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Zh.S.Yelyubayev Ж.С.Елюбаев
On Arbitration Clauses in Subsoil Use Contracts
Introduction
At the current stage of the development of mankind the key direction in the international policy of the most states is the process of economic integration. Integration processes become more intense in the countries of Eastern and Western Europe and in the CIS countries.
Cooperation between the economic unions, major international corporations and other business entities becomes more prominent in interrelations and often causes an increasing conflict between the interested parties. Therefore, efficient and fair solution of economic and other differences in accordance with the principles and rules of the international law and current international arbitration practices is a key premise of strengthening and development of international economic cooperation.
When choosing any means or ways of resolving economic disputes and other differences between the parties of the economic relations, the parties should be certain, in the first place, that they are adequate, efficient and used in good faith equitable. Diversity of currently existing means of dispute settlement does not mean that all of them without exception can be applied to resolve economic disputes.
Meanwhile, today there is no doubt that international commercial arbitration is the main means of resolution of disputes arising in the sphere of international commercial exchange as interpreted in the broad sense. The interest in arbitration as a method of resolving differences without resort to the state court is not incidental. In a number of cases due to the lack of budget financing, cases overloading, red tape and politicization, the issues of the state court systems compel to search more efficient ways out of conflict situations.
Types of Commercial Arbitration
Current international commercial arbitration has three general forms[2]: а) Permanent arbitration courts, which are usually established by various commercial and professional organizations acting under the rules approved by the said organizations; б) «ad hoc» arbitration courts formed by the parties to resolve a specific dispute and operating under the rules established by the parties to a dispute; в) Administrative arbitration courts, that take a mid position between permanent and «ad hoc courts. The principle of their operation is based on ad hoc court administration by specific commercial institutions or permanent arbitration courts, as indicated in the special rules.
It should be noted that the popularity of arbitration and recognition of its significance by the government authorities in different countries caused both international regulation of commercial arbitration and adoption of internal legislative acts on this issue which are very important for developing arbitration practices.
Arbitration Advantages
The attractiveness as a basic advantage of non-government arbitration is determined by the following factors: а) Independence and integrity of an arbitration court ensured by the process of election (appointment) of arbitrators; б) Participation of highly qualified experts as arbitrators because the parties themselves select (appoint) arbitrators out of competent and experienced ones; в) A possibility for the parties to determine dispute jurisdiction and proceedings, more opportunity to apply the principles of good faith, fairness, confidentiality and expedient dispute solution; г) Provision for cooperation given that arbitration facilitates mutual agreement of the parties and amicable settlement that helps retain a spirit of trust and cooperation in future; д) Finality of an arbitral award, when no authority is entitled to revise an initial arbitral award; е) Obligatoriness (executive force) of an arbitral award for the parties and guarantee of enforcement of such award if the parties waive its performance (e.g. based on the provisions of the New York Convention (1958); ж) «privacy» of dispute handling, which is achieved by a confidential process without the presence of unrelated parties and allows retaining image and business reputation before the participants of international economic cooperation.
Arbitration Disadvantages
Noting advantages of arbitration process, one should not avoid considering arbitration disadvantages as compared to other methods of dispute settlement, e.g. in state courts.
First of all, it should be noted that arbitration is void of state power attributes and therefore it cannot on its own behalf enforce the appearance of witnesses, require from government authorities or third parties documents, materials and opinions; impose liens on property to secure claims of the applicant. It also should be noted that the powers of the arbitration court to call co-plaintiffs or co-defendants, replace inappropriate plaintiffs or defendants with proper ones can be limited to the extent of an arbitration clause.
Further, giving their consent to arbitration the parties as a rule commit to promptly perform an arbitral award and irrevocably waive their right to any form of appeal, revise and protest. In a number of cases, dispute resolution rules elected by the parties, e.g. the Rules of the London Court of International Arbitration (Article 16.8) stipulate that «All awards shall be final and binding on the parties». However, appellation of the acts of arbitrators and awards within the framework of the arbitration court system is allowed in certain cases. Thus Article 31 of the UNCITRAL Rules allows appellation and therefore revision by the panel of arbitrators of the award made solely by the Chairman on the procedural matters. Article 52 of the Washington Convention contains a specific rule that provides to each party to the dispute the right to require cancellation of an award subject to a number of procedural and material grounds including: abuse of powers by the arbitration court, insufficient grounds for the award passed and even tampering with one of the arbitrators.
Execution of Arbitral Awards
The efficiency of court defense in general and enforcement of arbitral awards in particular in many cases depend upon the final stage of arbitration process, i.e. execution of an award. Arbitration courts complete dispute resolution by issuing an award, which as a rule is final and binding upon the parties. It suggests that the parties are to comply with awards voluntarily. However, in practice cases are not infrequent when awards are not executed voluntarily and it causes their enforcement. All key issues of enforcement in any country of foreign awards are regulated by the known international conventions (e.g. the New York Convention (1958); the European Convention (1961); for CIS countries - the Kiev Treaty (1992)). These international acts stipulate that foreign awards are enforced by the host judicial agencies.
Meanwhile, the said New York Convention (Article V) contains a provision that enforcement of an award may be dismissed under the request of the party against which the award was made, if this party provides to the competent authority an evidence, e.g. that the parties to an arbitration agreement were unable under any law applicable to them or an agreement was invalid under the law in the jurisdiction of which the agreement is. There also exist other grounds.
Recognition and enforcement of an award may be refused if the competent authority of the country whose jurisdiction and enforcement are sought, establishes that: а) The subject of a dispute cannot be subject to arbitration under the laws of this country; or б) Recognition and enforcement of this award contradicts the public order of this country.
Hence there is a risk of non-execution of an award especially in the CIS countries. Thus e.g. in the Republic of Kazakhstan there develops a tendency in the state courts, where claimants appeal seeking to obtain award enforcement orders, to check the merits of the awards. Such practice is not based on the law and is beyond the jurisdiction of the state court whereas pursuant to Clause 2 of Article 31 of the Law of the Republic of Kazakhstan of December 28, 2004 No. 23-III «On International Commercial Arbitration» an award can be cancelled by the competent court[3] only in cases where: 1) a party seeking cancellation provides evidence that: One of the parties to the arbitration agreement has been recognized by the competent court as incapable or the arbitration agreement is invalid under the law to which it was surrendered by the parties, and in the absence of such instruction under the legislation of the Republic of Kazakhstan; It was not duly notified of the appointment of an arbitrator or arbitration proceedings or it was not able to provide its explanations for other reasons recognized by the competent court as valid; An award was passed on a dispute that is not stipulated in or subject to the arbitration agreement, or contains provisions relating to the issues beyond the scope and jurisdiction of the arbitration agreement; A composition of the arbitrators or arbitration procedures did not comply with the agreement of the parties and the arbitral rules; 2) the competent court determines that the arbitration agreement contradicts the public order[4] of the Republic of Kazakhstan or the dispute on which the arbitration award was passed cannot be subject to the arbitration proceedings under the legislation of the Republic of Kazakhstan.
However, notwithstanding the above disadvantages, dispute arbitration is the most democratic and fair, reasonable and effective, and hence as a rule parties to subsoil use contracts choose commercial arbitration for dispute resolution. Such tendency has a legislative basis. Thus e.g. the Law of the Republic of Kazakhstan of January 27, 1996 No. 2828 «On Subsoil and Subsoil Use» contains a provision stipulating that disputes relating to fulfillment and termination of subsoil use contracts shall be resolved in accordance with the dispute settlement procedures stipulated in a given contract. In addition, if such disputes of the parties to a subsoil use contract cannot be resolved under the above procedures, the parties may refer the dispute to: А) the court in accordance with the legislative acts of the Republic of Kazakhstan or Б) to the international arbitration under the legislative act of the Republic of Kazakhstan on investments.
Arbitration Institutes of Kazakhstan
It should be noted that there are two types of arbitration courts in Kazakhstan: commercial arbitration courts regulated by the Law of the Republic of Kazakhstan of December 28, 2004 No. 23-III, which consider disputes where one of the parties is not a resident of the Republic of Kazakhstan; and arbitral tribunals regulated by the Law of the Republic of Kazakhstan «On Arbitral Tribunals» of December 28, 2004 No. 22-III which consider disputes between the residents of the Republic of Kazakhstan. The existence of the said two laws is not deemed to be the best practice because commercial arbitration courts and arbitral tribunals are non-state commercial courts considering disputes arising from civil contracts. The establishing of jurisdiction of arbitration courts subject to the entity status is a discriminatory measure with regard to the residents of the Republic of Kazakhstan. The parties to civil relations should be free in their choice of a body to considering contractual disputes.
Arbitration Agreement in the Contracts
So, practically all major subsoil use contracts executed in Kazakhstan stipulate commercial arbitration court as a competent body to resolve disputes. And as a rule, the parties to contracts choose international arbitration, such as: the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), the International Arbitration Court of the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), and the American Arbitration Association (AAA) etc. This circumstance evidences that major subsoil users, such as transnational companies prefer international arbitration institutes as bodies to resolve contractual disputes in the sphere of subsoil use to state courts and commercial arbitration courts established in. First, it can be explained by a wish to ensure impartial, independent and competent dispute resolution and a wish to exclude any (direct or indirect) interference by the state in dispute resolution.
However, in practice there exits many issues related to the implementation of arbitration agreement, when authorized state agencies of the Republic of Kazakhstan become initiators of disputes and prefer state courts of the Republic of Kazakhstan ignoring arbitration agreement between the parties to a contract.
For example, one of the subsoil use contracts entered into with a business entity with a foreign participation[5] contains a rule that «the provisions of the contract, respective rights and obligations thereunder, and their appearance, interpretation and enforcement are regulated by the laws of the Republic of Kazakhstan, providing that the parties’ intentions as permitted by the law shall be met to the full extent and the Republic of Kazakhstan and a subsoil user make all efforts to amicably resolve disputes pertaining to such contract, however unresolved disputes shall be resolved by arbitration, given that the Republic of Kazakhstan waives its sovereign immunity. An award shall be final and binding upon the parties». Further, there contains a provision that «arbitration shall be conducted under UNCITRAL Arbitration Rules, and arbitrators shall be appointed by the Stockholm Chamber of Commerce».
However, notwithstanding the above arbitration agreement, the state court of Kazakhstan adjudicated a dispute initiated by the authorized state agency with regard to the interpretation of one of the key provisions of the subsoil use contract related to one of the company’s products. In addition the court of the first instance and courts of higher instances dismissed a motion of the representatives of the subsoil user seeking termination of proceedings in the state court and refer the dispute to commercial arbitration determined by the parties to the contract. Thus there was a violation of the arbitration agreement subject to a separate arbitration; however given that subsequently the parties resolved the dispute amicably, the said new subject of the dispute became irrelevant.
It should be noted that the priorities of the commercial arbitration court can be used in the resolving of property disputes arising in business. The only condition is the existence of an arbitration clause in the contract or an additional agreement signed by the parties. When executing contracts many businessmen do not pay a proper attention to the language of the arbitration clause, hence impeding arbitration. It also concerns subsoil use contracts. It should be noted that under the Kazakhstan law an arbitration agreement is deemed «a written agreement of the parties to a contract on referring a dispute that has arisen or might arise to arbitration which can be executed in the form of an arbitration clause in a contract or exchange of letters, telegrams, phone calls, telexes, faxes, electronic or other documents defining entities and the content of their intents» (Clause 4 of Article 2 of the Law of the Republic of Kazakhstan of December 28, 2004 No. 23-III «On International Commercial Arbitration»).
Matters of Practice
Thus, in the performance of terms and conditions of a contract executed between the Kazakhstan-Israel Joint Venture and the US company there arose an investment dispute. Pursuant to the arbitration clause in the contract, the dispute was subject to arbitration in The Hague Arbitration Court under the UNCITRAL Rules. However, no arbitration court exists in the Hague that could resolve a commercial dispute between the companies; this fact was officially confirmed by the Embassy of the Kingdom of Netherlands in Kazakhstan. A claim filed by the company with the South Kazakhstan Oblast Court (the Republic of Kazakhstan), at the location of the defendant, was dismissed because the dispute was not in the jurisdiction of the court. Hence, the company was in a difficult situation as the contractual arbitration clause did not comply with the provisions of the UNCITRAL Rules and the applicable legislation of the Republic of Kazakhstan. Of course, in case of the parties’ consent it could have been ad hoc arbitration in the Hague; however the Kazakhstan side did not express its consent to such arbitration.
In another case the parties to the contract executed between the South Korean company and a Kazakhstan firm stipulated the arbitration procedure under the UNCITRAL Rules. The alternative clause provided for dispute resolution either in the Korean Commercial Arbitration Chamber or in the Almaty Arbitral Tribunal as determined by the pledge holder. By exercising its right to choose arbitration, the Korean company acting as a pledge holding plaintiff filed a claim with the IUS Arbitral Tribunal (Almaty, the Republic of Kazakhstan); the defendant did not object to it and signed an agreement concerning the selection of this arbitral court and an arbitrator[6].
Recommendations per Arbitration Clause
The above examples demonstrate existing concerns in the issues of determining a body to resolve disputes pertaining to the performance of contracts, including subsoil use contracts. Therefore it is very important to provide a proper and accurate language of the arbitration clause in a contract to mitigate a risk of procedural disputes between the parties, and a contract should contain an obligatory provision for governing law.
As per subsoil use contracts executed in Kazakhstan an example may be the arbitration clause of the International Commercial Arbitration Court of the Eurasia Mediation Center (ICAC) which reads as follows: «any disputes arising from or in connection with this contract (agreement) shall be subject to final resolution by the International Commercial Arbitration Court of the Eurasia Mediation Center (Almaty, the Republic of Kazakhstan) in the presence of one or several arbitrators under the applicable Rules of the International Commercial Arbitration Court»[7]. This arbitration clause is characterized by concise clear and meaningful content which language does not require additional interpretation.
Conclusion
In conclusion I would like to express a hope that long-term traditions that formed at the European continent will find their ground to develop in Kazakhstan. Huge changes in this country during the last decades that resulted in the adoption of two legislative acts on arbitration court and arbitral tribunal as well as ratification of the New York Convention and other international legal acts give a hope for an independent development of the institute of commercial arbitration.
[1] © All exclusive copyrights to this work belong to Zh.S. Yelyubayev. [2] The classification by the authors of the book «Baker & McKenzie: International Commercial Arbitration. Central and Eastern Europe countries and CIS». [3] Competent Court - a court in the judicial system of the Republic of Kazakhstan, which is subject to the civil procedural legislation of the Republic of Kazakhstan is authorized to consider cases of dispute between the parties to a respective agreement in the first instance (Clause 6 of Article 2 of the Law of the Republic of Kazakhstan of December 28, 2004 No. 23-III «On International Commercial Arbitration). [4] Public Order - foundation of state and public organization stipulated in the legislation of the Republic of Kazakhstan (Clause 10 of Article 2 of the Law of the Republic of Kazakhstan of December 8, 2004 No. №23-III «On International Commercial Arbitration») [5] The author of this paper does not specify the parties to the contract, based on the provisions regarding confidential information. [6] P. Greshnikov, Arbitral Tribunal in Kazakhstan: Opportunities and Perspectives. International Business Journal «Kazakhstan», No. 1/2, 2001. [7] See the Rules of the International Commercial Arbitration Court of the Eurasia Mediation Center (ICAC) and other documents of ICAC, www.icac.kz.
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