LEGAL COMMENTARY: COUNTERCLAIMS IN ARBITRAL PROCEEDINGS – DECISION NO. 07/2017/QĐ-PQTT OF THE PEOPLE'S COURT OF HANOI ON THE REFUSAL TO SET ASIDE AN ARBITRAL AWARD

In arbitral proceedings, the Respondent is entitled not only to submit a Statement of Defence in response to the Claimant's claims but also to bring counterclaims against the Claimant on matters related to the dispute. However, an independent claim by the Respondent may be considered and resolved by the Arbitral Tribunal only if it is submitted in the proper form and in accordance with the applicable procedures for counterclaims.

Decision No. 07/2017/QĐ-PQTT of the People's Court of Hanoi provides a noteworthy practical example of the consequences arising when the Respondent raises a claim for damages in its Statement of Defence without submitting a separate Counterclaim.

1. Case summary

L Province Import-Export Joint Stock Company (the Claimant) and Company G (the Respondent) entered into a Business Cooperation Contract dated 20 January 2000 for the establishment and operation of a duty-free shop in the area of L C International Border Gate, Lao Cai Province.

During the performance of the contract, the Claimant alleged that the Respondent had breached its obligation to supply goods, seriously affecting the shop's business operations. The Claimant commenced arbitration at Arbitration Centre X, requesting that the Arbitral Tribunal:

1. Terminate the Business Cooperation Contract;
2. Order the Respondent to pay damages of VND 181,398,000.

The Respondent denied having committed any breach. In its Statement of Defence and at the hearing, the Respondent requested that:

• If the contract were terminated, the Claimant be ordered to reimburse costs and pay damages totalling VND 10,367,755,622;
• If the contract continued to be performed, the Claimant be ordered to reimburse costs and pay damages totalling VND 3,264,505,157.

The Claimant requested that the Arbitral Tribunal decline to consider the above claims because they were independent claims, yet the Respondent had neither prepared nor submitted a Counterclaim.

The Arbitral Tribunal subsequently issued Arbitral Award No. 29/16, granting the request to terminate the Business Cooperation Contract, rejecting the Claimant's claim for damages of VND 181,398,000, and making a determination on the arbitration costs.

2. Application to set aside the arbitral award

The Arbitral Tribunal constituted under Arbitration Centre X resolved the dispute concerning the Business Cooperation Contract between L Province Import-Export Joint Stock Company (the Claimant) and Company G (the Respondent).

The Respondent challenged the decision of the Arbitral Tribunal constituted under Arbitration Centre X before the competent Court. The People's Court of Hanoi accepted the application and established a Panel to consider and resolve the Respondent's application.

In its application to set aside the arbitral award, the Respondent argued that the Arbitral Tribunal's acceptance of the Related Party's (the Claimant's) request to terminate the Business Cooperation Contract, without considering the legal consequences of such termination, failed to ensure objectivity in resolving the case, constituted an arbitrary application of the law and a breach of procedural rules, and contravened the fundamental principles of Vietnamese law.

The People's Court of Hanoi held that the party applying to set aside the arbitral award (the Respondent – Company G) had not submitted a Counterclaim. Therefore, there were no grounds to grant Company G's application to set aside the arbitral award.

3. Commentary

Clause 1, Article 36 of the 2010 Law on Commercial Arbitration provides: “The respondent shall have the right to counterclaim the claimant on matters related to the dispute.”

At the hearing, the Related Party (L Province Import-Export Joint Stock Company) maintained the claims stated in its Statement of Claim dated 9 September 2016, requesting the termination of the Contract entered into with the Applicant.

Regarding the Applicant's request that the Related Party bear the costs incurred and pay damages of VND 10,367,755,622 for its breach of the Contract, the Related Party requested that the Arbitral Tribunal decline to consider the request because it was independent of the Related Party's claims, while the Applicant had not submitted a Counterclaim.

In the dispute, the Applicant (Company G) argued: “The decision of the Arbitral Tribunal granted the Related Party's request to terminate the Business Cooperation Contract without considering the legal consequences of the termination of the Business Cooperation Contract.”

Accordingly, the Applicant requested that the Arbitral Tribunal consider the consequences of terminating the Contract. However, the matters raised by the Applicant were intended not merely to oppose the Related Party's request to terminate the Contract but also to assert independent claims concerning the costs and losses arising from such termination.

The Panel rejected the Applicant's request on the following grounds: “The Applicant has not brought a counterclaim against the Related Party seeking the resolution of damages in the event of termination of the Contract. Therefore, there are no grounds for the Panel to consider the Applicant's request to set aside the arbitral award on the basis that the arbitral award contravenes the fundamental principles of Vietnamese law.”

Arbitration Centre X also provided its opinion to the People's Court of Hanoi regarding the Respondent's counterclaim. In particular, Article 9 of the Arbitration Rules of Arbitration Centre X applicable to the dispute provided that the Respondent was entitled to bring a counterclaim against the Claimant; the Counterclaim had to be submitted to the Centre at the same time as the Statement of Defence and had to contain all the particulars prescribed in Clause 2, Article 9 of the Arbitration Rules.

On the basis of the above legal grounds, the Panel concluded that the application to set aside Arbitral Award No. 29/16 dated 16 January 2016, issued by the Arbitral Tribunal constituted under Arbitration Centre X, should be dismissed.

Clause 1, Article 36 of the 2010 Law on Commercial Arbitration provides: “The respondent shall have the right to counterclaim the claimant on matters related to the dispute.” Clause 4, Article 36 of the same Law further provides: “The counterclaim shall be settled by the arbitration council which settles the claimant's statement of claim according to the order and procedures for settling statements of claim provided by this Law” [2]. These provisions not only recognise the Respondent's right to bring a counterclaim but also establish conditions governing the exercise of that right. Accordingly, a counterclaim must be related to the dispute and fall within the scope of the arbitration agreement.

In addition, Clause 2, Article 36 of the 2010 Law on Commercial Arbitration provides: “A respondent's counterclaim shall be filed with the arbitration centre. In case a dispute is settled by ad hoc arbitration, the counterclaim shall be filed with the arbitration council and the claimant. The counterclaim shall be filed simultaneously with the statement of defence.”

Clause 1, Article 10 of the Arbitration Rules of the Middle Commercial Arbitration Center (MCAC) also provides: “The Respondent shall have the right to bring a counterclaim against the Claimant. The Counterclaim shall be based on the arbitration agreement relied upon by the Claimant in commencing arbitration against the Respondent. The Counterclaim shall be made in a separate written submission, independent of the Statement of Defence. The Counterclaim shall be submitted to the Centre at the same time as the Statement of Defence” [3].

Under the above provisions, the Respondent is entitled to bring a counterclaim against the Claimant, but the Counterclaim must be based on the arbitration agreement relied upon by the Claimant in commencing arbitration against the Respondent. The Counterclaim must be made in a separate written submission, independent of the Statement of Defence, and submitted to the arbitration centre at the same time as the Statement of Defence. A counterclaim may arise from the same legal relationship or facts stated in the Claimant's Statement of Claim, but it must still relate to the dispute and fall within the scope of the arbitration agreement. Therefore, the Respondent must prepare and submit its Counterclaim to the arbitral institution in accordance with the applicable procedures.

Accordingly, if the Respondent wishes the Arbitral Tribunal to resolve an independent claim against the Claimant, it must state that claim in a Counterclaim. Where the Respondent merely raises an independent claim in its Statement of Defence or at the hearing, without preparing and submitting a Counterclaim in accordance with the prescribed procedure, the Arbitral Tribunal has no basis to accept and resolve that claim as a counterclaim.

According to the course of the proceedings, the Arbitral Tribunal confirmed: “Throughout the entire process of resolving Dispute No. 29/16, the Arbitral Tribunal did not receive any Counterclaim from the Applicant requesting the Arbitral Tribunal to consider and resolve the consequences of the termination of the Contract.”

The Panel of the People's Court of Hanoi held: “The Applicant has not brought a counterclaim against the Related Party seeking the resolution of damages in the event of termination of the Contract. Therefore, there are no grounds for the Panel to consider the Applicant's request to set aside the arbitral award on the basis that the arbitral award contravenes the fundamental principles of Vietnamese law.”

Thus, for an independent claim to be considered, the Respondent must prepare and submit a Counterclaim. In this case, however, the Applicant did not submit a Counterclaim requesting that the Arbitral Tribunal consider and resolve the consequences of terminating the Contract. The Arbitral Tribunal therefore had no basis to resolve those claims as counterclaims brought by the Respondent.

The approach adopted by the Arbitral Tribunal and the Panel was consistent with the course of the dispute and the applicable law. A counterclaim in arbitral proceedings is similar in nature to a counterclaim in court proceedings and constitutes an important procedural right of the Respondent. The Respondent should therefore have a thorough understanding of the requirements governing the form and content of, and the time limit for submitting, a Counterclaim in order to safeguard its lawful rights and interests.

5. Conclusion

A counterclaim is a procedural right of the Respondent, enabling it to proactively assert an independent claim against the Claimant in the same dispute. However, the exercise of this right must fully comply with the requirements concerning the scope of the claim, the arbitration agreement, the form of the Counterclaim, the time of submission, and the applicable procedures under the 2010 Law on Commercial Arbitration and the relevant arbitration rules.

Decision No. 07/2017/QĐ-PQTT demonstrates that where the Respondent merely raises an independent claim in its Statement of Defence or presents it at the hearing, without preparing and submitting a Counterclaim in accordance with the prescribed procedure, the Arbitral Tribunal has no basis to accept and resolve that claim as a counterclaim. Accurately identifying the claim, preparing a complete Counterclaim, and complying with the applicable time limit are therefore directly relevant to safeguarding the Respondent's lawful rights and interests in arbitral proceedings.

[1] Decision No. 07/2017/QĐ-PQTT dated 18 August 2017 of the People's Court of Hanoi.

[2] Law on Commercial Arbitration No. 54/2010/QH12

[3] MCAC Arbitration Rules

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