Errors in the Arbitration Agreement – Civil Law

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Arbitration, as an effective means of alternative dispute resolution, is actively used by parties to legal relationships, especially by foreign investors. An arbitration agreement is a prerequisite to the arbitration and is essential for the arbitration to occur. The content and accuracy of the agreement largely determine the arbitrability of a dispute. Therefore, a good draft arbitration agreement is a crucial task at the contract or separate document stage when a dispute is to be submitted to arbitration.

In practice, many arbitration problems are due to lack of awareness of the nature, role and operation of arbitration. In the Republic of Kazakhstan, arbitrations may exist in the form of arbitrations formed specifically to address a particular dispute (“ad hoc arbitrations”) or as permanent institutional arbitrations. The International Arbitration Center under the Astana International Financial Center is of special interest, which is not subject to national arbitration law and is governed by the Rules of Arbitration and Mediation, approved by the AIFC. Regardless of the type of arbitration, an appeal is only possible if there is a duly drafted arbitration agreement between the parties to the proceeding.

According to Article 2, paragraph 8 of the Law of the Republic of Kazakhstan “On Arbitration” of April 8, 2016, an arbitration agreement is a written agreement between the parties to submit a dispute arising or likely to arise civil law relationships. By entering into an arbitration agreement, the parties themselves waive the right to sue in state court, agree to voluntarily and bindingly comply with the terms of the arbitration award, and agree to its finality. When concluding an arbitration agreement, the parties must agree on the arbitration terms, such as the arbitral tribunal (its title in the case of permanent arbitration), the place, the language, the applicable law, the constitution and rules of arbitral procedure. Normally, all permanent arbitrators recommend using their own arbitration clause. By their clauses and unless otherwise agreed by the parties, the permanent arbitrators submit the terms of the arbitration procedure to their own rules, which specify all the necessary procedural modalities.

The form of the arbitration agreement

From the definition of an arbitration agreement follows the form it must take. As agreed by the parties, an arbitration agreement may be contained in a separate clause of a contract (the “Arbitration Clause”) or it may be entered into as a separate agreement independent of the main contract. An arbitration agreement is also deemed to be in writing if (1) it is entered into, including by means of an exchange of letters, telegrams, telephonograms, facsimiles, electronic documents or other documents identifying the parties and evidencing their willingness to submit to the dispute to arbitration or (2) it is submitted by an exchange of statement of claim and statement of defense in which one party declares that there is an agreement and the other does not oppose it. In our experience, the most common form of an arbitration agreement is a separate clause in a contract signed by both parties. However, in practice, we have been dealing with the use of identical arbitration clauses by different entities, which do not contain all the terms of the arbitration and therefore do not work. The fact that one and the same clause taken from the Internet is used indicates negligence in the drafting of the arbitration agreement. In the meantime, such arbitration clauses subsequently cause problems which considerably slow down the arbitral process and sometimes make it impossible to arbitrate the dispute.

The most common mistakes in drafting an arbitration agreement in practice:

1. The arbitration agreement does not refer to a particular arbitration or refers to a non-existent arbitration.

Often, intentionally or unknowingly, parties choose a non-existent arbitration or fail to appoint a particular arbitration with the authority to resolve potential disputes. This also applies when the parties indicate the name of an arbitration in an erroneous way or when the names of different arbitrations are confusingly similar. Consequently, the parties cannot seize either the arbitral tribunal or a state court for the settlement of the dispute. However, there is a way out of this situation and it is as follows: 1) if the parties to the arbitration are located in a country party to the European Convention on International Commercial Arbitration of April 21, 1961 (hereinafter the “European Convention”), the plaintiff must submit a request appointment of an arbitrator to settle the dispute or 2) where the parties to the proceedings are not parties to the European Convention, the claimant will request the respondent to enter into a supplementary agreement on the terms of the arbitration not governed by the convention arbitration in force. If the respondent does not accept or ignores the claim for settlement of the terms of arbitration, the claimant is advised to go to a national court. This right derives from the provision of article 10 of the law on arbitration: “the court seized of an action on the subject of the arbitration refers, if one of the parties so requests, the parties to the arbitration no later than the presentation of its first statement on the merits, unless it finds that the arbitration agreement is invalid, inoperative or unenforceable”. In other words, in order to submit potential disputes with an arbitration clause to the jurisdiction of a state court, the court must prove the invalidity and unenforceability of the arbitration agreement due to the absence of an arbitral body specified in the arbitration agreement.

2. Extended interpretation of the scope of the arbitration clause

Extended interpretation of the scope of the arbitration clause

The definition of the arbitration agreement in the law on arbitration provides for the submission to arbitration of a dispute arising or likely to arise from a civil law relationship. However, not all disputes arising from civil law relationships are competent for arbitration. The term “civil relations” itself is quite broad and includes non-contractual disputes that may arise outside the contract in which the arbitration clause is included. In entering into an arbitration agreement, however, the parties generally refer to the arbitration jurisdiction to resolve any disputes that may arise directly in connection with the performance, breach, invalidity or termination of a contract, rather than to civil law relations in general. In accordance with article 20 of the law on arbitration, it is up to the arbitral tribunal to decide whether or not it has jurisdiction to hear the dispute submitted to it. If the scope of the arbitration clause is interpreted broadly, there is a risk that the claim will be dismissed if the arbitral tribunal decides that it does not have jurisdiction to decide the dispute. Moreover, in the event that it proves necessary to seize a state jurisdiction to obtain the execution of an arbitral award, the latter may refuse to issue an enforceable title on the grounds that “the award was rendered on a dispute not provided or not covered by the arbitration agreement, or contains rulings on matters outside the scope of the arbitration agreement, and because the dispute is outside the jurisdiction of the arbitral tribunal”. It is therefore recommended to extend the arbitration clause directly to the contract and to the disputes that may arise within the framework of the contract.

3. Non-indication of the applicable law in the arbitration agreement

Governing law is also an important term of the arbitration agreement. As a general rule, when a Kazakh permanent arbitral tribunal is chosen and the arbitration is subject to its rules, the applicable law is that of the Republic of Kazakhstan. However, in the absence of reference to this condition of the arbitral procedure, the European Convention solves this problem in the following way: “the law chosen by the parties and, failing that, the law of the country where the award is made However, if the parties have not specified the law applicable to the arbitration agreement and it is not possible to determine in which country the award must be made, the court determines the applicable law by referring to the rule of conflict of laws of the country where the case is brought. The International Arbitration Center, for example, settles the question in such a way that in the absence of agreement on the applicable law, the Arbitral Tribunal applies the law which it considers most appropriate to the circumstances of the case and to the principal object. Furthermore, the International Arbitration Center follows the rule that any designation by the parties of the law of a given State shall be deemed to refer to the substantive law of that State and not to its conflict of law rules. In particular, in Kazakh practice, the question of the applicable law has yet to be settled.

In order to avoid these and other problems, we recommend that you research the experience and rules of permanent arbitrations before entering into an arbitration agreement, choose an arbitration body with an impeccable reputation, agree on the terms essentials of the arbitration process and familiarize yourself with the list of arbitrators. When adopting its own rules, each arbitral tribunal specifies all the necessary procedural questions. Therefore, to minimize the risks that may arise from omissions in the arbitration agreement, it is advisable to choose specific rules and submit the arbitration to the rules of these rules. Arbitration has many advantages and guarantees a fair arbitral award, provided that the arbitration agreement is drafted correctly and in its entirety.

We are always happy to assist with the drafting of the arbitration agreement and representation in arbitration proceedings.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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