Is the Arbitration Agreement specified in a high-value contract entered into by the Legal Representative of the Company without the approval of the Board of Directors or the General Meeting of Shareholders invalid under the laws?

In practice of dispute resolution at Arbitration, there are many cases where the Enterprise’s Charter provides for the Legal Representative regarding the establishment of the arbitration agreement, including: (i) Limitation on dispute settlement authority (“Case No.1”); or (ii) Limitation on the authority to sign a high-value transaction/contract with an arbitration agreement therein (“Case No.2”). Since then, the question is often raised of whether these internal limitations affect the validity of the Arbitration Agreement? The following are our empirical analysis for the two Cases above.

In the Case No.1, it is assumed that the Company Charter does not allow the legal representatives of the Company to enter into the Contract with the arbitration agreement and the dispute must be resolved at the competent Court. However, at the time of signing the Contract with the Company’s partner, the legal representative entered into the Arbitration Agreement, in which stated that all arising disputes from the Contract shall be settled at Arbitration. Based on our experience in similar cases, the limitation in the Company’s Charter shall be of an “internal regulation of the Company” feature only and it might not be invoked this internal rule to assume that the Arbitration Agreement is invalid. According to Article 141.2 of 2015 of the 2015 Civil Code, “the legal representative has the right to enter into and perform all civil transactions in the interests of the principal, unless otherwise provided by law”. In this case, the legal representative of the Company has full authority to establish all transactions and only in case of “otherwise provided by law”, the legal representative is not allowed to enter into the Arbitration Agreement. From this case, it is clear that the limitation on the selection of a dispute settlement authority is only specified in the Charter but not provided by laws, it could not be used as a legal ground to invalidate the Arbitration Agreement.

In the Case No. 2, according to Article 162 of the Law on Enterprises and the Charter of the Company, the transactions/contracts of great value are required to be approved by the Board of Directors or the General Meeting of Shareholders[1]. However, in reality, the General Director, who also has the role of the legal representative, signs the Contract of high value in which exists the Arbitration Agreement. In our view, we agree with the point of recognizing the validity of the Arbitration Agreement even in the case the legal representative of the Company violates the above provisions as stipulated in the Charter or in 2014 Law on Enterprises. The reason is that according to Article 19 of the 2010 Law on Commercial Arbitration, the Arbitration Agreement is completely independent of the Contract and the changes, extension, cancellation of the Contract or the invalidation or non-performance of the Contract shall not invalidate the Arbitration Agreement. Besides, the independence of the Arbitration Agreement is also stipulated in Article 6.4 of the 1955 ICC Arbitration Rules, and Article 21.2 of the 1976 UNCITRAL Arbitration Rules are consistent with the provisions of the 2010 Law on Commercial Arbitration. This provision is essential to ensure that even if the Contract is voided or invalid, the Arbitration agreement will not be canceled for the purposes to (i) Decide the jurisdiction of the dispute settlement; (ii) the formality of dispute resolution and (iii) evaluation of claims arising from of this invalidation or the breaches of the obligations leading in the Contract invalidation (if any).

Therefore, to avoid risks and disputes related to the establishment of the Arbitration Agreements, we opine that enterprises should establish an effective mechanism to prevent their legal representatives from signing the translation/contract which is considered to be out of scope of their assigned authority under provisions of the Charter or the provisions of the Enterprise Law. Furthermore, it should also be noted that these internal limitations will not affect the validity of the Arbitration Agreement.