How to Design Arbitration Clauses in A Chinese OEM Agreement?

As for some Chinese Original Equipment Manufacturer (OEM) Agreements, many purchasers choose arbitration authorities as an approach to settle business disputes. I often receive emails from clients consulting how to design arbitration articles in an OEM agreement. Adopting the arbitration approach has its advantages.

1. Arbitration Articles can Exclude the Jurisdiction of China Courts

According to Article 5 of the Arbitration Law of the People’s Republic of China, “Where the disputing parties have reached an arbitration agreement and one party applies to the People’s Court to have the case heard, the People’s Court shall not deal with this, except if the arbitration agreement is invalid.”

That is to say, once an arbitration article has been set in a Chinese OEM agreement, then courts cannot try any more unless the arbitration agreement is invalid.

2. An Arbitration Article can Lead to A Final Award Effect

According to Article 9 of the Arbitration Law of the People’s Republic of China, “Where an arbitration award has been made and a party reapplies for arbitration or requests a hearing before the People’s Court upon the same matter, the arbitration commission or People’s Court shall not deal with the matter.”

This is one of the most obvious differences between arbitration and litigation. Compared to arbitration, litigation can provide an appeal mechanism. Further, if any of the disputing parties do not accept the awards from the litigation, appealing to a higher court can be conducted.

In conclusion, setting an arbitration article as an approach to solving disputes can be faster than choosing a litigation approach from the perspective of procedure.

3. Attention: Invalid Circumstances of Arbitration Clauses

According to Article 16 of the Arbitration Law of the People’s Republic of China, “An arbitration agreement shall include arbitral clauses stipulated in the contract and other written agreements which request arbitration to be made prior to or following the occurrence of a dispute. An arbitration agreement shall include the following: (1) the expression of an application for arbitration; (2) items for arbitration; (3) the chosen arbitration commission.”

According to Article 18 of the Arbitration Law of the People’s Republic of China, “Where an arbitration agreement has not specified or has not specified clearly items for arbitration or the choice of an arbitration commission, the parties concerned may conclude a supplementary agreement. If a supplementary agreement cannot be reached, the arbitration agreement shall be void.”

In reality, some overseas buyers choose to set arbitration as an approach to solving disputes in an OEM agreement, however, sometimes arbitration clauses are regarded as invalid by courts due to lacking clear clause or a clear arbitration commission. For example, in the contract, an arbitration clause cannot be drafted like this: the disputes shall be under the jurisdiction of the Chinese Arbitration Commission, which will be regarded as lacking a clear choice of an arbitration commission.

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Contact us:

Jack Meng, is a Chinese lawyer practicing in Shanghai.

Email: finlandlove@outlook.com

Telegram: @Jackmeng2024