Along with recourse to state courts, international commercial arbitration (not to be confused with the arbitration courts of the Russian Federation, which are state federal courts of special jurisdiction that consider commercial disputes between legal entities, individual entrepreneurs and state bodies, the analogy of which in Kazakhstan are specialized inter-district economic courts) is one of the most popular means of resolving disputes between parties to an international contract.
International commercial arbitration is a non-state, commercial arbitration court, specially designed to consider disputes between participants in international commercial transactions, the parties to which are persons of different nationalities (foreign firms and organizations).
International arbitration decisions of commercial arbitrations are enforced throughout the world in accordance with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Convention has been ratified by more than 140 states (including Russia and Kazakhstan), that is, by almost all economically significant jurisdictions, unlike, for example, state courts, whose decisions are enforced only in those countries with which this country has relevant bilateral or multilateral international agreements on mutual recognition and enforcement of court decisions.
In pursuance of this Convention, Kazakhstan adopted the Law of the Republic of Kazakhstan “On International Arbitration” on December 28, 2004, which establishes relations arising in the course of international arbitration activities on the territory of the Republic of Kazakhstan, as well as the procedure and conditions for the recognition and enforcement of international arbitration decisions in Kazakhstan.
A similar Law exists in the Russian Federation (Law of the Russian Federation of 07.07.1993 “On International Commercial Arbitration” No. 5338-1)
There are two main types of international commercial arbitration:
— permanent arbitration (institutional arbitration) — arbitration proceedings under the auspices of a permanent arbitration organization (institution) and according to the rules developed by it;
— arbitration to resolve a specific dispute (ad hoc arbitration) — arbitration proceedings under rules not associated with any arbitration organization (for example, according to the UNCITRAL Arbitration Rules or according to rules developed by the parties themselves).
Permanent arbitration institutions
Permanent arbitration institutions are created at chambers of commerce and industry, exchanges, organizations and associations of entrepreneurs.
Among the permanent arbitration institutions, the most famous and authoritative are:
- The International Court of Arbitration (ICC Arbitration) at the International Chamber of Commerce, located in Paris, is perhaps the most famous and experienced of the international arbitration institutions. According to a 2008 study conducted by PWC, more than 45% of the survey participants preferred the ICC to other institutions;
- The London Court of International Arbitration (LCIA), the main arbitration institution of the UK, one of the oldest in the world, founded in 1892;
- The American Arbitration Association (Triple-A), the main arbitration institution of the USA. International arbitration proceedings are administered by its subsidiary, the International Centre for Dispute Resolution (ICDR);
- The Arbitration Institute of the Stockholm Chamber of Commerce (SCC Institute), a Swedish arbitration institution known for a large number of cases involving parties from the former CIS;
- China International Economic and Trade Arbitration Commission (CIETAC), the central arbitration institution of the People’s Republic of China.
In the CIS, the most significant commercial arbitration is the International Commercial Arbitration Court (ICAC) at the Chamber of Commerce and Industry (CCI) of the Russian Federation in Moscow.
In Kazakhstan, the most significant commercial arbitration is the Kazakhstan International Arbitration.
Arbitration proceedings in such permanent commercial arbitration courts, unlike ad hoc arbitration, are conducted on the basis of rules (regulations) specially developed by these arbitration institutions, which prescribe the procedure for considering disputes (a kind of private civil procedure code).
The main advantages of permanent arbitration are:
The presence of rules and procedures that ensure the rapid formation of an arbitration tribunal and the commencement of proceedings, as well as the resolution of standard procedural situations, such as challenging an arbitrator, determining arbitration costs, securing a claim;
Lists of recommended arbitrators from which the parties may select those who will hear the dispute between them (although it is not mandatory to select an arbitrator from the list). The institutions have detailed and regularly updated information on the arbitrators, including their experience, specialization, knowledge of languages, etc.;
administrative and technical assistance from the arbitration institution, including assistance in a situation where one of the parties delays or ignores the proceedings.
Arbitration for the resolution of a specific dispute (ad hoc arbitration)
A “classic” ad hoc arbitration is formed directly by the parties to the contract to consider one specific dispute, and the rules of the proceedings are determined either by the parties jointly or by the arbitral tribunal. However, usually, instead of agreeing on the rules, in order to save time and avoid contradictions, the parties use existing rules, for example, the UNCITRAL Arbitration Rules. These rules allow for a minimum reduction in procedural disputes and a way out of a deadlock in the event, for example, that the defendant does not appoint an arbitrator, or if two arbitrators cannot reach an agreement on the candidacy of the chairman.
Ad hoc arbitration proceedings are held quite rarely. A 2008 study conducted by PWC showed that in the last 10 years only 14% of decisions were made within the framework of ad hoc arbitrations, and this form of arbitration was preferred by large corporations with turnovers of more than 50 billion dollars, that is, having their own legal departments.
The main advantage of ad hoc arbitration is the maximum flexibility of proceedings, the great potential for their acceleration and cost reduction. In addition, the parties to ad hoc proceedings can independently determine the amount of the arbitration fee or avoid paying it (if they do not appoint an arbitration institution to administer the case).
The main disadvantage of ad hoc arbitration is that the effectiveness of ad hoc proceedings depends heavily on the parties’ willingness to cooperate in resolving their dispute. If one of the parties ignores the proceedings or even deliberately opposes them, this leads to significant losses of time that can be avoided in the case of institutional arbitration.
Arbitration Agreement
In order for a dispute under a foreign trade contract to be considered in international arbitration, the parties must enter into an arbitration agreement.
An arbitration agreement is an agreement by the parties to an existing or future dispute to submit such a dispute to an arbitral tribunal. The arbitration agreement is the central element and basis of the entire arbitration proceeding.
There are two main forms of arbitration agreements:
arbitration clause — a provision in an agreement on the referral to arbitration of future disputes arising therefrom. In this case, the parties refer not to a specific dispute, but to the legal relationship from which such a dispute may arise;
arbitration agreement (submission agreement) or, traditionally, compromise — an agreement by the parties to refer to arbitration an existing, specific dispute between them.
Sample arbitration clauses
Recommended arbitration clause of the ICAC at the Russian CCI:
«Any dispute, controversy or claim which may arise out of or in connection with the present contract (agreement), or the execution, breach, termination or invalidity thereof, shall be settled by the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation in accordance with its Rules».
Recommended arbitration clause of the Kazakhstan International Arbitration:
“Any disputes and/or disagreements arising out of or in connection with this contract (agreement) shall be finally settled by the Kazakhstan International Arbitration in accordance with the current Rules.”
It is also recommended to add to the arbitration clauses the terms on the number of arbitrators, applicable substantive law, venue and language of the proceedings:
The Arbitration Tribunal shall include [one/three] Arbitrators.
The place of the arbitration proceedings shall be …………[specify].
The language of the arbitration proceedings shall be [……………] language.
“This contract (agreement) shall be governed by the substantive law of …………[specify country]”.
ICDR Suggested Arbitration Clause:
«Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined by arbitration administered by the International Center for Dispute Resolution in accordance with its International Arbitration Rules.»
LCIA Suggested Arbitration Clause:
«Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.
The number of arbitrators shall be [one/three].
The seat, or legal place, of arbitration shall be [City and/or Country].
The language to be used in the arbitral proceedings shall be [ ].
The governing law of the contract shall be the substantive law of [ ].»
Recommended ICC Arbitration Clause:
All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.
However, along with the advantages of considering disputes in commercial arbitration courts, there are also disadvantages:
— the period for considering a dispute may be extended: (almost all ICAC regulations contain a provision on extending the period for considering a dispute by the ICAC chairman in exceptional cases without any specific time limits)
— decisions of commercial arbitration courts are not subject to unconditional execution in the country of the debtor’s location (enforcement of decisions of international commercial arbitration courts is carried out by filing an application with the state (competent) court, which in certain cases may refuse to issue a writ of execution and satisfy the application for the enforcement of a decision of a commercial arbitration court);
— there is a mechanism for commercial arbitration courts to demand additional fees in cases of prolonged consideration of a judicial dispute (although the courts themselves often extend such consideration), translation of documents, involvement of an expert, business trips to the place of consideration of disputes, etc.