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08 06 / 17

SPEAR’S #6 International commercial arbitration. A guide to action for business.

We continue to publish articles of PARADIGMA in the journal “SPEAR’S” that tell about real court cases and examples of non-standard and creative solutions invented in the complex economic conflicts. We present an honest and frank discussion on our experience with the nuances, opportunities and approaches undertaken in disputes with business representatives.

This article opens a series of PARADIGMA publications, devoted to the real cases from legal practice and examples of unconventional and creative decisions of complicated economic conflicts. An honest and frank discussion of our experience together with opportunities and approaches undertaken to resolve disputes between business representatives.

The International Commercial Arbitration is a traditional approach to resolve disputes arising from international commercial contracts, which is also an alternative to the national litigation. The International Commercial Arbitration is a more simple and flexible legal remedy comparing to the complex litigation process in other foreign jurisdictions.

The International Commercial Arbitration is a specifically founded non-state institute that is oriented on settlement of disputes arising out of international commercial relations between the parties incorporated in different jurisdictions.

It should be noted that parties have to include an arbitration clause in the contract beforehand or conclude a separate agreement that stipulates the order of dispute resolution (arbitration agreement) if they wish to be able to resolve future disputes by means of the International Commercial Arbitration.

It is important to bear in mind that text of the arbitration clause (arbitration agreement) shall include all the essential points in relation to settlement of a possible dispute (governing law, pre-trial order and etc.).

Moreover, it is possible to settle a dispute by means of the international commercial arbitration even after a conflict  has already arisen. The parties can come to this decision by mutual agreement (by making a submission to arbitration).

There are two forms of international commercial arbitrations. The first form is a permanent arbitration (established in a form of arbitration institutions affiliated with the Chambers of commerce or other entrepreneurial societies).  The second form is arbitral tribunals established for settlement of a particular dispute (so called ad hoc courts that cease to function after the end of arbitration procedure).

Nowadays, the largest world arbitration centers (institutes) are London Court of International Arbitration (LCIA), Arbitration Institute of the Stockholm Chamber of commerce (SCC),the International Court of Arbitration of the International Chamber of Commerce (ICC) and the American Arbitration Association (AAA). Also arbitration institutions of the Asian region such as Singapore International Arbitration Centre (SIAC) and Hong Kong International Arbitration Centre (HKIAC) are becoming increasingly popular.

According to the summary statistics of the London International Arbitration Court (LCIA) about 20% cases were heard with participation of the Commonwealth of Independent States (CIS) companies over the last 5 years. So why commercial arbitration courts are becoming so popular? What are their advantages comparing to the state courts? Why do the Russian businessmen choose this kind of arbitration to settle disputes more and more often?

The first reason is that resolution of disputes in a commercial arbitration court has a number of clear advantages. And perhaps the most important benefit of the international commercial arbitration is enforceability of court decisions especially in such situations when parties are located in different states. International commercial arbitrations are guided by objectives laid down in the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 which was ratified by more than 140 states. The Convention presents a sort of guarantee under which an arbitration decision will be enforced within the member states jurisdiction. For comparison, decisions held by foreign courts in the absence of a relevant international agreement are usually not enforceable within the territory of another state.

In addition, a decision made by international commercial arbitration is final, while a decision of a state court can be appealed to a higher court and it takes a long time before the final decision is awarded.

One of the substantial advantages of addressing the international commercial arbitration is confidentiality of the process. The parties can be sure that when they entrust their case to the international commercial arbitration court a risk of information leak and disclosure of a commercial secret is minimized.

One more advantage of settling the case by a commercial arbitration is that parties have an opportunity to choose arbitrators who will settle their dispute. Formation of the Panel of Arbitrators by the parties provides impartiality and independence to the arbitration process and allows selecting the most proficient specialists of international dispute resolution. Also at the time of conclusion of an arbitration agreement parties can choose nationality, qualification and number of the future arbitrators.

One of the qualities of commercial arbitration is that the process is more flexible and less formal comparing to the proceedings in state courts. General procedural provisions of commercial arbitration are governed by rules of procedure and regulations of the respective arbitration institutions. By submitting a dispute to a particular commercial arbitration court parties accept validity of the respective rulings of such a court.

At the same time parties have a right to choose a governing law, place of a dispute resolution, language of the proceedings by themselves and also parties can fix a convenient procedural timetable for them.

However, there is a flip side of the coin. Thus, the particular benefits of commercial arbitration such as flexibility of the procedure and possibility to appoint highly qualified arbitrators (who usually have busy workschedule) have a significant influence on the length of the period of case examination.

It has been argued that commercial arbitration courts hear cases in a shorter period of time than the state courts. However, an objective view is that in fact these time periods are quite comparable.

In that case it should be noted that development of commercial arbitrationsis moving on. Nowadays the so-called fast-track arbitration procedure that is able to significantly shorten period for consideration of cases is used more and more often. A general idea of this procedure is that the parties agree on strict deadlines for all the procedural steps including filing documents, hearings dates and other actions that cannot be changed.

It is worth knowing that proceedings in international commercial arbitration usually entail significant financial costs including payment of arbitration fee, legal representation and other additional costs. However,  according to the most of arbitration rulings a defeated party must reimburse legal costs of a successful party.

It is also important to consider current opportunities of providing protection to the parties’ interests within the frameworks of arbitration procedure. In fact, a decision on merits of the case cannot always be enforced, for example due to wrongdoing of a Defendant in relation to the management of his assets.

One of the institutions that provides real restoration of violated rights and enforcement of court decision is an institution of interim measures. Interim measures are specific procedural measures which can be imposed by court and that are aimed at securing a claim or guarantee of the applicant's interests, which are applied if the failure to take these measures could make it difficult or impossible to enforce the judgment.

With regard to international commercial process there is a whole range of interim measures aimed at effective protection of rights of the parties during the arbitration. The measures consist of orders to take appropriate measures to avoid the loss of any rights, orders of arbitrators to prohibit submission of similar claims in other jurisdictions (antisuit injunction), seizure of assets and other measures aimed at preserving assets within the jurisdiction in which the arbitral award will be enforced, orders for securing legal costs within the framework of the arbitration process (security for costs) and orders for placing the contested sum in a special bank account, etc.

We also would like to admit that even in case of a weak position of one of the parties there is a number of remedies used in commercial arbitration that allow to protect rights and interests of the defending party and that can force the opponent to change his tactics and to start negotiations.

We would like to tell a real example of successful adoption of interim measures from our company’s practice. In that case, we represented interests of a Defendant in the London Court of International Arbitration. The case clearly demonstrates how to protect a party’s interests in a commercial arbitration.

The Claimant was an offshore company that had recently undergone restructuring. The company raised doubts about its financial reliability and its ability to pay the Defendant’s legal expenses in case an arbitral tribunal renders an award against the company.

In this situation, the Defendant’s representatives decided to file a Motion for Legal Costs (the aforementioned security for costs) on the grounds  that the Claimant had initiated hearing of the case in arbitration and the Defendant must not be encumbered by financial status of the claimant; the Claimant contrary to the demands of the defendant did not provide information on his financial status and that the Claimant was a specially incorporated offshore company.

Thereafter as the Claimant has not provided any significant evidence of his capacity to pay despite a request of arbitrators (that money receipt on the bank account was of random and irregular nature in accordance with the statement of bank) the panel of arbitrators came to the conclusion that there was a high probability that the Claimant did not possess enough financial sources for reimbursement of the Defendant’s legal expenses. As a result, the arbitrators issued a specific order on security for costs.  Eventually the Claimant initiated negotiation with the Defendant with an aim to peacefully resolve the conflict.

Another example of a successful application of interim measures from our practice is filing of Application for the prohibition of submission of similar claims in other jurisdictions (antisuit injunction). A Claimant wishing to exert pressure on a Defendant, whose interests was represented by our company, initiated several similar lawsuits in different jurisdictions both against the Defendant himself and against his subsidiaries. At the same time the main Agreement (the Claimant’s lawsuit was based on that Agreement) stated that all the disputes arising from it shall be considered at the London Court of International Arbitration. In this regard, the Defendant’s representatives submitted a claim to the LCIA with a request to prohibit the Claimant from filing similar claims in other jurisdictions. Such a tactic of the Defendant allowed to "pacify" the Claimant and was one of the factors that brought him to sign a settlement agreement on conditions favorable to the Defendant.