Pay Attention: Writing Arbitration Agreements to Avoid Surprises

“Arbitration agreements deserve more attention by transaction parties in real practice.”

Arbitration Agreements In commercial contracts, especially with foreign entities, it is very common to agree on arbitration as a dispute resolution method. A typical arbitration agreement specifies arbitrable matters, arbitration institution, place of arbitration, and arbitration rules. In crafting an arbitration agreement, especially when the arbitration clause is embedded in the main body, contracting parties normally write into the contract the applicable law and dispute resolution authority for the main contract, but rarely do the same for the arbitration agreement itself in addition to the main contract.

In general, if a dispute involves issues surrounding the validity (or arbitrability) of an arbitration clause, whereas the arbitration agreement does not provide anything about arbitrability, two questions may come up in practice: (1) what is the applicable law on resolving the arbitrability issue? (2) who has jurisdiction over the arbitrability issue – a court or an arbitration institution?

Case Study 1: Hong Kong Law

We handled a technology transaction deal recently and came across the applicable law issue. The deal involves terminating a patent license agreement in the context of a company takeover.

The license agreement had an arbitration clause which provided that the arbitration institution was HKIAC, the place of arbitration Hong Kong, and HKIAC’s arbitration rules apply. The license agreement also provided Chinese law as the governing law of the agreement. However, the agreement said nothing about the governing law of the arbitration clause.

The concern was whether the arbitration clause was valid so that any arbitral award based upon the arbitration clause can be enforced in mainland China.

According to Article 7 of the “Arrangement Concerning Mutual Enforcement of Arbitral Awards between Mainland and Hong Kong,” issued by the Supreme People’s Court, where no governing law of an arbitration clause is provided, if the arbitration clause is invalid pursuant to the law of the arbitration venue, i.e., Hong Kong law in this case, any arbitral award made on the basis of this arbitration clause may not be enforced by a court in mainland China.

Therefore, the issue boiled down to whether the arbitration clause was valid under Hong Kong law. To resolve the issue, we needed to have a legal opinion from a Hong Kong lawyer. Considering the time constraints involved, we indicated in the legal opinion obtained from the PRC lawyers that the validity of the document needed to be reviewed by a Hong Kong lawyer.

Regarding the jurisdiction issue, pursuant to Chinese Arbitration Law, both a court and an arbitral tribunal may have jurisdiction over the validity issue of an arbitration clause, but a court has limited priority in case of jurisdictional conflict.

To shed some light on how the same issue is treated under U.S. law, a U.S. case is introduced below, which deals with whether a non-infringement determination of a patent is arbitrable.

Case Study 2: U.S – California Law

In 2007, Rohm Japan and MaxPower signed a technology license agreement (TLA), under which, Rohm Japan and its subsidiaries (collectively referred to as “Rohm”) were permitted to use MaxPower’s MOSFET related technology by paying a royalty to MaxPower. Rohm Semiconductor USA, LLC vs. Maxpower Semiconductor, Inc. 2021-1709, United States Court of Appeals for the Federal Circuit.

The TLA includes an agreement to arbitrate “any dispute, controversy, or claim arising out of or in relation to this Agreement or at law, or the breach, termination or validity thereof”. The arbitration agreement provides that arbitration is to be conducted in accordance with the California Code of Civil Procedure (CCCP).

In 2019, a dispute arose between Rohm Japan and MaxPower regarding whether the TLA covers Rohm’s silicon carbide MOSFET products. In September 2020, MaxPower notified Rohm Japan of its intent to initiate arbitration. Shortly afterwards, Rohm USA, a subsidiary of Rohm Japan, filed a complaint for declaratory judgment action for non-infringement of four patents owned by MaxPower in a federal district court and four inter partes review petitions concerning the same patents. MaxPower then filed a motion in the district court to compel arbitration.

The focus of the dispute was whether the issue of arbitrability of non-infringement determination of patents should be decided by a court or an arbitral tribunal when the arbitration agreement only refers to CCCP as the governing law, while not providing who has the jurisdiction to apply the law.

According to the law of the state where the arbitration agreement was signed, unless there is a clear and unmistakable agreement to arbitrate arbitrability, the issue of arbitrability should be decided by a court.

The court first found that the dispute under arbitration was of international commercial nature as per CCCP§1297.13, and then, decided that an arbitral tribunal has jurisdiction over the issue of arbitrability of international commercial arbitration as per CCCP §1297.161.

The court further determined that there is a clear and unambiguous delegation of authority to the arbitrator to decide the issue of arbitrability in line with the U.S. Court of Appeals for the Ninth Circuit’s decision in Oracle v. Myriad.

The Ninth Circuit concluded in line with cases from other circuits that incorporation of the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules is clear and unmistakable evidence that the parties agreed the arbitrator would decide arbitrability. The district court thus decided based on the reasoning in Oracle that incorporation of CCCP in the TLA is clear evidence to establish the arbitrator’s jurisdiction in deciding the arbitrability issue.

The court further distinguished this case from Chesapeake Appalachia v. Scout Petroleum, in which the Third Circuit carved out an exception to the rule for class arbitration, considering that the dispute in the present case was between two parties.

As a takeaway, arbitration agreements deserve more attention by transaction parties in real practice. While an under-developed clause may not render the arbitration agreement invalid, a full-fledged clause would certainly help clients to facilitate their transaction goals and reduce litigation risks.

Image Source: Deposit Photos
Image ID: 71915191
Author: airdone

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