Is arbitration the optimal solution?

In the context of modern business, ompanies often encounter disputes and need to choose appropriate litigation procedures to resolve these disputes. The current trend is for an increasing number of companies to choose arbitration as an alternative method of dispute resolution to litigation. Arbitration has become the preferred choice of many companies because of its speed, confidentiality and efficiency. However, not all cases should be resolved through arbitration, and in some cases arbitration may not be the best option. In this article, the author looks at the issues that companies need to consider when choosing arbitration proceedings^[1] to resolve their commercial disputes.

1. Prerequisites for dispute resolution by arbitration

Commercial arbitration is an out-of-court dispute resolution method in which the parties agree to have their dispute resolved by one or more arbitrators who make a binding award. It is a method of dispute resolution that is highly valued for its confidentiality, flexibility and time-saving, and is particularly suited to the dynamic business environment. However, in order for a dispute to be resolved by arbitration, there must be a valid arbitration agreement. According to Article 5 of the 2010 Commercial Arbitration Law, an arbitration agreement must be made in writing, either before or after a dispute arises, in the form of an arbitration clause in a contract or a separate agreement, and must clearly specify the method of dispute resolution by arbitration. If the agreement does not meet these conditions, it may result in the agreement being void and the dispute not being resolved by arbitration. This is the fundamental and indispensable legal basis for choosing an arbitration dispute resolution mechanism.

A valid arbitration agreement requires not only a clear consensus between the parties, but also the fulfilment of the subject and content conditions. The person signing the arbitration agreement must have full civil capacity and authority to represent the company. If the agreement is signed by an unauthorised person, it may be considered invalid, resulting in the inability to conduct arbitration proceedings. This has been confirmed by many decisions of the court in Vietnam, where the court has declared the arbitration agreement invalid due to violation of the subject conditions, which are specifically mentioned in the following section.

2. Choice of arbitration institution and arbitrator

One of the most important factors to consider when choosing an arbitration dispute resolution method is the choice of arbitration institution and arbitrator to resolve the company's dispute. The basic principles of arbitration are that this dispute resolution mechanism is not only fair and effective, but also guarantees the freedom and independence of the parties involved. In this process, the selection of suitable arbitrators and reputable, responsible arbitration centres plays an important and sometimes decisive role in the resolution of business disputes.

Under the current rules, the parties have the right to freely select arbitrators based on criteria deemed appropriate to the circumstances of the dispute, such as experience, professional qualifications, nationality, independence, objectivity, etc. It should be noted that, at present, Vietnamese law only prescribes the basic standards for becoming an arbitrator and empowers the arbitration institution to determine the conditions for becomingan arbitrator^[2], but does not specify the criteria for selecting suitable arbitrators or arbitrators who are not arbitrators of the centre resolving the dispute. Therefore, the criteria set by the parties for the selection of an arbitrator will help to ensure that the dispute resolution process is fair and in accordance with the applicable law and the language of the arbitration. Each arbitral institution has its own rules of procedure, which makes the choice of the right arbitral institution all the more important. If the right choice is made, the parties can achieve an effective and speedy resolution of the dispute. For example, in a particular case, choosing an arbitrator with experience and in-depth knowledge of the area of dispute, as well as a reputable arbitration institution, can help ensure that the award will be objective and fair. On the contrary, the wrong choice may expose the parties to undesirable legal and financial risks. As a result, the arbitrator is a relatively important position, similar to the choice of the arbitral institution. Referring to the ICC's Guidelines on Factors to Consider when Appointing an Arbitrator in a Dispute, the parties may consider factors such as the context and circumstances of the dispute, the experience of the arbitrator, the seat of the arbitration, the applicable law, the amount in dispute and the language of the arbitration.

In addition, other diverse factors such as the nationality, ethnicity, culture and gender of the arbitrator may also be considered in the selection of an arbitrator^[3].

3. Other factors

Normally, if a dispute meets the conditions for being settled by arbitration, the parties may first choose an arbitration institution and appoint an arbitrator who is/is not a member of that arbitration institution or, conversely, on the basis of the appointment of an arbitrator, agree to choose the relevant arbitration institution. However, each arbitral institution will have its own rules of arbitration procedure which the parties must respect and follow when resolving disputes before that arbitral institution. These rules are not only based on the 2010 Commercial Arbitration Law or the law applicable to arbitration in the country, but also depend on the specific characteristics of that arbitral institution or the dispute resolution practices in the host country. Therefore, the arbitration rules may also be an aspect to be considered when choosing an arbitral institution to resolve disputes. The choice of arbitration institution and arbitrator will have an impact on the overall dispute resolution process of the parties and, if the choice is appropriate, it can help the parties to reach an effective solution in resolving the dispute.

Another aspect to consider is the choice of applicable law and the place of arbitration. Without a clear agreement on the applicable law, the Arbitration Council may apply conflict-of-law principles, which will be detrimental to the companies. Therefore, companies should carefully consider all of the above factors before making a decision.

4. The current situation of annulment of arbitral awards in Vietnam

Although arbitration is considered an effective method of resolving commercial disputes in Vietnam, the reality shows that the rate of arbitral awards being set aside by the Court is not low. This is due to the Court's rights under Article 68 of the 2010 Law on Commercial Arbitration and Article 14 of Resolution 01/2014/NQ-HDTP of the Supreme People's Court. Accordingly, the grounds for setting aside an arbitral award include: (i) there is no arbitration agreement or the arbitration agreement is invalid, (ii) the composition of the Arbitration Council or the proceedings are inconsistent with the parties' agreement or contrary to the provisions of the Law on Commercial Arbitration, etc., and the arbitral award is contrary to the fundamental principles of Vietnamese law. These are important reasons that businesses should pay special attention to when choosing to resolve disputes through arbitration.

The high rate of arbitral awards being set aside by the courts in Vietnam has caused concern for companies choosing this method of dispute resolution, as once an arbitral award is set aside, companies not only lose time and money in the arbitration process, but also run the risk of facing a new litigation process in court, which may change the outcome of the dispute resolution and seriously affect the company's business operations.

Typical cases of annulment of arbitral awards in Vietnam often involve the court finding that the arbitration agreement is invalid, that the procedure did not comply with the rules, or that the basis was not really clear, e.g. that the award is contrary to the fundamental principles of Vietnamese law. In some cases, arbitral awards have been annulled because the arbitrator did not comply with the rules on fairness, equality and non-discrimination in the dispute resolution process, typically the content of the assessment of the Ho Chi Minh City People's Court in Decision No. 868/2023/QD-PQTT of 5 June 2023 on the grounds that the arbitrator did not comply with the principles of equality and non-discrimination, resulting in an impartial award and seriously affecting the rights of the defendant. In this decision, the Arbitration Council found that both the claimant and the respondent were at fault, but there was not enough basis to assess the degree of fault of each party. However, the Arbitration Council still forced the defendant to bear all the risks and accept the claim of the claimant. This is considered to be not objective and inconsistent with the degree of fault of both parties, resulting in a serious impact on the legitimate rights and interests of the defendant. The court found that the arbitral award did not comply with the principle of "equality and non-discrimination", which is a fundamental principle of Vietnamese law as stipulated in Article 16 of the Constitution of 2013 and Clause 1, Article 3 of the Civil Code of 2015, and therefore this award was annulled in accordance with the provisions of Point d, Clause 2, Article 68 of the Law on Commercial Arbitration 2010. This is not only an issue that the arbitrator or the Arbitration Council must pay attention to, but also a clear demonstration of the risks that companies may face if the basis for setting aside an arbitral award under the above principle is not really clear. The consequence of setting aside an arbitral award is that a new round of litigation begins, and if the parties cannot agree to continue to resolve the dispute through arbitration, the dispute must be resolved by a court of competent jurisdiction if it is to be resolved. At that point, a new round of litigation begins on the case as if it had never been resolved.

It can be seen that the choice of dispute resolution method can have many effects on the rights and interests of the parties to the dispute. The choice of arbitration may be considered as a business strategy in situations where the dispute needs to be resolved quickly, confidentiality of information and cost savings are prioritised. However, companies need to carefully consider legal, time and financial factors to ensure that arbitration is a truly effective tool in protecting business interests. In our experience, to maximise the benefits of choosing to resolve disputes by arbitration, companies should prepare at an early stage, starting with the drafting of the agreement, ensuring clarity and compliance with the law, and considering highly qualified, reputable and impartial arbitrators, as well as reliable arbitration institutions to ensure that the award is less likely to be set aside by a competent court.

Read more at: Các vấn đề doanh nghiệp cần cân nhắc khi lựa chọn tố tụng trọng tài

Lawyer Cao Nguyen Bao Lien

HM&P Law Firm