COURT SET ASIDE ARBITRAL AWARD DUE TO ARBITRAL TRIBUNAL’S ERRONEOUS IN APPLYING THE PRINCIPLE OF KNOWLEDGE WITHOUT OBJECTION TO THE AUTHORITY TO CONCLUDE AN ARBITRATION AGREEMENT

[2019] Ho Chi Minh City Court, Decision No. 1098/2019/QD-PQTT

BACKGROUND

This dispute arose from a service contract between SG Company Limited (“SSY”—the Award Debtor) and VL Company Limited (“VL”—the Award Creditor) signed in 2013, which contained an arbitration agreement selecting the Vietnam International Arbitration Centre (“VIAC”) as the dispute resolution authority. During the performance of the contract, VL initiated arbitration proceedings at VIAC, claiming outstanding principal and interest of over VND 156 million. The Arbitral Tribunal ordered SSY to pay VND 153,366,446 to VL, as rendered under the Arbitral Award No. 61/18 HCM dated 25 January 2019.

SSY, disagreeing with the award, filed a petition dated 25 February 2019 before the Ho Chi Minh City Court to set it aside, on the basis of:

• First, the summon letter to attend hearing was signed by a VIAC Secretary, which SSY argued constituted a procedural violation.
• Second, the arbitration agreement in the contract was invalid because the signatory on SSY’s side was not its legal representative.

THE COURT’S FINDING

Regarding the summon letter for the hearing signed by the VIAC Secretary:

Upon reviewing the case file, the Court held that the Secretary had signed the notice pursuant to a lawful delegation from the VIAC President and at the request of the Arbitral Tribunal. Furthermore, the hearing was held as scheduled with full participation of the parties. Hence, the fact that the summon letter was signed by the VIAC Secretary did not affect the parties’ participation in the proceedings nor infringed upon their lawful rights and interests. Accordingly, this reason was insufficient to set aside the arbitral award.

On the validity of the arbitration agreement:

The Arbitral Tribunal and the Court took divergent views on the validity of the arbitration agreement. The Tribunal found the arbitration agreement valid, reasoning that: (1) during performance of the contract, the issuance of SSY’s letters and debt reconciliation minutes, respectively signed by an authorised Deputy Director and the Chief Accountant, demonstrated that SSY’s legal representative was aware of and did not object to the content of the contract, which included the arbitration agreement; and (2) the Vietnamese translation of the contract recorded the signatory, Mr. Jeffrey, as “Tổng giám đốc” (General Manager), and SSY did not object to this translation during arbitral proceedings, implying Mr. Jeffrey had authority to sign.

As to (1), the Court held that these documents referred only to debts without specifying which contract they arose from. Additionally, the Court found that the Chief Accountant had no authority to conclude an arbitration agreement. Therefore, the Court could not establish that the debts shown in these documents were within the scope of the arbitration agreement recorded in contract No. SSY/VyLam14-02; nor did it show that SSY’s legal representative was aware of the arbitration agreement and did not object.

As to (2), the Court rejected this reasoning based on two reasons. First, the Court held that the determination of legal representative of a company must be based on the Investment Registration Certificate, the Enterprise Registration Certificate, and the Charter, of such company. However, as per the Investment Registration Certificate provided by SSY, the legal representative of SSY at that time was Mr. Huan, holding the General Director position (as “Tổng giám đốc” in Vietnamese). Mr. Jeffrey was neither General Director nor legal representative at the time of signing the contract; and the translation of “General Manager” as “Tổng giám đốc” was inaccurate.  Second, the Court further held that the Arbitral Tribunal had failed to comply with Article 30.3 and Article 43.1 of the  Law on Commercial Arbitration 2010  (“LCA”) when it did not take necessary actions required under Articles 45 and 46 of the LCA to clarify the authority of Mr. Jeffrey despite the fact that the Respondent had, both in its Statement of Defence and during the arbitration hearing, objected to the validity of the arbitration agreement on the ground that its signatory lacked authority. the Tribunal’s sole reliance on the translation of the contract, without such verification, was improper.

Consequently, the arbitration agreement signed by an unauthorised person was invalid under Article 18.2 of the LCA, and therefore, no valid arbitration agreement was established as an arbitration clause of a contract under Article 16.1 and 16.2 of the LCA.

Conclusion of the Court 

Accordingly, the Court, citing Article 68.2(a) of the LCA, set aside the Arbitral Award No. 61/18 HCM.

COMMENT

This case highlights the view of the Vietnamese Court regarding the matter of authority to conclude an arbitration agreement. This is not the first case in which the Court took a narrow interpretation of the principle of “The legal representative knew or should have known without any objection” to reject recognizing the validity of an arbitration agreement established by an unauthorised person. This case and many previous cases raise another concern on whether this principle, which was promulgated by the Supreme Court, demonstrating a pro-arbitration stance of Vietnamese’s legislature, becomes inoperative due to such narrow interpretation.

1. Regarding the matter of authority to conclude an arbitration agreement in LCA and the guidance of the Supreme Court

As we all know, arbitration is commonly favoured by companies or commercial organizations. Pursuant to the Civil Code, and the Law on Enterprises, the person who has authority to represent company to enter into an arbitration agreement shall be its legal representative, or the authorised representative by the legal representative. Besides that, Article 143(2) of the 2015 Civil Code provides that a transaction exceeding the scope of representation shall nonetheless bind the principal if “The principal knew or should have known without any objection”. This provision was designed to protect transactional stability and prevent abuse by principals who might otherwise remain silent while enjoying contractual benefits, only to later repudiate obligations.

Based on the above principles, Article 3(2) of Resolution No.01/2014/NQ-HDTP promulgated by the Supreme Court, guiding Article 18(2) of the LCA, stipulates that an arbitration agreement made by incompetent persons remains valid if, during the negotiation, the performance of such arbitration agreement, or during the arbitral proceedings, the competent person has accepted or concerning “knowledge without objection”.

In this case, in our opinion, the condition of the legal representative “knew but did not object” the arbitration agreement was fulfilled, based on the following facts:

• Both parties actually performed their obligation in the service contract containing the arbitration clause;
• Letters and reconciliation statements signed by SSY’s Deputy Director, authorised by legitimate legal representative, and Chief Accountant confirmed the outstanding debts arose from the service contract; and
• At no point during contract performance, did SSY raise objections to the agreement.

On that basis, the contract—including its arbitration clause—should be regarded as binding upon SSY.

2. Other concerns

The Court’s restrictive approach in this case has troubling implications. If “knowledge without objection” is interpreted so narrowly, Article 143(1)(b) will be virtually inapplicable in practice. Transactions performed in good faith could later be invalidated, despite long-standing performance and recognition of obligations. This creates legal uncertainty, discourages reliance on actual conduct as evidence of assent, and poses a significant threat to the enforceability of arbitration agreements where authority to sign may be challenged after the fact.

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