The consequences of incorrect or unclear identification of arbitral institution in an arbitration agreement

On 10 December 2019, the Plenum of the Russian Supreme Court adopted the Resolution on the fulfillment by Russian courts of the assistance and control functions in respect of internal arbitration and international commercial arbitration.

The Supreme Court revised the initial draft due to several recommendations. In particular, this document now contains essential rules with regard to the regulation of the public policy clause, restrictions on ad hoc arbitration and consequences of violation of such restrictions, alternative dispute resolution agreements, etc.

Moreover, the current case law apparently demonstrates an urgent need for clear writing of the arbitration agreement. An unclear and ambiguous wording of the respective clause regarding the arbitral procedure (by reference to specific institutional or ad hoc rules) often becomes a cause of disputes between parties. It is a quite complex issue to assess and to prove the real intention of disputing parties in most cases that is why the arbitral procedure (by reference to specific institutional or ad hoc rules) must be identified pitch-perfect.

Therefore, the practical relevance of the language which indicates the arbitral procedure constitutes a key element of the arbitration agreement.

Submitting the disputes to “arbitration court”: an ambiguous wording

In a recent case, the Russian Supreme Court stated that the reference in the arbitration agreement to settle the disputes resulting out of the contract in “arbitration court” does not as such indicate the refusal of the parties from the consideration of disputes in the state court and, therefore, is not an arbitration clause.

Kazakhstani and Russian entities agreed that “the parties agreed that all disputes between the parties that have not been settled by means of claims, shall be resolved in the arbitration court at the location of the claimant in accordance with the current legislation of the country of arbitration proceedings”. Kazakhstani entity started the procedure in the Arbitration Center of the National Chamber of
Entrepreneurs of the Republic of Kazakhstan “Atameken” (the Center) and won the case.

The respondent refused to perform this award and the claimant commenced litigation in a Russian court to enforce the award. The Russian entity indicated that the parties agreed on the resolution of disputes in state courts and did not agree on the resolution of disputes in international commercial arbitration (non-state court) (in Russian state commercial courts are called “arbitrazhnye sudy” (“arbitration courts”)).

The state courts ruled to enforce the award and dismissed the respondent’s arguments that the Center had no jurisdiction. The judicial Board of the Supreme Court of the Russian Federation vacated the judgments of lower courts finding substantial violations of substantive and procedural law. The highest court found that the parties had not agreed upon arbitral procedure because the arbitration agreement did not specify a particular arbitral institution (or rules applicable to an ad hoc arbitration) as competent for dispute resolution. Therefore, the arbitration clause could not be interpreted to conclude that the Center was agreed on for dispute resolution.

On the contrary, the parties used the terms “court” and “proceedings”, which are characteristic of the settlement of disputes by state justice. Consequently, the dispute between the parties was resolved within an incompetent arbitral institution.

It is noteworthy that if the companies really wanted to submit disputes to an arbitral institution rather than state court, they would take into account the legislation not only of Kazakhstan but also of Russia, which clearly distinguishes the arbitration court and the state commercial court. Accordingly, if the parties had agreed non-state mechanism of dispute resolution, the agreement between them would have unambiguously specified an arbitral institution.

The new rules in the Resolution of the Russian Supreme Court Plenum

Paragraph 30 of the official text of the Resolution of Plenum of the Russian Supreme Court sets forth general rules as to the unenforceability of arbitration agreement. An arbitration agreement is unenforceable if its content cannot establish the intention of the parties with respect to the arbitration procedure chosen by them. For example, it cannot be identified whether a particular institutional arbitration or ad hoc tribunal has been selected.

Another variation of unenforceability is the situation when an agreement cannot be executed in accordance with the intention of the parties. This statement illustrates the situation when an agreed arbitral institution cannot fulfill the arbitration procedure in accordance with the requirements of applicable law.

In the interpretation of the arbitration agreement, which contains an inaccurate name of the arbitral institution or the applicable rules of arbitration, it should be possible to establish an arbitral institution or arbitration rules. An arbitration agreement can be declared unenforceable only if it is impossible to establish the actual intention of the parties.

Also, sometimes names of two or more arbitral institutions are similar to the name indicated by the parties. On this occasion, such deficiency in the arbitration agreement cannot be corrected provided that such deficiency cannot be eliminated by the mechanisms established in Article IV of the European Convention on International Commercial Arbitration 1961 (the Convention).

If there are doubts about the validity and enforceability of the arbitration agreement, it is necessary to evaluate not only the text of the arbitration agreement but also other evidence that allows establishing the actual will of the parties including negotiations and correspondence preceding the arbitration agreement, as well as subsequent behavior of the parties.

Kazakhstani practice

Article 10 of the Law “On arbitration” stipulates that if an action brought to a state court is subject to arbitration according to the parties’ agreement, the court shall refer them to arbitration, if either party so requests not later than the submission of its first statement on the merits of the dispute. However, this rule does not apply if the court finds that the arbitration agreement is invalid, invalid or unenforceable.

This article is fully consistent with Article 8 (1) of the UNCITRAL Model Law on international commercial arbitration. This rule, in addition to delineating the competence between an arbitral institution and the state court, aims to solve the problem of pathological arbitration clauses.

Most often these are arbitration clauses, which set forth that all disputes arising out from the contract shall be settled in the “arbitration court”. When determining the actual intention of the parties, it turns out that one party (usually a Russian company) allegedly meant state arbitration court (considering the judicial system of the Russian Federation), the other party – arbitral institution, that is, a non-state court. It is also not uncommon for an arbitration clause to specify a non-existent arbitration. Such a clause simply cannot be fulfilled.

In one case (the decision of the District Court No. 2 of the Auezovsky District of Almaty No. 2-7540-18-00-2/4515), the arbitral institution received from the district court files of a civil case between two commercial entities on the recognition of the contract as invalid. The state court found out that according to the agreement, “if disputes cannot be resolved through negotiations, they are subject to arbitration in accordance with the current legislation of the Republic of Kazakhstan”. In this regard, the court considered that this case should be transferred to the Kazakhstani arbitral institution for consideration on the merits, rather than heard by a state court.

However, such an approach is not well-grounded: since both parties are residents of the Republic of Kazakhstan, pursuant to Article IV of the Convention, it is impossible to identify a specific arbitral institution. This owes to the Convention is applicable only to arbitration agreements of both legal entities which have a permanent residence or their location in the different Contracting States at the time of the conclusion of such an agreement (Article I of the Convention). Therefore, such a clause is pathological and non-enforceable.

Conclusion

Beyond a reasonable doubt, specifying the arbitral procedure by reference to specific institutional or ad hoc rules is a crucial part of an arbitration clause or arbitration agreement. Any discrepancies and deficiencies as to the precise name of the respective arbitral institution will lead to an unenforceability of such clause or agreement. As a result, the parties deprive themselves of an ability to settle disputes by arbitration. This, in turn, is the basis for additional financial costs and long-term litigation in state court.

Now, the Resolution of the Plenum of the Russian Supreme Court has brought the unified approach as to this matter of unclear identification of the arbitral institution in an arbitration clause. Hopefully, it will speed up and simplify the arbitration procedure between disputing parties and grant them more guarantees for the effective mechanism of alternative dispute resolution.

About the Author:

Konstantin Voropaev obtained an LLM degree with distinction at Robert Gordon University (Scotland) in 2017 having previously graduated with honours from Omsk State University in 2012. His professional interests include various legal areas, compliance and ethics procedures. He deals with international commercial arbitration in different jurisdictions (Russia, Central Asia, and Europe), legal matters in pharmaceutical production and medical affairs in clinical trials, civil and contract legal issues, compliance.

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