Legal Aspects of Commercial Arbitration

1. Legal Aspects of Commercial Arbitration Olena Bokareva JASN06 International Law on Shipping and Trade September 17, 2012 Lund University

2. Further reading • Redfern, Hunter, et al. Redfern and Hunter on International Arbitration (2009), http://www.kluwerarbitration.com • Klaus P. Berger. Private Dispute Resolution in International Business: Negotiation, Mediation, Arbitration(2 Volumes and interactive DVD-ROM), KluwerLaw International, (2006)

3. Dispute resolution • Negotiation • Mediation and conciliation • Arbitration • Litigation

4. International Commercial Arbitration Redfern, Hunter, et al. Redfern and Hunter on International Arbitration, p. 1 ”Commercial arbitration – a private method of dispute resolution , chosen by the partiesthemselves as an effectiveway of putting an end to disputesbetweenthem, withoutrecourse to the courts of law”.

5. Terminology • Klaus P. Berger, Volume I • Arbitralaward– formal decision by an arbitral tribunal on the subjectmatter of the arbitration • Arbitrationagreement– consensual basis of everyarbitration, may be contained in a contract or in a separate agreement • Arbitrationclause– arbitrationagreementcontained in a contract • Lex arbitri– the applicablearbitrationlaw; due to the principle of territoriality the law of the jurisdictionwhere the tribunal has itsseat • Lex fori– the law in force in the country where a domesticcourt sits

6. Arbitration v. Litigation • Advantages: • ”Neutral” tribunal • Internationally enforceable decision • Flexibility of arbitral proceedings • ”confidentiality” of the arbitral process – an important advantage (a private process, no public or press) • Disadvantages: • Costs • Limited powers of arbitrators • No joinder of parties • Conflicting awards – no system of precedents in arbitration

7. Types of arbitration • Institutionalarbitration– arbitration that is conductedaccording to the arbitrationrules of an arbitral institution chosen by the parties (ICC, Swiss Chambers’ Arbitration Institution, ArbitrationInstitute of the Stockholm Chamber of Commerce, etc.) • Ad hoc arbitration– arbitrationconductedaccording to the rulesdrafted by the parties or to UNCITRAL ArbitrationRules

8. Arbitral Institutions • Own set of rules • Many are based on UNCITRAL Rules • Ownmodel form of arbitrationclause • Example of Arbitral Institutions: • The International Chamber of Commerce • The London Chamber of Arbitration • The American ArbitrationAssociation • Swiss Chambers’ ArbitrationInstitution • ArbitrationInstitute of the Stockholm Chamber of Commerce • The DanishInstitute of Arbitration

9. Features of arbitration • The agreement to arbitrate • The choice of arbitrators • The decision of the arbitral tribunal • The enforcement of the award

10. Apllicable laws • Lex arbitri– law of the place or seat of arbitration • Substantive law (or conflict of laws) • The lawgoverningrecognition and enforcement of the award

11. Lex Arbitri • ArbitrationLaw of the seat of arbitration • Examples: • Swiss Federal Statute on Private International Law, Chapter 12: International Arbitration • The Swedish ArbitrationAct (SFS 1999:116) • German ArbitrationLaw 1998 • DanishArbitrationAct 2005 • UK ArbitrationAct 1996

12. Substantive law • Freedom of the parties to choose the law in the Contract • Iftheyfail to do so, the arbitratorswill make a choice for them (a chosen national lawmight not be updatedrelating to commercialarbitration) • Closestconnection with the contract

13. ArbitrationAgreement • Arbitrationagreementestablishes the jurisdiction of the arbitral tribunal . The agrement of the parties is the onlysource from which this jurisdictioncan come. • ”Anydisputearisingout of this Contract is to be settled by arbitration in Zurich” - could be valid, but not recommended

14. UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 • Article II • 1. EachContracting State shallrecognisean agreement in writingunder which the partiesundertake to submit to arbitration all or anydifferenceswhichhavearisen or whichmayarisebetweenthem in respect of a defined legal relationship, whethercontractual or not, concerning a subjectmattercapable of settlement by arbitration. • 2. The term ”agreement in writing ” shallinclude an arbitralclause in a contract or an arbitrationagreement , signed by the parties or contained in an exchange of letters or telegrams • Recognition and enforcement of an arbitralawardmay be refusedif the parties to the arbitrationagreementwere under someincapacity, or if the agreementwas not valid under itsowngoverninglaw (Article V(1)(a))

15. The agreement to arbitrate • UNCITRAL Model Law on International Commercial Arbitration • Article 7. Definition and form of arbitration agreement • (1) “Arbitration agreement” is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. • (2) The arbitration agreement shall be in writing. • (3) An arbitration agreement is in writing if its content is recorded in any form, whether or not the arbitration agreement or contract has been concluded orally, by conduct, or by other means. • (4) The requirement that an arbitration agreement be in writing is met by an electronic communication if the information contained therein is accessible so as to be useable for subsequent reference; “electronic communication” means any communication that the parties make by means of data messages; “data message” means information generated, sent, received or stored by electronic, magnetic, optical or similar means, including, but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex or telecopy. • (5) Furthermore, an arbitration agreement is in writing if it is contained in an exchange of statements of claim and defence in which the existence of an agreement is alleged by one party and not denied by the other. • (6) The reference in a contract to any document containing an arbitration clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract.

16. Submission agreement • It sumbits an existing dispute to arbitration • A dispute has already arisen • The interests of the parties may conflict • The parties have to negotiate and draft of a submission agreement (this can take some time)

17. DefectivesClauses • In practice the parties pay little attention to the dispute resolution clause • “Parties in international contract negotiations should always pay close attention to the careful drafting of the dispute resolution clause. The time and money invested at the drafting stage must be considered as an investment in the future, when a dispute arises between the parties”. Klaus P. Berger, p.306

18. DefectiveClauses, Examples • ”In the event of anyunresolveddispute, the matterwill be referred to the International Chamber of Commerce” • ”Disputeshereundershall be referred to arbitration, to be carriedout by arbitratorsnamed by the International Chamber of Commerce in Geneva in accordance with the arbitrationprocedure set forth in the Civil Code of Venezuela and in the Civil Code of Francem with dueregard for the law of the place of arbitration” – Craig, Park & Paulsson, International Chamber of Commerce Arbitration(3rd ., Oceana, 2000), pp.132-133.

19. DIS Model Arbitration Agreement • The German Institution of Arbitration (Deutsche Institution für Schiedsgerichtsbarkeit e.V., DIS) advises all parties wishing to make reference to the DIS Arbitration Rules to use the following arbitration clause: • "All disputes arising in connection with this contract or its validity shall be finally settled in accordance with the Arbitration Rules of the German Institution of Arbitration (DIS) without recourse to the ordinary courts of law.“ • The following points – particularly in the case of a foreign element – should be considered: - The place of arbitration is ...- The number of arbitrators is ...- The language of the arbitral proceedings is ... - The applicable substantive law is ...

20. Reccommendedclaused by DanishInstitute of Arbitration • Any dispute arising out of or in connection with this contract, including any disputes regarding the existence, validity or termination thereof, shall be settled by arbitration arranged by The Danish Institute of Arbitration in accordance with the rules of arbitration procedure adopted by The Danish Institute of Arbitration and in force at the time when such proceedings are commenced.”

22. Establishment of the Tribunal • Chapter III of UNCITRAL ModelLaw • Section II of UNCITRAL ArbitrationRules • The claimantcannotbring his casebefore an arbitral tribunal until it is established • Usuallyone or threearbitrators • The seat of arbitration should always be fixed in a city instead of a certain country • Language of the proceedings • Interimmeasures of protection

23. Jurisdiction of the Tribunal • ‘Kompetenz-Kompetenz ’– arbitral tribunal decides on itsowncompetence • UNCITRAL ModelLaw, Chapter IV • Article 16(1) The arbitral tribunal mayrule on itsownjurisdiction, includinganyobjections with respect to the existence or validity of the arbitrationagreement. For that purpose, an arbitrationclausewhich forms part of a contractshall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and voidshall not entailipsojure the invalidity of the arbitrationclause (’separability’) • UNCITRAL ArbitrationRules, Article 23

24. Choice of arbitrators • Unevennumber of arbitrators (three arbitrators is sufficient) • Replacement of an arbitrator • Nationality of the arbitrators • Nomination/appointment of arbitrators and the constitution of the arbitral tribunal • Qualities of the arbitrators (legal background, expertise, languageskills, knowledge of the proceduralrules of the seat of arbitration, independence and impartiality, availability • Chairman – conducts the proceedings

25. Appointment of Arbitrators • Impartialityand independence • Disclosure • Challenge and replacementof arbitrators

26. The Award UNCITRAL ModelLaw, Chapter VI, Art.28 (1): The arbitral tribunal shalldecide the dispute in accordance with suchrules of law as are chosen by the parties as applicable to the substance of the dispute. (2) Fallinganydesignation by the parties, the arbitral tribunal shallapply the lawdetermined by the conflict of lawsruleswhich it considersapplicable Article 31 – the awardshall be mad einwriting and shall be signed by the arbitrator or arbitrators. In arbitralproceedings with morethanonearbitrator, the signatures of the majority of all members of the arbitral tribunal shallsuffice, provided that the reason for anyomittedsignature is stated. The awardshallstate the reasonsuponwhich it is basedand shallstateits date and the place of arbitration. After the arawd is made, a copysigned by the arbitrators in accordance with para. 1 of this articleshall be delivered to each party

27. New York Convention Article I.2 The term ”arbitralawards” shallinclude not onlyawardsmade by arbitratorsappointed for eachcasebutalsothosemade by permanent arbitralbodies to whichpartieshavesubmitted

28. ”Final and Binding” • Award in principal in final • The award has important legal consequences , since it constitutes a bindingdecision on the disputebetween the parties • The majority of awards are performedvoluntarily

29. Challenge against the Award • “Challenge” means “to appeal” against an awardor “recourse” against award • Alternatives – litigation, appeal to a higher court • Effects of challenge: • Confirm the award • Refer it back to the tribunal • Vary the award • Set it aside in whole or in part (unenforceable)

30. UNCITRAL ModelLaw, Chapter VII • (1) Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of this article. • (2) An arbitral award may be set aside by the court specified in article 6 only if: • (a) the party making the application furnishes proof that: • (i) a party to the arbitration agreement referred to in article 7 was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of this State; or • (ii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or • (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside; or • (iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or • (b) the court finds that: • (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State; or • (ii) the award is in conflict with the public policy of this State.

31. Cont. • (3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the award or, if a request had been made under article 33, from the date on which that request had been disposed of by the arbitral tribunal. • (4) The court, when asked to set aside an award, may, where appropriate and so requested by a party, suspend the setting aside proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the arbitral tribunal’s opinion will eliminate the grounds for setting aside.

32. The enforcement and recognition of the award • New York Convention 1958 • An awardmay be recognisedwithoutbeingenforced • If it is enforcedthen it is recognised by the courtwhich orders itsenforcement • Usuallyenforced in another country than the seat of arbitration by national courts

33. UNCITRAL ModelLaw, Chapter VIII • Article 35 • (1) An arbitral award, irrespective of the country in which it was made, shall be recognized as binding and, upon application in writing to the competent court, shall be enforced subject to the provisions of this article and of article 36. • (2) The party relying on an award or applying for its enforcement shall supply the original award or a copy thereof. If the award is not made in an official language of this State, the court may request the party to supply a translation thereof into such language.

34. Refusal of Recognition of Awards • New York Convention does not permit any review on the merits of an award to which the Convention applies (Art. V). Nor does the Model Law • The grounds for refusal are exhaustive • The burden of proof is not upon the party seeking recognition and enforcement • Enforcing court is not obliged to refuse enforcement • Internationally accepted standard

35. UNCITRAL ModelLaw, Article 36 • Grounds for refusingrecognition or enforcement • (1) Recognition or enforcement of an arbitral award, irrespective of the country in which it was made, may be refused only: • (a) at the request of the party against whom it is invoked, if that party furnishes to the competent court where recognition or enforcement is sought proof that: • (i) a party to the arbitration agreement referred to in article 7 was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or • (ii) the party against whom the award is invoked was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present hiscase; or • (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or • (iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or

36. Cont. • (v) the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made; or • (b) if the court finds that: • (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State; or • (ii) the recognition or enforcement of the award would be contrary to the public policy of this State. • (2) If an application for setting aside or suspension of an award has been made to a court referred to in paragraph (1)(a)(v) of this article, the court where recognition or enforcement is sought may, if it considers it proper adjourn its decision and may also, on the application of the party claiming recognition or enforcement of the award, order the other party to provide appropriate security.