracts is the applicable law of arbitration agreements. As previously analyzed, the arbitration agreement is independent of the contract, therefore, the same is also applied to the applicable laws. In other words, the choice of applicable laws for the contract does not translate to the same laws being applied to the arbitration agreement of said contract.

As such, during the contract drafting process, parties must clarify the applicable laws for the arbitration agreement. In the event that the parties desire that the arbitrational agreement and contract share the same applicable laws, the parties should explicitly specify that the applicable law is to be applied to both the contract and the arbitration agreement.

Simultaneously, the parties must examine relative documents (such as the Company’s charter, Authorization documents, Appointment documents, etc.) to confirm the authority of the representative that signs the contract and the arbitration agreement for each party, thereby limiting the risk of contract and the arbitration agreement being signed by unauthorized personnel.

Written by:

Senior Associate Tran Pham Hoang Tung Phone: (84) 901 334 192 Email: tung.tran@cnccounsel.com

Legal Assistant – Pham Nguyen Tan Trung Phone: (84) 347 924 900 Email: trung.pham@cnccounsel.com

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[1] Supreme Court and Internation Finance Corporation (IFC) (2017), Guidebook on arbitration and mediation, Thanh Nien Publication, page 52

[2] Supreme Court and Internation Finance Corporation (IFC) (2017), Guidebook on arbitration and mediation, Thanh Nien Publication, page 3-4

[3] Decision No. 09/2023/QD-PT dated January 17, 2023 by the High Court of Hanoi

[4] Nigel Blackaby, Constatine Partasides QC, Alan Redfern, Martin Hunter, Redfern and Hunter on International Arbitration (Sixth Edition), Oxford University (2015), paragraph 2.101 – 2.113.

[5] Decision No. 06/2018/QD-PQTT dated September 11, 2018 by the Civil Court of Hanoi

[6] Do Van Dai, Dispute resolution via arbitration within the context of globalization, Hong Duc Publication (2022), page 120.

[7] Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967)

[8] Stephen J. Ware, Arbitration Law’s Separability Doctrine After Buckeye Check Cashing, Inc. v. Cardegna, Nevada Law Journal, Vol. 8, No. 107 (2017), trang 107 <https://scholars.law.unlv.edu/cgi/viewcontent.cgi?article=1136&context=nlj>.

[9] Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006).

[10] Vishal Gera, India: Doctrine Of Blue Pencil, Mondaq (07/01/2016) <https://www.mondaq.com/india/contracts-and-commercial-law/456278/doctrine-of-blue-pencil>.

[11] Goh Yihan, Lee Pey Woan & Tham Chee Ho, Contract Law, Singapore Academy of Law Annual Review of Singapore Cases No. 15 (2014), page 251 – 252 <https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=3631&context=sol_research>.

[12] Nguyen Trung Nam, Arbitration Agreement – A comparison of Law of Vietnam and Law of Korean in relation to Model Law 2006, Memoirs of the Science Conference on “Current issues of international arbitration” held by Ho Chi Minh City University of Law on March 23, 2022, page 32 – 33, <https://viarb.vn/wp-content/uploads/2022/03/VIARB_Thoa-thuan-trong-tai-Goc-nhin-so-sanh-phap-luat-Viet-Nam-voi-Han-Quoc-trong-moi-lien-he-voi-Luat-Mau-2006.pdf>.

[13] Point d clause 2 Article 138, point đ clause 2 Article 147 and point d clause 1 Article 148 Law on Enterprise 2020.

[14] Clause 2 Article 18 Law on Commercial Arbitration 2010; clause 2 Article 3 Resolution No. 01/2014/NQ-HDTP dated March 20th, 2014 by Council of Judges of Supreme Court on the guidelines for provisions in Law on Commercial Arbitration.

 

In upcoming articles, CNC intends to further analyze relative aspects regarding the laws on Commercial Arbitration in Vietnam.

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