Arbitration Clause in a Contract - Coursework Example

?Arbitration The arbitration clause in a contract which is a common feature in all international contracts is an agreement separate from the underlying contract and hence known as the “bedrock” of international arbitration.1 The arbitration agreement must be carefully drafted so as to provide for the rights of the parties and their duties to submit to arbitration proceedings and competence of arbitral tribunal to resolve disputes. National courts (appointing authority) also have a role to play in referring the parties to arbitration. Parties to the dispute have rights to seek enforcement of arbitral awards as envisaged by the New York Convention, any other international treaties or national laws as may be provided for in arbitration agreement (clause).2 The instant case involves parties from different nations namely U.K. and Malaysia and hence the contract between them is an international contract attracting the law of international commercial arbitration. The contract envisages supply of toilet flushes by the Malaysian company to the London plumbing firm. It is clear that their contract has a clause for arbitration to be resorted to in the event of disagreement or dispute between them. On the one hand, George Ltd of London wishes to terminate the contract and Cheap Stock Corp of Malaysia maintains that George Ltd’s demand for termination is a violation of the contractual terms, on the other. This constitutes a dispute between them warranting arbitration as provided by the arbitration clause of the underlying contract. The arbitration agreement if valid will enable the arbitrators to decide whether the London firm is entitled to prematurely terminate the contract entered into with the Malaysian company by examining the terms of the underlying contract. The arbitration clause in the underlying contract might be ideally as follows as provided for by the London Court of International Arbitration (LCIA) or on the similar lines “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 the arbitration shall be [city and/or country]. The language to be used in the arbitral proceedings shall be [language]. The governing law of the contract shall be the substantive law of [jurisdiction].”3 If the parties have not chosen any institutional arbitration, UNCITRAL Arbitration rules provides for Ad hoc arbitration according to which the arbitration clause shall be as follows. Ad hoc arbitration under UNCITRAL Arbitration Rules “All and any disputes or differences arising out of or in connection with this Agreement, or the breach, termination, or invalidity thereof, shall be referred to and finally resolved by arbitration in accordance with the UNCITRAL Arbitration Rules [as at present in force/as in force at the time when arbitration proceedings are commenced] (‘the UNCITRAL Rules’).” 4 The adhoc arbitration clause is more inclusive in that it includes even differences apart from disputes relating to “agreement or breach, termination or invalidity thereof.” 5 Since the parties do not appear to have chosen any institutional arbitration, Adhoc arbitration as per the UNCITRAL rules may be applied. The relevant rules in this connection stipulate “The Notice of Arbitration shall be served in accordance with Article 3 of the UNCITRAL Rules”. 6 Further, the appointment of arbitrators and their numbers (one or three) and the authority (institution) by whom to be appointed are also to be governed by the UNCITRAL Rules. The place and the seat of the arbitration such as city and/or country and language of arbitration will also be named by the authority. Validity of the arbitration agreement in the contract The contract in question contains the term ‘any disagreement or dispute between the parties is to be settled by arbitration’. It should be determined here whether it is a valid agreement or not. Such an agreement being the bedrock of arbitration, it would render the enforceability of the award itself impossible, if held as invalid. First of all, it must be mentioned that merely because the other party’s contention is that George Ltd’s proposal of premature termination of the contract is a violation of its terms, it does not render the arbitration agreement invalid. It is because of the concept of autonomy of arbitration agreement as independent of the main contract. Even if the main (underlying) contract is null and void or illegal, arbitration clause would be valid because of the autonomy it enjoys in arbitration law. Question may arise as to whether law governing the underlying contract would also govern the arbitration agreement (clause). Since these questions are unlikely to arise at the back of the parties’ minds at the time of entering into contract, arbitration clause is considered as “Cinderella clause” of the main contract. This doctrine of separability has been recognized in Prima Paint Corp v Flood & Conklin Mfg. Co. of the U.S.,7 Cour de cassation l e civ., Hecht v Bushman’s 4 July 1972, of France.8 Nat’l Power Corp v Westinghouse 9 of Swiss Tribunal , Fiona Trust & Holding Corp v Privalov of English House of Lords 10 and Corti di Cassazione of Italy 11 The principle of autonomy stems from the principle of competence- competence (Kompetenz-kompetenz) meant to ‘ring-fence’ the arbitration against the judicial control mechanism.12 It must be mentioned that an award passed with a ‘null and void’ arbitration agreement cannot be enforced as per one of the grounds for refusal of enforcement under the New York Convention.13 Arbitrabilty is another factor to determine the validity of arbitration agreement apart from the formal and material validity of the agreement. Formal validity requires that the international arbitration agreement must be in writing and signed by the parties as regulated by Article II (2) of the New York Convention.14 It is speculated that Article VII (1) of the Convention leaves it to the discretion of national courts to give force to an agreement terms of which are not strictly in accordance with Article II by applying liberal national standards to determine formal validity of arbitration agreements. However, applicability of this provision to determine validity of agreements is a moot point. As to the material validity of an arbitration agreement, the law governing it has to be the law of the country where the award is to be made subject to parties’ agreement to the contrary. This is in accordance with the conflict rule in Article V (1) (a) of the New York Convention so as to ward-off conflit negatif. The court will examine if the arbitration agreement embodies the essential elements (essentialia) as being practiced in most of the developed arbitral jurisdictions, such as (1) who are the parties to the agreement, (2) their determination to subject their dispute to the arbitration, and (3) the details of the subject-matter of arbitration, i.e ‘a dispute or a legal relationship’. Absence of the collateral elements such as naming of the place of arbitration, number of arbitrators, or procedures to be applied would not render an arbitration agreement invalid in as much as it can be remedied through interpretation or modification (amendment). It therefore turns out that it is enough if the essential core elements i.e obligation to resolve disputes through arbitration and the right to insist on resolution of disputes to be resolved in this manner can be inferred. It is therefore clear that the terms of the arbitration in the instant case under discussion would constitute a valid arbitration agreement. George Ltd has a strong case that it can rightfully demand that the dispute or difference be referred to arbitration. 15 Steps to be taken to commence arbitral proceedings George Ltd who wishes to terminate the contract may not have any claim from Cheap Stock Corp unless it has paid any security deposit and/or advance payment or any other damage or loss of business or profit due to default on the part of the Malaysian company. Generally, it is the supplier who has more stakes in the contract, would be forced to refer the matter for arbitration for resolving the dispute. Unless George Ltd has any claim to be made on the Cheap Stock Corporation, it is premature for it to refer the dispute to arbitration. However, if it wants to end the uncertainty surrounding the termination of contract, it can take steps to initiate arbitration. Regardless of the particular institutional or statutory rules of arbitration, steps to be taken may not vary significantly. In the absence of any institutional arbitration, George Ltd is advised to invoke adhoc arbitration and follow the UNCITRAL Rules of arbitration. 16 Article 3 provides for notice of arbitration to be communicated by the party (claimant) seeking recourse to arbitration to the other party Cheap Stock Corp, Malaysia (Respondent). Once the notice has been received by the respondent, arbitral proceedings are deemed to have commenced. This cut off time varies in other institutional arbitrations. George Ltd shall take care to state in the notice its demand for the dispute being referred to arbitration and names and addresses of the parties to the dispute citing the arbitration clause being invoked. It should identify the contract in connection with which the dispute has arisen along with brief description of the claim and amount of claim involved, if any. The wordings of article 3(e) show that non-monetary and tortious claims are also arbitrable. Thus, George Ltd can simply claim for contract termination even without stating any monetary claim. So stating, the claimant must spell out in the notice, the relief or remedy sought for. Last but not the least, it should propose to the respondent the number of arbitrators to be appointed i.e sole arbitrator or three arbitrators, language in which arbitration proceedings are to be held and the place of arbitration. George Ltd is so advised as there is no such indication in the arbitration clause as to the number of arbitrators and place of arbitration. As stipulated in the article 4, George Ltd shall await response from the respondent within thirty days of receipt of the notice. The response shall contain the contact details of the respondent and its reply to other issues set out in the notice such as arbitration clause and contract indentified, claim and remedy sought by the claimant. The respondent is also likely make a plea that arbitral tribunal constituted lacks jurisdiction besides their counter-claim or claims for set-off indicating value if any involved and the relief or remedy sought. A notice can be expected from the respondent for a claim against any party to the arbitration other than the claimant. Once the claimant and respondent fulfil their obligations as above, an Arbitration Tribunal is deemed constituted regardless of any failure to respond to the claimant’s notice and any incomplete or delayed response by the respondent. And any such issues will be resolved by the arbitral tribunal.17 Both the parties to the arbitration are entitled to be represented or assisted by persons of their choice in which case their names and addresses should be furnished to all the parties and the arbitral tribunal specifying whether they will act as representatives or assistants. In case of representative, a proof authority to act as the representative may have to be furnished to the tribunal in such form as may be required by the arbitral tribunal. George Ltd therefore should decide on assistance or representation and readily issue of letter of authority even before being asked to do so by the arbitral tribunal.18 If the parties have not reached agreement as to the appointment of sole arbitrator within 30 days of receipt notice of respondent by the respondent, three arbitrators have to be appointed.19 On the other hand if there is agreement for the appointment of a sole arbitrator but no appointment has been made within 30 days of receipt of proposal by all the parties, then the appointing authority shall appoint a sole arbitrator at the request of a party. While the appointing authority is required to do so as promptly as possible, it should adopt a list-procedure unless the parties resist the said procedure or appointing authority itself feels that list procedure is not necessary for any appropriate reasons. The list-procedure involves sending a list of minimum three identical names to all the parties to the dispute and each party returning the list within 15 days of receipt with objections if any against any of the names. The remaining names not objected to may be numbered in order of preference. The appointing authority shall appoint the sole arbitrator from among the list according to the order of preference immediately after the expiry of 15 days stated above. If the appointing authority finds it difficult to follow the above procedure, it can appoint one at its discretion.20 In case of appointment of three arbitrators, each party has to appoint one arbitrator and the two arbitrators so appointed have to choose the third arbitrator who shall function as the presiding arbitrator. If either of the parties does not appoint an arbitrator on its behalf within 30 days of notification of the appointment, the other party can approach the appointing authority for appointing the second arbitrator. The presiding arbitrator can also be appointed in the similar fashion, if the two arbitrators are unable to reach a consensus on his/her appointment.21 George Ltd is well advised to follow the above procedure for appointment of sole arbitrator or three arbitrators as the case may be. Further, George Ltd is advised that arbitartors so appointed should disclose to the parties any circumstances that would give rise to justifiable doubts as to their impartiality or independence as directed in article 11 of the UNCITRAL rules. If they fail to disclose without delay any such circumstances to the parties and other arbitrators, their appointment can be challenged if such circumstances actually exist. But the challenge can be made only for the reasons which came to the knowledge of the parties after the appointment. The procedure for the challenge is provided in article 13. Accordingly, if George Ltd feels that the appointment of any arbitrator should be challenged, it should send a notice to that effect to the arbitrator(s) concerned within 15 days after the appointment or within 15 days of its becoming aware of such circumstances stated above. The copy of notice of challenge should also be communicated to other parties and other arbitrator. The parties may agree to the challenge. The challenged arbitrator can also withdraw from the office but it would not amount to the validity of the grounds of challenge. If there is stalemate as a result of parties and/or the arbitrator not agreeing to the challenge, George Ltd shall approach the appointing authority for a decision on the challenge.22 Replacement of the arbitrator would follow as per article 14 as per the procedure laid down in articles 8 to 11 both in the cases of arbitrator(s) voluntarily withdrawing from the office and in the event of the appointing authority upholding the challenge. However, the appointing authority may also appoint a substitute arbitrator if it finds it justifiable to deprive the challenging party to nominate its arbitrator or authorise the remaining arbitartors to proceed with the arbitration and arrive at a decision or an award. 23 Apart from the above procedures, George Ltd has to make a decision in regard to the arbitral seat and choice of law governing the arbitration. In the absence any such choices having been made as revealed by the arbitration clause, it would be ideal for George to choose London as the seat of arbitration and UK’s substantive law as the law governing the subject matter of arbitration. Conclusion In view of the forgoing analysis, the George Ltd has no problem with the arbitration being initiated invoking the existing arbitration clause and adopting an adhoc arbitration with UNCTRAL rules. Bibliography Cases Germany Hecht v Bushman’s 4 July 1972, reprinted in 99 Journal du Droit International (1972), 843 et seq. in Franco Ferrari, Stefan Kroll in Conflict of Laws in International Arbitration (Walter de Gruyter, GMBJ, Munich p24-25) Italy Corti di Cassazione, 17 Sept 1947 n 1570 reprinted in: Bernini, Italy Ad Informandum, Int’l Handbook on Commercial Arbitration Suppl. (1994),17 in Ferrari, F., Kroll, S., in Conflict of Laws in International Arbitration (Walter de Gruyter) 24-25) Sweden Nat’l Power Corp v Westinghouse DFT 119 II 380,384 in Franco Ferrari, Stefan Kroll in Conflict of Laws in International Arbitration (Walter de Gruyter, GMBJ, Munich p 24-25) U.K. Fiona Trust & Holding Corp v Privalov [2007] 1 All England Reports (Commentary) 891; English Court of Appeal, aff’d [2007] UKHL 40 (House of Lords) in Franco Ferrari, Stefan USA Prima Paint Corp v Flood & Conklin Mfg. Co. 388 U.S. (1967) 395,403-04 in Franco Ferrari, Stefan Kroll in Conflict of Laws in International Arbitration (Walter de Gruyter) 24 Statutory Instruments Article 7 United Nations Commission on International Trade Law (UNCITRAL) General Assembly Resolution 65/22, UNCITRAL Arbitration Rules as revised in 2010, United Nations New York 2011. accessed 19 Oct 2011 Article 8 United Nations Commission on International Trade Law (UNCITRAL) General Assembly Resolution 65/22, UNCITRAL Arbitration Rules as revised in 2010, United Nations New York 2011. accessed 19 Oct 2011 Article 9 United Nations Commission on International Trade Law (UNCITRAL) General Assembly Resolution 65/22, UNCITRAL Arbitration Rules as revised in 2010, United Nations New York 2011. accessed 19 Oct 2011 Article 13 United Nations Commission on International Trade Law (UNCITRAL) General Assembly Resolution 65/22, UNCITRAL Arbitration Rules as revised in 2010, United Nations New York 2011. accessed 19 Oct 2011 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517. United Nations Commission on International Trade Law (UNCITRAL) General Assembly Resolution 65/22, UNCITRAL Arbitration Rules as revised in 2010, United Nations New York 2011. accessed 18 Oct 2011. Books Born, International Commercial Arbitration Vol 1.655 in Chapter 6 Pathological Arbitration Clauses, Another Lawyers’ Nightmare Comes True in Kroll, International Arbitration International Commercial Law: Synergy Convergence (Kluwer Law International, 2011) 130 Girsberger, G., & Ruch, P.J., Chapter 6 Pathological Arbitration Clauses, Another Lawyers’ Nightmare Comes True in Kroll, International Arbitration International Commercial Law: Synergy Convergence (Kluwer Law International 2011) 129 Goldman, The Complementary Roles of Judges and Arbitrators in Ensuring that International Commercial Arbitration is Effective, in International Arbitration: 60 years of ICC Arbitration, A look at the Future (1984), 257,263 Graffi L, The law applicable to the validity of the arbitration agreement: A practitioner’s view in Ferrari, F., Kroll, S.in Conflict of Laws in International Arbitration (Walter de Gruyter, 2010)19 Kroll, International Arbitration International Commercial Law: Synergy Convergence (Kluwer Law International, 2011) 116 Websites Sample Arbitration Clauses accessed 19 Oct 2011 Read More