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How not to fall into the abyss with an arbitration clause: TOP 5 tips

There is much debate around what is best: state courts or the “Alternative Dispute Resolution (ADR), to which arbitration belongs. However, it is obvious that it is arbitration that is the best way to consider and resolve disputes, in which all the benefits of a jurisdictional form are combined with the loss of defects of a state court. Therefore, concluding an arbitration agreement, it is important to avoid language that can prevent the establishment of the will of the parties to the transaction. Although the clarity of the wording cannot compensate for the semantic flaws of the arbitration agreement. So, we highlight the TOP-5 problems, for the solution of which we offer appropriate advice.

Institutional or ad hoc arbitration?

It is clear that in each case it is necessary to choose the most advantageous of the possible options. This is a matter of legal art (in particular, the so-called forum shopping). However, in our deep conviction, it is institutional arbitration that is the best method for resolving disputes, especially in the field of international commerce.

However, the election of insufficiently authoritative arbitration entails the risk of poor-quality arbitration proceedings. So, recently (June 28, 2018), the Supreme Court of Cyprus quashed the arbitral award, as it established the lack of objectivity and impartiality of the arbitrator. Aristos Michael et al v SPE Stroumpiou (Civil Appeal 190/12).

If a dispute arises in the field of legal relations relating to a particular industry in which there are specialized arbitration institutions, we recommend that you contact them. In particular, the London Maritime Arbitrators Association (LMAA) is considered the most authoritative maritime arbitration.

In ad hoc arbitration, the burden of arbitration rests with the parties and the arbitrators from the time they are appointed. Of course, parties can alleviate this burden by choosing a regulation designed for use in ad hoc arbitration.

Place of Arbitration

The choice of the place of arbitration is of great importance both for practical convenience and for legal consequences. As a rule, it is precisely the place of arbitration that is determined by agreement of the parties to the dispute or is determined in another way (for example, by the arbitration court), and not the place where the case was actually considered, of decisive legal significance. This is confirmed in the well-known and very iconic dispute Ecuador v Occidental Exploration & Production Co [2005]. Therefore, it is recommended that you choose a friendly arbitration jurisdiction. Other things being equal, in our opinion, the United Kingdom (in particular, the London Arbitration) is favorable for arbitration of jurisdiction.

Parties must determine the number of arbitrators

When considering a dispute, the ad hoc arbitration shall indicate the number of arbitrators in accordance with the UNCITRAL Arbitration Rules as amended in 2013. Such a duty exists since 2010. When the UNCITRAL Arbitration Rules were quite radically revised. In general, the number of arbitrators can be arbitrary, but odd, protecting against the occurrence of stalemate situations. Each party must appoint an equal number of arbitrators, who then, by mutual agreement, choose a super arbitrator. A serious drawback of ad hoc arbitration is the weak administration. Therefore, national law provides the right to appoint an arbitrator. For example, the Law of Ukraine “On International Commercial Arbitration” dated February 24, 1994. It provides for the possibility, if the parties have not agreed on the choice of an arbitrator, at the request of either party, the arbitrator should be appointed by the president of the Ukrainian Chamber of Commerce and Industry.

The number of arbitrators has a significant effect on the overall cost, duration and quality of the arbitration. It is difficult in advance to determine the quantitative composition of the tribunal, since it is not clear what the complexity of the possible dispute will be. Therefore, it is recommended that the number of arbitrators be determined when a dispute has already arisen.

What law applies to the contract and disputes arise from it?

The provision on the election of substantive law can be stated in a clause separate from the arbitration clause or in the arbitration clause, from which it will be clear that it defines two aspects, namely, applicable law and arbitration jurisdiction.

Sometimes the parties do not give preference to any national legal system as substantive law. Instead, they choose lex mercatoria (e.g. Incoterms) or international law that does not belong to any national law. In other cases, the parties authorize the arbitral tribunal to resolve the dispute based on the principles of fairness and reasonableness (ex aequo et bono). Before choosing such options, you should be careful. The lack of choice of the applicable law by the parties entails problems with the determination of the substantive law to be applied by the arbitration court.

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