Abstract: Besides many advantages, arbitration also reveals certain limitations, including the Arbitral Tribunal's limited jurisdiction over third parties. The question arises as to the need for accurately identifying cases of Arbitral Awards related to third parties and the possibility of the Court annulling these awards due to third parties, thereby, drawing lessons to minimize the risk of setting aside Arbitral Awards. Moreover, there is also a need for solutions to improve the mechanism for challenging Arbitral Awards which currently retain many shortcomings.
Overview:
When the parties choose to resolve their disputes in arbitration, there are many more advantages compared to resolving through the Court. However, there are still some certain disadvantages, one of which is the limitations on the jurisdiction of the Arbitral Tribunal over the third parties in not only rendering the Arbitral Awards but also collecting evidence and applying interim urgent measures.
Especially in recent years, the aforementioned limitations of arbitration have been increasingly recognized in practices. Within the scope of this article, the author only mentions and addresses cases where the content of Arbitral Awards is related to third parties, upon which the Court may rely to set aside the Arbitral Award if requested by a party. In particular, this article will cover the following main points:
Arbitral Awards related to third parties may include the following cases:
(i) The decision of the Arbitral Tribunal in the arbitration award directly determines the rights or obligations of the third party;
(ii) The decision of the Arbitral Tribunal in the arbitration award determines the rights or obligations of one disputing party, but these rights or obligations are over a third party;
(iii) The reasonings of the arbitral award directly determine the rights or obligations of the third party;
(iv) The reasonings of the arbitral award determines the rights or obligations of one disputing party, but these rights or obligations are over a third party;
(v) The decision or the reasonings of the arbitral award only specify the rights or obligations of the disputing parties pertaining to themselves, but the exercise of these rights or obligations will affect or may affect the legal rights and interests of the third party.
2. The possibility of Arbitral Awards being set aside due to the involvement of third parties and legal grounds for the Court to set aside Arbitral Awards
To assess the possibility of arbitral awards being set aside due to the presence of third parties, it is necessary to consider which cases may be one of the grounds for cancelling arbitral awards as provided in Article 68(2) of the Law on Commercial Arbitration (referred to as “LCA 2010).
In practice, based on the experience of the author, almost none of the arbitral awards belongs to the first four cases (from (i) to (iv)) mentioned in section 1 above. This is perhaps because arbitrators are aware of the jurisdictional limitations of the Arbitral Tribunal concerning third parties, and these cases are easily recognizable as having "infringed" upon the legal rights and interests of third parties. Therefore, the author will not mention the possibility of annulment of arbitration awards for these cases.
However, the remaining case in section 1 above (case (v)) is quite different. The author has known of at least two arbitral awards in two dispute cases that fell into this scenario, where the decision or the reasonings of the arbitral award only specifies the rights or obligations of the disputing parties on themselves, but the exercise of these rights or obligations affected the legal rights and interests of the third party.
Case 1: Company A (seller) and Company B (buyer) signed and performed several sales contracts with each other. Regarding Contract X, A signed a mortgage agreement with Bank C to pledge its receivables claim rights arising from Contract X to secure A's loan at the bank.
However, later, A and B signed a set-off agreement for the receivables arising from Contract X mentioned above (B owes A) with the receivables arising from Contract Y (which A owes B), which effectively extinguished A's right to claim the receivables arising from Contract X.
Despite signing the set-off agreement as mentioned above, A still filed a request for arbitration against B to demand that B pays A the receivables arising from Contract X, arguing that the set-off of receivables was not in accordance with A's intention. Meanwhile, B disagreed with A's claim because the debt A demanded had been agreed to be set off against the debt from Contract Y as agreed in the set-off agreement.
The Arbitral Tribunal rendered an arbitral award rejecting A's claim, reasoning similarly to B's argument as above.
Subsequently, Party A filed a petition requesting the Court to set aside the Arbitral Award, provided evidence to demonstrate A's right to claim the receivables arising from Contract X have been mortgaged to Bank C to secure A's loan at the bank.
The Court verified with Bank C and was provided with its confirmation, along with evidence demonstrating the Mortgage agreement of the receivables mentioned above had been registered as collateral transactions according to the regulations of the Bank. Bank C also disagreed with the arbitral award.
Based on the evidence, the Court issued a Decision to set aside the Arbitral Award rendered to resolve the dispute between A and B, reasoning that the Arbitral Award infringed upon the rights and legitimate interests of the third party - Bank C. It means that the Arbitral Award was contrary to the fundamental principles of Vietnamese law that is one of the grounds to cancel the arbitral awards provided for in Article 68(2) of LCA 2010. The Court concluded: The set-off agreement between A and B violated the prohibition of the Civil Code, which states that mortgaged assets cannot be sold, or exchanged (unless with the consent of the mortgagee), yet the Arbitral Award still recognized this agreement, which made A's loan at Bank C no longer secured by assets.
In this dispute, the Arbitral Tribunal might not be intentionally at fault because during the arbitration process, the parties did not provide information about A's right to claim receivables arising from Contract X has been mortgaged to Bank C so the Arbitral Tribunal was not aware of these details to render an appropriate arbitral award. Nevertheless, this serves as a valuable experience for arbitrators.
Case 2: A real estate business (Company A) signed a contract to purchase real estate with customer B. During the contract performance process, when B already made partial payment, a dispute arose between the parties because B claimed that A had breached the obligation to transfer the real estate, while A claimed that B had breached the payment obligation. As a result, A unilaterally terminated the contract and signed a contract to sell the real estate to another customer (C).
Due to being unable to resolve the dispute on their own, B initiated arbitral proceedings against A, requesting A to be compelled to continue fulfilling the real estate purchase contract between the two parties, specifically to compel A to transfer the real estate to B. Conversely, A maintained its stance of disagreement with B's request for arbitration, arguing that B had breached the payment obligation, thus A unilaterally terminated the contract and signed a contract to sell the real estate to another customer (C). A provided the Arbitral Tribunal with the contract and evidence regarding the transfer of real estate between A and C.
The three arbitrators in the Arbitral Tribunal were unable to reach a unanimous decision on the resolution plan, with each arbitrator holding a different perspective. Specifically:
- Arbitrator 1's Perspective: Accepting respondent B's claim, obligating A to transfer the real estate to B.
- Arbitrator 2's Perspective: Rejecting respondent B's claim because B has not fulfilled the conditions (has not paid the agreed-upon amount in the contract) to demand A to transfer the real estate.
- Arbitrator 3's Perspective: Rejecting respondent B's claim because there is no ground.
Thus, two arbitrators share the perspective of rejecting the claimant's claim. According to the principle of majority rule, the Tribunal must issue an Award rejecting the claimant's claim. However, these two arbitrators did not agree on the grounds for rejecting the respondent's claim. One arbitrator argues against acceptance because B has not met the conditions (meaning B still has the opportunity to request in the future once full payment is made), while the other argues against acceptance because the claim is not grounded (meaning B does not have the opportunity to claim rights).
According to Article 60(2) of the LCA 2010, in cases where no majority is reached in the voting, the arbitral award shall be made according to the opinion of the Presiding Arbitrator of the Arbitral Tribunal. In this dispute, the Presiding Arbitrator of the Arbitral Tribunal is the one who holds the view that does not accept the claimant's request because there is no ground.
Therefore, if the arbitrators still maintain their positions, the arbitral award must be made according to the opinion of the Presiding Arbitrator of the Arbitral Tribunal, including both the part of the decision and the reasonings, meaning the Arbitral Tribunal has to issue the arbitral award with the decision stating the rejection of the claimant's claim and the reasonings stating that this request lacks grounds.
Recognizing the discussion within the Arbitral Tribunal and the legal provisions mentioned above, the arbitrator 1 has changed his perspectives from accepting to resolve the claimant's claim and compelling party A to transfer the asset to party B, then, agreeing with the view of arbitrator 2 that does not accept the claimant's claim because B is not qualified. At the same time, the arbitrator 1 has requested the Arbitral Tribunal (in addition to the reasonings) to incorporate this point into the Award: "When B meets the conditions (pays in full), B has the right to initiate another dispute to demand A to transfer the property to B”. Since arbitrator 1 also agrees with this proposal of the arbitrator 2, the Arbitral Tribunal must decide by majority, meaning that the above statement must be in the decision of the arbitral award.
An "unexpected", "ironic" result has occurred: the losing party (B) did not request the annulment of the arbitral award as is customary; instead, it was the winning party (A) who submitted a petition requesting the Court to set aside the arbitral award. In the request, A presented the reason for requesting the Court to set aside the arbitral award as the decision part of the arbitral award contains the sentence "When B meets the conditions (pays in full), they have the right to initiate another dispute to demand A to transfer the asset to B". A also once again stated that the related asset has been sold and transferred to a third party, therefore it cannot be transferred to B, even if the arbitral award in the future accepts other B's request for arbitration. Perhaps A feared that B would initiate arbitral proceedings against them in the future based on the aforementioned arbitral award and would cause trouble for A with the third party. Therefore, did A proactively submit a petition requesting the Court to set aside the arbitral award?
The legal grounds upon which the Court may resolve the request for annulment of the arbitral award in the above-mentioned cases are provided in Article 68(2) of the Law on Commercial Arbitration and Article 3(4) of the Civil Procedure Code.
3. Experience in preventing the risk of arbitral awards being set aside due to involvement with third parties
There is experience accumulated from the case 1 mentioned above, we can see that if the Arbitral Tribunal were more cautious when resolving disputes related to an asset (including property rights) by requiring the parties to indicate whether the asset was mortgaged, leased or involved in a transaction involving a third party, it could also be avoided obtain or limit the risk of arbitral award being set aside.
Learning from the case 2 mentioned above, we can see that if the Arbitral Tribunal issued a Arbitral Award from the point of view of Arbitrator 3's Perspective, which refused B's request due to its lack of grounds, there would be no issues related to the third party, and the parties will not be able to cite reasons related to the third party to request the annulment of the arbitral award.
In the case where the Arbitral Tribunal issued an arbitral award based on the perspective of the arbitrator 1, even when the arbitral award did not address the rights or obligations of the third party, it would inevitably infringe upon the legitimate rights and interests of the third party when the arbitral award was enforced, as the relevant property has been sold and transferred to the third party. Here, two possibilities may arise:
(i) The arbitral award is set aside by the Court at the request of one party because the arbitral award infringes upon legitimate rights and interests of a third party.
(ii) The arbitral award cannot be enforced because the third party is not a disputing party and is not obligated to enforce the arbitral award (the civil enforcement agency will reject enforcement).
Regardless of whichever scenario occurs (whether the arbitral award is set aside or cannot be enforced), it is not what the parties and arbitrators expected when starting arbitral proceedings.
In summary, to prevent the annulment of the arbitral award due to third-party involvement, the Arbitral Tribunal needs to be extremely cautious. They should not only avoid directly determining the rights or obligations of the third party or the rights and obligations of a disputing party towards the third party in the arbitral award but also exclude the possibility that the enforcement of the arbitral award will affect the legal rights and interests of the third party as illustrated in the examples provided.
4. Completing mechanisms for arbitral award annulment where the arbitral award infringes upon the legal rights and interests of third parties and public order
Article 1 of Article 68 of the Law on Commercial Arbitration states:
“The court considers the annulment of an arbitral award upon the request of one party.”
Moreover, throughout the entire Law on Commercial Arbitration, there is no other provision that allows a third party (other than the disputing parties) to request the annulment of an arbitral award.
Thus, in cases where an arbitral award infringes upon the rights and legitimate interests of a third party, infringes upon national interests, or public order (referred to collectively as the third party), there will be no mechanism to annul the arbitral award if the disputing parties do not submit a request to the court to annul the arbitral award. This scenario may occur when the arbitral award only causes harm to the third party without causing harm to the disputing parties, or in other words, when the parties feel satisfied with their respective rights and see no benefit in requesting the annulment of the arbitral award.
This can be considered a significant flaw in the current Law on Commercial Arbitration. If it is not amended or supplemented promptly, in the future, there may be cases where a third party's rights and legitimate interests are infringed upon by an arbitral award, yet they have to "grin and bear it" because there is no way to annul that arbitral award.
In the author's propose, to address the aforementioned shortcomings, the Law on Commercial Arbitration should include provisions allowing a third party, whether an organization, an individual whose rights and legitimate interests are infringed upon by an arbitral award, or an authority, organization managing related fields, or the Public prosecutor's office (if the arbitral award infringes upon national interests, public interests), to have the right to submit a request to the court to set aside the arbitral award in these cases.
Conclusion
While the limitation of jurisdiction of the Arbitral Tribunal over third parties is an inherent and insurmountable constraint of arbitration, what the arbitrators have to pay attention to is identifying cases where the arbitral award involves third parties that may be annulled or may not be enforceable, especially when drafting the arbitral award (from the reasoning part to the decision) in such a way that the risk of annulment or unenforceability of the arbitral award due to the involvement of third parties is eliminated or at least minimized.
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According to the Department of Judicial Support , Ministry of Justice, currently , there have been 48 arbitration institutions established in our country, with over 600 arbitrators participating in resolving thousands of commercial disputes each year 1 . An arbitration service has been developed. Along with the growth , the trait of this service became more apparent , includi ng the relevance of third-party interests. Unlike court litigation, in principle, arbitration is a private dispute resolution method , therefore, the involvement of third parties is exceptional. The discourse discusses how the arbitral tribunal considers and guarantee s the third party's interest in the arbitra l proceedings by providing some situations in which disputing parties or the arbitral tribunal may need to consider the interests of third parties. The goal of arbitr ation is to make contributions to resolving disputes fairly, thereby encourag ing parties to fulfill their obligations voluntarily in order to avoid further dispute escalation of disputes . Based on the analysis , the author suggests policy improvements pertaining to third parties that may be considered in the upcoming revision of the Law on Commercial Arbitration.
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