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Failure to Name Arbitral Seat in the Arbitration Clause May Cause an Arbitral Award to be Unenforceable
Arbitration is an alternative dispute resolution method that is different from the court proceeding because of its flexibility. The parties have the right to decide the specifics of their resolution, such as the appointment of an arbitrator for their cases, the location of the arbitral seat, and the applicable laws.
The selection of arbitration seats is vitally important as the country’s law that the seat is located at will be used as a framework to support and supervise the arbitral proceedings. Similarly, the court will have the jurisdiction to intervene in the arbitral proceedings by issuing interim measures or revoking the arbitral awards. Moreover, the seat of arbitration will set the nationality of the arbitral award and enforce an award. The seat of arbitration will also affect the result of arbitral proceedings significantly. For example, if the parties choose Riyadh, Saudi Arabia, the arbitration will comply with Shari’a law. Alternatively, in case the seat of arbitration in London, the arbitral proceedings will also permit the applications for security for costs under the Arbitration Act 1996. Meanwhile, selecting an arbitral seat in the US may be subjected to intervention by the court under 28 USC section 1782.
However, the arbitration seat must be segregated from the actual location of the proceedings, even though they are often held in the same place. Certain arbitration rules have stressed the distinction between location and venue, such as Article 18 of the ICC Rules (2021) [1] and Article 16 of the LCIA Rules (2020) [2].
Furthermore, the arbitral seat’s national law, which is usually not the same as the substantive law of the contract, will govern the arbitration clause in the event where the absence of a detailed agreement where the parties would have agreed to deviate from the general substantive law. It is important to note that the substantive law of the contract does not always apply to the arbitration clause as the arbitration clause exists independently and apart from the contract’s terms. For example, In Hong Kong, under Hong Kong law, the arbitration clause cannot be enforced under regulations from China if there is no specification on the arbitral institute or the arbitration rules set forth.
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Taizhou Court Case
In Taizhou Haopu Investment Co., Ltd. v Wicor Holding AG, Taizhou Court, PR China, Case Docket Number: [2015] Tai Zhong Shang Zhong Shen Zi No. 00004 (June 2 2016), the Taizhou Intermediate People’s Court of Jiangsu Province (“Court”) denied to recognize and enforce an ICC award based on the public policy under Article 7 of the Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and the Hong Kong SAR (“Arrangement”). This decision is the second time a Chinese court used the exception on public policy as the reason to deny enforcing and recognizing a foreign arbitral award, after the “Hemofarm” case decision ruled by Jinan Intermediate People’s Court of Shandong Province in 2008.
In this case, the Court applied PRC law in determining the validity of the arbitration clause because both parties did not agree on any law that governed the arbitral procedures or the seat of arbitration that will allow the Court to use the law with less restriction (such as Hong Kong law).
In December 2012, the Court decided that such arbitration clause was invalid. The Court had the jurisdiction to hear the dispute as the arbitration clause did not stipulate any arbitral institute. Moreover, the Court could not determine the institute through the relevant arbitral rules required under PRC law.
While the court was pending the court proceeding for this case, the parties had started the arbitral proceedings in the ICC located in Hong Kong. As the Chinese party did not exercise the right to select the seat of arbitration, the ICC court determined that Hong Kong will be the seat for this case. The ICC delivered the award on 2 occasions, one in July 2014, the other in November 2014. Then, on December 9, 2014, the parties filed the award enforcement request to the Court to enforce according to the judgment. However, on June 2, 2016, the Court had determined that the award enforcement would breach PRC public policy because the award conflicted with a Chinese court ruling.
Issues for parties to consider
Parties should select the seat of arbitration and explicitly state the governing law for arbitral procedures. These precautions are to avoid the uncertainty regarding the law that will govern the arbitration and the arbitration clause, including the court that will supervise the arbitration. Additionally, the parties should confirm that there is no restriction under that country’s arbitration law, which may affect the enforceability of the arbitral award.
The following point to note is that the parties must give careful attention to the arbitration provision of the contract, including the matter of the arbitration’s seat and the rule to be used in arbitration proceedings, as well as ensuring that the arbitration clause complies with the applicable law to such arbitration. The Taizhou case has shown that the uncertainty arising from the failure to select the arbitral seats may lead to legal inconsistency, thus render the award unenforceable.
Reference:
- https://www.international-arbitration-attorney.com/seat-arbitration-international-commercial-arbitration/
- https://disputescentre.com.au/wpcontent/uploads/2017/06/Gonzalo_Vial_Arbitral_Seat_Article.pdf
- https://www.nortonrosefulbright.com/en-au/knowledge/publications/ee45f3c2/issues-relating-to-challenging-and-enforcing-arbitration-awards-grounds-to-refuse-enforcement
- https://www.hlarbitrationlaw.com/2016/09/one-step-forward-two-steps-back-prc-court-refuses-to-enforce-an-icc-award-on-the-ground-of-public-policy/
- https://hsfnotes.com/arbitration/2016/09/13/taizhou-intermediate-peoples-court-refuses-recognition-and-enforcement-of-icc-award-on-basis-of-public-policy/
- https://www.bakermckenzie.com/-/media/files/insight/publications/2016/08/failure-to-specify-arbitral-seat/al_china_failurespecifyarbitralseat_aug16.pdf?la=en
- [1] Article 18: Place of the Arbitration
- 1)The place of the arbitration shall be fixed by the Court, unless agreed upon by the parties.
- 2)The arbitral tribunal may, after consulting the parties, conduct hearings and meetings at any location it considers appropriate, unless otherwise agreed by the parties.
- 3)The arbitral tribunal may deliberate at any location it considers appropriate.
- [2] Article 16 Seat of Arbitration, Place(s) of Hearing and Applicable Law
- 16.1 The parties may agree in writing the seat (or legal place) of their arbitration at any time before the formation of the Arbitral Tribunal and, after such formation, with the prior written consent of the Arbitral Tribunal.
- 16.2 In default of any such agreement, the seat of the arbitration shall be London (England), unless and until the Arbitral Tribunal orders, in view of the circumstances and after having given the parties a reasonable opportunity to make written comments to the Arbitral Tribunal, that another arbitral seat is more appropriate. Such default seat shall not be considered as a relevant circumstance by the LCIA Court in appointing any arbitrator or Emergency Arbitrator under Articles 5, 9A, 9B, 9C and 11.
- 16.3 If any hearing is to be held in person, the Arbitral Tribunal may hold such hearing at any convenient geographical place in consultation with the parties. If the Arbitral Tribunal is to meet in person to hold its deliberations, it may do so at any geographical place of its own choice. If such place(s) should be elsewhere than the seat of the arbitration, or if any hearing or deliberation takes place otherwise than in person (in whole or in part), the arbitration shall nonetheless be treated for all purposes as an arbitration conducted at the arbitral seat and any order or award as having been made at that seat.
