Hong Kong: Drafting an Effective Arbitration Clause in the Light of the Issues Posed by E-Commerce

The consent of the parties to submit to arbitration by a binding arbitration agreement is the cornerstone of international arbitration. With the upsurge in global electronic ("e-commerce") transactions¹ entered into as a result of email communications or via the Internet by way of a trading platform (using a mechanism provided on a web site), contracts are increasingly entered into which are "paper-less" or not recorded in writing in the historical sense of that phrase. Where arbitration is the chosen method of dispute resolution in these contracts, then the arbitration agreement entered into is generally in electronic form.²

The threshold question, which arises, is whether such e-commerce arbitration agreements are enforceable - there may be doubts if the applicable principles of law established by legislation and case law are inadequate or outdated.³

Of great importance is whether e-commerce arbitration agreements satisfy the requirements of the major international treaty governing the recognition and enforcement of arbitral awards, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the "New York Convention"). In particular, whether:

1. e-commerce arbitration agreements will be recognised as being valid in form (for example whether they satisfy any "writing" or "signed by the parties" requirement which applies under the applicable law⁴); and
2. any award made pursuant to such an arbitration agreement will be able to be enforced or may be susceptible to challenge.

As a result of these issues, parties who enter into e-commerce arbitration agreements expect to initiate arbitral proceedings but are oftentimes frustrated, Courts have to resort to strained and expansive interpretations of legislation and enforcement problems may be created when awards are rendered. Problems may arise when the law governing the arbitration provides a broader definition of the writing requirement for arbitration agreements than the law of the place of enforcement. Any uncertainty created due to differences in, and a lack of uniformity of, interpretation of the writing requirement for arbitration agreements is detrimental to international business.

The arbitration laws of most countries contain the requirement that arbitration agreements must be in "writing" (variously defined); such laws frequently require that the arbitration agreement be signed by the parties or contained in communications exchanged between them. The actual content of these requirements varies from country to country.

An e-commerce arbitration agreement will generally be enforceable under the applicable law if there is existing legislation and case law which recognises the validity of e-commerce contracts or additional legislation validating electronic transactions has been enacted.

The question of whether valid arbitration agreements should be able to be concluded electronically should, from a theoretical and policy perspective, pose no more problems than have been created by the increased use of telex and subsequently of telecopy or facsimile.⁵ The reason for this is that, in reality, e-commerce is merely a new form of communication.

The United Nations Commission on International Trade ("UNCITRAL") has led the way in developing various model laws in respect of electronic transactions and the Model Law on Electronic Commerce was completed in 1996.⁶ The Model Law on Electronic Commerce aimed to establish equal treatment under the law for online and offline contracts (a "media neutral environment"), by providing norms and rules to validate contracts formed through electronic means, defining the characteristics of valid electronic writing and signature, and providing guidance on the legal recognition of data messages.⁷ The Model Law on Electronic Commerce has been used by many countries as a basis for legislation to recognise and confirm the validity of electronic transactions and contracts.⁸ The Model Law on Electronic Commerce has already been adopted in Europe by Ireland, France, Slovenia and the states of Jersey. In addition, both Canada and the USA have been influenced by the Model Law on Electronic Commerce by adopting respectively, the Uniform Electronic Commerce Act (adopted in 1999 by the Uniform Law Conference of Canada) and the Uniform Electronic Transaction Act (adopted in 1999 by the National Conference of Commissioners on Uniform State Law).⁹

The European Union has adopted a Directive on Electronic Commerce of 8 June 2000, which must be implemented by member states by 16 January 2002 ¹⁰ It does not contain any specific provisions relating to the written requirement of arbitration agreements as required by almost all of the Arbitrations Acts in Europe. In addition, this Directive does not preclude the Member States ability to maintain or establish general or specific legal requirements concerning secure electronic signature.

On 24 November 2000 the ASEAN countries¹¹ signed an e-ASEAN Framework Agreement ¹² which includes a commitment to adopt electronic commerce regulatory and legislative frameworks that create trust and confidence for consumers by, inter alia, expeditiously establishing national laws and policies relating to electronic commerce transactions based on international norms and facilitating mutual recognition of digital signature frameworks.

Singapore ¹³ and Hong Kong SAR ¹⁴ have led the way by enacting legislation based on the Model Law on Electronic Commerce. This law provides conclusively that binding agreements can be made by the exchange of emails or other electronic means (unless there is an express agreement to the contrary) and that the "writing" requirement in any statute includes any means by which information may be recorded and providing for the recognition of digital signatures. A survey of other ASEAN countries reveals that similar legislation is in the process of being enacted.¹⁵

In Asian countries not part of ASEAN, reforms are also being implemented. In the PRC, the need for appropriate legislation has been recognised by the Ministry of Information Industry but none is yet in place.¹⁶ In Japan, the cabinet has approved a bill to revise laws to allow the electronic issuance of documents related to electronic transactions among private parties.¹⁷ Moreover, the Japanese Law Concerning Electronic Signatures and Certification Services 2000 came into force on 1 April 2001. In Taiwan the government has recognised the need for appropriate legislation, however, as yet none is in force.¹⁸ On 5 February 1999, the Korean Government enacted the Digital Signature Act, which deals solely with setting up a legal framework for the operation of licensing authorities. It does not make any statement regarding the legal validity of an electronic document; therefore a major barrier to e-commerce remains.

The signatories to the 1958 New York Convention could not have anticipated the developments in e-commerce that have taken place. Article II(3) of the New York Convention requires the Courts of a signatory state to direct disputes that have been filed before the Courts to arbitration when a binding arbitral clause exists between the parties. Article II(1) requires a signatory to recognise an "agreement in writing" to refer disputes to arbitration and article II(2) provides that an "agreement in writing" shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams. Likewise, article 7(2) of the UNCITRAL Model Law on International Commercial Arbitration ¹⁹ follows the New York Convention in requiring written form. It widens and clarifies the definition of written form in article II(2) of that Convention by adding "telex or other means of telecommunication which provide a record of the agreement".

UNCITRAL has recognised the potential problem created by the form requirements in articles II(2) and 7(2) of the Model Law on International Commercial Arbitration if such provisions are narrowly interpreted.²⁰ The UNCITRAL Arbitration Working Group has noted that article II(2) had been interpreted broadly by national Courts to include other means of communication, particularly telex (and presumably extending to facsimile). If the same teleological interpretation is adopted, there is no reason why it should not extend to cover electronic commerce.²¹

To ensure, however, a uniform interpretation of the form requirement, the UNCITRAL Arbitration Working Group has proposed that a declarative interpretative instrument be prepared which aims to apply the Model Law on Electronic Commerce as a rule of interpretation to article II(2) of the New York Convention²² It is proposed that the interpretative declaration be to the effect that article II(2) should be broadly interpreted; it will note that technologies in international commerce have advanced since the New York Convention was drafted in 1958, and that subsequent international legal instruments have recognised other interpretations of writing requirements, particularly in the area of electronic commerce.

The non-binding nature of the proposed declarative interpretative instrument has raised concerns that it will not effectively resolve the problem because state Courts may choose to ignore it (unless it is adopted by legislation).²³ There is also an issue as to whom it should be addressed; no view has yet been reached as to whether it should be directed to a particular body, such as legislatures or Courts.²⁴

The UNCITRAL Arbitration Working Group has also recommend that article 7(2) of the Model Law on International Commercial Arbitration be modified and that the modifications be circulated with an accompanying guide to enactment.²⁵

It would be prudent before entering into an e-commerce arbitration agreement to consider the applicable law and the law of any place where the award is to be enforced to identify whether an enforcement risk exists. If there is a risk, then a possible way of overcoming it is for the parties to enter into a submission agreement (in a more traditional written form) after the dispute arises, confirming their agreement to submit the dispute to arbitration. Alternatively, if no agreement between the parties can be reached, then the enforceability issue could be determined as a preliminary issue in the arbitration (to try to avoid enforcement difficulties at a later stage).

The issues raised by e-commerce are not novel; similar issues were raised when telexes and faxes first came to be used in international commerce. E-commerce does, however, require the supplementation or adaptation of existing legal principles and laws. Given the pro-e-commerce attitude evinced by ASEAN members and otherAsian countries it seems likely that any interpretation issues in respect of the New York Convention are likely to be resolved by agreement. Provided that an overly technical approach is not taken by national Courts and other bodies when deciding these issues and policy considerations are considered, there is unlikely to be any real issue about the enforceability of e-commerce arbitration agreements or awards made pursuant thereto. Measures are being taken by bodies such as UNCITRAL to overcome any uncertainties, but developments are occurring rapidly and the pace of response is slow. There remains a residual risk that an arbitration based on an e-commerce arbitration agreement may be frustrated or an award not enforced on technical grounds. These risks can be overcome if parties are advised and made aware of any limitations in the applicable law at the time that the e-commerce arbitration agreement is entered into. Further, any enforceability issue can potentially be overcome by a post-dispute submission agreement between the parties or by determining the point as a preliminary issue.

1. The reference to "e-commerce transactions" in this briefing is to transactions carried out by means of electronic data interchange and other means of communication which involve alternatives to paper based methods of communication and storage of information.
2. Referred to in this briefing as e-commerce arbitration agreements.
3. This briefing focuses on the issues particularly raised by the nature of e-commerce arbitration agreements and will not address any other requirements for enforceability under the applicable law (such as whether the agreement is sufficiently certain).
4. Governing law of the contract and/or the law governing the arbitration agreement (if not the same).
5. See the comments of the United Nations Commission on International Trade Law Working Group on Arbitration, Thirty-second Session (2000) (A/CN.9/WG.II/WP.108/Add.1), para.35.
6. General Assembly Resolution 51/162 UNICITRAL Model Law on Electronic Commerce (1996) (A/RES/51/162).
7. ibid., at para 6.
8. Including all member states of the European Union, who are obliged to adopt the EU Directive on Electronic Commerce by January 2002.
9. This Act has been enacted as law in a number of States in the USA.
10. Some countries such as the UK have already implemented the directive – see the Electronic Communications Act 2000.
11. State of Brunei Darussalam, Kingdom of Cambodia, Republic of Indonesia, Lao People’s Democratic Republic, Malaysia, Union of Myanmar, Republic of the Philippines, Republic of Singapore, Kingdom of Thailand and Socialist Republic of Vietnam.
12. Signed at the Fourth ASEAN Informal Summit 22-25 November 2000, Singapore.
13. The Singapore Electronic Transactions Act came into effect on 10 July 1998.
14. The Hong Kong Electronic Transactions Ordinance Cap.553 which came into effect (in stages) on 7 January, 18 February and 7 April 2000.
15. For example, in Thailand, a draft e-commerce law has passed its second and third readings (15 October 2000) and was signed by the Deputy PM on 5 November 2000. It is not yet in force.
16. "E-commerce needs legal support" by Xue Hong in China Daily 1/
17. "Cabinet approves e-commerce bill" in The Japan Times 21/10/2000.
18. Press release of the Executive Yuan (cabinet) dated 24 December 1999.
19. Which has been widely used by many countries as a basis for their arbitration, whether by wholesale or piecemeal adoption (including Hong Kong (although article 7(2) is excluded from application by section 2AC of the Arbitration Ordinance Cap. 341) and Singapore) as a model for their legislation relating to arbitration.
20. United Nations Commission on International Trade Law Working Group on Arbitration, Thirty-third Session (2000) (A/CN.9/485), para 21.
21. United Nations Commission on International Trade Law Working Group on Arbitration, Thirty-second Session (2000) A/CN.9/WG.II/WP.108/Add.1), paras. 35-36.
22. United Nations Commission on International Trade Law Working Group on Arbitration, Thirty-third Session (2000) (A/CN.9/485), paras 62-64.
23. United Nations Commission on International Trade Law Working Group on Arbitration, Thirty-third Session (2000) (A/CN.9/485), paras, 60-61.
24. ibid., para 62.
25. ibid, paras 23-59, 70.

"© Herbert Smith 2002

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