International Arbitration Recent Developments

INTERNATIONAL ARBITRATION﷓﷓RECENT DEVELOPMENTS INTERNATIONAL ARBITRATION‑‑RECENT DEVELOPMENTS By Ross Masud Director General, Wafaqi Mohtasib (Ombudsman)'s Secretariat During the colonial era International trade was controlled from the metropolitan 'centres located in Europe. Consequently, the mechanisms for the settlement of International trade disputes also developed in these metropolitan centres. Most of the disputes arising from international trade and economic transactions were, therefore, referred to the institutions for settlement of disputes that developed in these centres like the International Chamber of Commerce's Court of Arbitration, the Permanent Court of Arbitration at The Hague, the London Court of Arbitration etc. There was a natural tendency of these centres, arising from the cultural bias, proximity and familiarity, to favour parties from the advanced Western countries. These institutions being more favourably inclined to the parties from the developed countries vis‑a‑vis the parties from the Third World countries did not inspire confidence in the Third World countries gaining independence after the Second World War. In view of the weaker bargaining position of the parties from the Third World countries, however, international agreements in the sphere of trade and economic exchange still provided for settlement of disputes under the auspices of these institutions. 2. It. was in this background that the Havana Conference of 1947‑48, contemplated establishment of the International Trade Organization with an appropriate mechanism for settlement of International disputes in the area of international trade and economic exchange. The negative attitude of developed countries, however, stalled the establishment of the proposed organization. 3. The disadvantage from which parties from developing countries suffered during the process of Arbitration under the Western Institutions have been underlined by the Supreme Court of India‑in the cases of Michael Golodelz. v. Siraj‑ud‑Din & Co. [A I R 1963 S C (India) 1044] and V/O Tractore Export v. Tractoro and Co. [A I R 1971 S C 1.]. In these cases the Court referred to difficulties faces by Indian business in the matter of foreign exchange, of production of witnesses abroad etc. while interpreting Section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961. A stage was, in fact, reached where some Third World countries, who emphasized the Sovereignty of States over their Natural Resources and the oppressive nature of the existing International Economic Order, discouraged arbitration in respect of disputes related to international commercial and economic transactions and preferred to have such disputes settled through their own Courts as in the case Libya, Algeria etc. Even in Pakistan there was a cabinet decision some years back to discourage Arbitration in International Commercial and Economic arrangements as far as possible, But as the parties from the Third World countries, did not have, sufficient bargaining strength they still yield to the pressure of parties from the 'advanced countries to have arbitration clauses providing for arbitration under the auspicious of the Western institutions. This unfortunate tendency had to be reversed and confidence in Arbitration as a means of Settling International Commercial and Economic Disputes in an expedient, relatively in expensive and impartial manner needed to be restored. 4. Some advancement was made in this field by the adoption of ICSID Convention in 1965 for the Settlement of Investment Disputes between States and Nationals of other States parties to the Convention. Later, the U.N. Commission on International Trade Law was established in 1968. The question of Arbitration was taken up by it on priority basis. 5. The work of UNCITRAL in this area resulted in the adoption of UNCITRAL Arbitration Rules in 1976 by the U.N. General Assembly. The U.N. Commission on International Trade Law specially considered the following existing Rules while developing the U.NCITRAL Arbitration Rules in 1976. ECE Rules: Arbitration Rules of the United Nations Economic Commission of Europe,. 1966, ECAFE Rules Rules for International Commercial arbitration of the United. Nations Economic Commission for Asian and the Far East (Now the United Nations Economic and Social Commission for Asia and the Pacific) 1966, ICC Rules Rules of Conciliation and Arbitration of the ICC 1975, Inter‑American Commercial Arbitration Rules of the American Arbitration Arbitration Association, Commission Rules: USSR Chamber Rules of procedure of the Foreign Trade Arbitration of Commerce Commission at the USSR Chamber of Commerce. Rules: 6. The Asia‑African Legal Consultative Committee [The author was Assistant Secretary‑General Asian‑African Legal Consultative Committee from 1981 to 1984.] which got involved in the work of UNCITRAL also developed a scheme for promotion and development of a mechanism for settlement of disputes to ensure fair, expeditious and comparatively in‑expensive procedures in order to streamline and generate confidence in international economic and commercial transactions. The committee finally established the two Regional Arbitration Centres at Cairo and Kuala Lampur. The objection of these centres include coordinating the working of institutions at the national level in the member countries. They also provide for an option to the parties while resorting to international institutions when it is not possible to refer a dispute to the national institutions. They also cater for the need of parties who prefer to have arbitration conducted m a Third country. These centres provide for Adhoc Arbitration under the UNCITRAL Arbitration Rules, 1976 and also arbitration under their own Rules which are slightly modified version of UNCITRAL Arbitration Rules, 1976. The modifications in UNCITRAL Rules are only relating to the provisions concerning "Appointing Authority" and some minor modifications to make them suitable for institutional arbitration. 7. The Asian‑African Legal Consultative Committee also discussed the U.N. Convention on Recognition and Enforcement of Arbitral Awards of 1958 and recommended that full autonomy of the parties under arbitration should be ensured and the provisions in the 1958 convension relating to the enforcement of awards being subject to Order Public or Public Policy of the country where the award is sought to be enforced should be modified. Although UNCITRAL did not consider it advisable to propose amendments in the 1958 Convension as it considered the working of the Convention quite satisfactory, it undertook to develop a Model Arbitration Law in order to facilitate modernization and unification of Arbitration laws of the different U.N. member countries besides developing a clear and more definite concept of Order Public etc. 8. The attitude of the international trading community may also be noted here briefly. The international trading community is mostly reluctant to go in for settlement of disputes through judicial fora as the judicial procedures are usually cumbersome and expensive. The trading community is, therefore, more favourably inclined towards Arbitration as a mechanism that provides more expedient, efficient and less expensive means of settling commercial disputes. Other reasons for preferring arbitration vis‑a‑vis the judicial system are avoiding formalities, complications and uncertainty of the outcome of disputes referred to foreign Courts. Besides, arbitration also provides the choice of neutral country arbitrators, sites and rules of procedures, while percluding legal norms of national laws. The parties also prefer international commercial arbitration for the settlement of commercial disputes to judicial procedure as arbitration allows greater appreciation of relevant usages of the concerned trade at the international level. 9. As we have referred to the U.N. Convention on Recognision and Enforcement of Arbitral Awards of 1958 and the work of Asian‑African Legal Consultative Committee in this area as well as its recommendations which led to the development of the Model Arbitration Law by UNCITRAL, it may be useful to specifically deal with recent developments in this area briefly. 10. Whereas, enforcement of International Arbitral awards in the case of private parties has not offered any major difficulties and it has been further facilitated by the U.N. Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958, the enforcement of awards in respect of disputes to which one of the parties was a Government has given rise to problems and there has been considerable development in this area. The Traditional doctrine of State Immunity, has been invoked by the Governments besides raising other objections to enforcement of arbitral awards against them. The reluctance to submit to arbitration is also manifested by many Governments. For example, the United States does not allow arbitration against the Federal Government unless a specific legislative authorisation is there. It is also argued sometimes that the person purporting to bind the Government did not have legal authority to do so. For instance, a U.S. Federal Court held an arbitration award unenforceable when it was contained in a standard salvage agreement signed by a U.S. Warship's Captain [B.V. Bureau Wijsmuller v. The United States, 1916 A.M.C. 2514 (SDNY 1976).]. At times it is argued that the agreement did not pertain to a commercial transaction but was of a nature involving investment, natural resources, concessions etc. and is beyond the realm of an ordinary commercial transactions. The Governments also purport to abrogate the contracts alongwith the arbitration clauses unilaterally and the claim of Sovereign immunity is also raised from the jurisdiction of foreign Courts to prevent enforcement of the arbitral awards. Recent trend, however, is to interpret the doctrine of State Immunity in a restrictive manner so as to confine State Immunity to acts jure imperii and to disallow immunity in respect of acts jure gestionis. It has also been held by Courts in different Countries that by signing a commercial agreement with arbitration clause a Government is deemed to have waived immunity impliedly. Modern Legislations in respect of State Immunity in different Western Countries have taken this line. For example, Foreign Soveraign Immunities Act, 1976 of the U.S.A. and State Immunity Act, 1978 of the U.K. [Section 9 of the State Immunity Act,1978 of the U.K. provides as follows] both provide that a foreign Government is presumed to have waived immunity impliedly by entering into an agreement with an arbitration clause. 11. It may be interesting to refer to arbitration proceedings ensuing the nationalization of assets of foreign oil companies and their concession rights by Lybia in early 1970. The assets of the British Petroleum Company were nationalised in 1971 thereafter Taxco Overseas Petroleum Company and California Asiatic Oil Company (CALASIATIC) and Libyan American Oil Company were nationalised from 1973‑77. The arbitral awards were rendered against Libya in these cases and after varied history of efforts made by these companies to enforce the arbitral awards, settlements were reached between the parties in all these cases. 12. It may be mentioned here that adoption of the Convention on Settlement of Investment Disputes between States and Nationals of other States in 1965, has been a development of considerable importance and has helped to create stability and confidence in transactions relating to investments across international frontiers. This is indicated by the fact that less than 20 disputes have arisen out of contracts wherein the ICSID clause had been incorporated during the last two decades or so. The utility of the dispute settlement machinery established under ICSID Convention has been further enhanced by the adoption of ICSID's Additional Facility Rules, 1978 which envisage conciliation or arbitaration even where the State of investment or the State to which the investor belongs is not a party to the ICSID Convention. 13. Coming to the actual provisions relating to settlement of international trade and economic dispute being incorporated in the agreements/ contracts between the parties from developing and developed countries, it may be observed that they show a great variety. The United Nations Industrial Development Organisation has developed some model agreements in which arbitration or settlement of dispute clauses have been drafted keeping in view the developments in this area and which can provide a useful guide to parties from ' the third World countries. In the UNIDO MODEL FORM OF AGREEMENT FOR THE LICENSING OF PATENT AND KNOW‑HOW IN THE PETROCHEMICAL INDUSTRIES, Article 10 Para 4 provides as follows:‑ " Arbitration 10.4 All disputes between the parties arising out of the provisions of this Agreement, if not resolved amicably by negotiation, shall be settled by arbitration in accordance with the Law of Arbitration of (country)/the Arbitration Rules of the United Nations Commission on International Trade Law/the Rules of Conciliation and Arbitration of the International Chamber of Commerce. 10.4.1 If either party hereto defaults under any provision of this Agreement and such default continues unremedied for days after written notice has been given by one party to the defaulting party and settlement has not been arrived at then the former party shall have the right to have the matter resolved and settled by Arbitration. 10.4.2 The award of the Arbitrator or Arbitrators, as the case may be, shall be final and binding on the parties hereto. Judgment upon the award may be entered by the Court of (country) by any Court of competent jurisdiction. 10.4.3 The LICENSOR and LICENSEE shall continue to undertake their obligation under the Agreement during any arbitration proceeding unless otherwise agreed by the other party in writing. 10.4.4 The LICENSOR and LICENSEE agree that in the event of arbitration proceedings, the Arbitator(s) shall have unrestricted access to the Plant for the purpose of the said Arbitration. 10.4.5 Arbitration shall be in (town) and all proceedings will be in language. The Governing Law shall be in accordance with Article 11.3." The model agreement leaves the option open with the parties to decide upon laws applicable to the agreement. 14. In the UNIDO MODEL FORM OF LICENSING AND ENGINEERING SERVICES AGREEMENT FOR THE CONSTRUCTION OF A FERTILIZER PLANT, THE SETTLEMENT OF DISPUTES AND ARBITRATION IS PROVIDED, in Article 10 para. 4 which reads as follows:‑ "10.4 Settlement of disputes and Arbitration 10.4.1 In the event of any dispute, difference or contention in the interpretation or meaning of any of the Articles to this Agreement or reasonable inference therefrom, both parties shall promptly make endeavour to resolve the dispute or differences by mutual discussions and agreement. Should the dispute or differences continue to remain unresolved, both parties to the Agreement shall proceed to Arbitration as provided for herein. 10.4.2 Subject to the provisions of this Article 10.4, either the LICENSEE or the LICENSOR may demand Arbitration with respect to any claim, dispute or other matter that has arisen between the parties. 10.4.2.1 However, no demand for Arbitration for any such claim, dispute or other matter shall be made until the later of (a) the date on which either of the parties has indicated his final position on such claim, dispute or matter, or (b) the (20th) Day after one party has presented his grievance in written form to the other' and no written reply has been received within (20) Days after such presentation of grievance 10.4.2.2 No demand for Arbitration shall be made after the‑‑Day following the date on which either of the parties has rendered his written final decision in respect of the claim, dispute or other matter as to which Arbitration is sought. The LICENSEE or the LICENSOR, as the case may be, shall be obliged to specify that the written decision is in fact the final decision within the meaning of this sub‑Article. Failure to demand Arbitration within said ( ) Days period, shall result in the decision being final and binding upon the other party. 10.4.3 All claims, disputes and other matters arising out of, or relating to, this Agreement or the breach thereof which cannot be resolved by the parties, shall be decided by Arbitration in accordance with the rules of procedure of an agreed Arbitration Court. This agreement so to arbitrate shall be enforced under the prevailing arbitration law. The award rendered by the Arbitrator shall be final, and judgments may be entered upon it in any Court having jurisdiction thereof. 10.4.4 Notice of the demand for arbitration shall be filed in writing with the other party to the Agreement in accordance with Article 10.4.3. The demand for Arbitration shall be made within the period specified in Article 10.4.2, after the claim, dispute or other matter in question has arisen, and in no event shall the demand for Arbitration be made after institution of legal or equitable proceedings based on such claim, dispute or other matter if it would be barred by the applicable statute of limitations. 10.4.5 The LICENSOR and the LICENSEE shall continue to carry out their obligations under the Agreement and maintain the progress schedule during any Arbitration proceedings, unless otherwise agreed by the parties in writing. 10.4.6 In the event of Arbitration, the LICENSOR and the LICENSEE agree that the Arbitrator(s) shall have unrestricted access to the Plant (notwithstanding the secrecy provisions of Article 4. 4) for the purpose of the said Arbitration. 10.4.7 Arbitration shall be at (town) and all proceedings will be in the‑‑language. The governing law shall be in accordance with Article 11.3." 15. In this case also the laws applicable to the agreement are left to be decided by agreement of the parties but in conformity with the laws of the country where the plant is to be located. 16. IN THE UNIDO MODEL FORM OF COST REIMBURSABLE CONTRACT FOR THE CONSTRUCTION OF A FERTILIZER PLANT AND THE UNIDO MODEL FORM OF TURKEY LUMP SUM CONTRACT FOR THE CONSTRUCTION OF FERTILIZER PLANT, the settlement of disputes and arbitration provisions are identical and read as follows:‑ "ARTICLE 37 SETTLEMENT OF DISPUTES AND ARBITRATION 37.1. In .the event of any dispute, difference of contention in the interpretation or meaning of any of the Articles to this Contract or reasonable inference therefrom, both parties shall promptly make endeavour to resolve the dispute or differences by mutual discussions and agreement. 37.1.1 Should the dispute or difference continue to remain unresolved, both parties may each nominate a person to negotiate and reconcile the dispute or differences to resolve thereby the matter of contention between the parties arising out of the contract. In the event that these two persons referred to cannot agree, they shall nominate a third Neutral Person to reconcile the dispute or difference. In case the two persons cannot agree on a third Neutral Person or in case the efforts of the Neutral Person nominated by the two parties fail to resolve the differences within (6) months, both parties to the Contract shall proceed to Arbitration as provided for herein. 37.1.2 Pending resolution of any such claim or dispute pursuant to Article 27.1.1, the CONTRACTOR shall perform in accordance with the contract without prejudice to any claim by the CONTRACTOR for additional compensation and/or time to complete the work if such instructions (are in his opinion) above and beyond the requirements of the Contract. 37.2 Notwithstanding the existence of a dispute, the CONTRACTOR and PURCHASER shall continue to carry out their obligations under the Contract, and payment(s) to the CONTRACTOR shall continue to be made in accordance with the Contract that in the appropriate cases qualify for such payment(s). 37.3 Subject to the provisions of this Article, either the PURCHASER or the CONTRACTOR may demand Arbitration with respect to any claim dispute or other matter that has arisen between the parties. 37.3.1 However, no demand for Arbitration of any such claim, dispute or other matter shall be made until the later of (a) the date on which the PURCHASER or the CONTRACTOR, as the case may be, has indicated his final position on such claim, dispute or matter, or (b) the (20th) DAY after the CONTRACTOR or PURCHASER, as the case may be, has presented his grievance in written form to the other, and no written reply has been received within (20) Days after such presentation of the grievance. 37.3.2 No demand for Arbitration shall be made after (‑‑) Day following the date on which the PURCHASER or the CONTRACTOR, as the case may be, has rendered his written final decision in respect of the claim, dispute or other matter as to which Arbitration is sought. The PURCHASER or CONTRACTOR, as the case may be, shall be obliged to specify that the written decision is in fact the final decision within the meaning of this sub‑Article. Failure to demand Arbitration within said (‑‑) Days period shall result in the decision being final and binding upon the other party. 37.4 All claims, disputes and other matters in question arising out of, or relating to, this Contract or the breach thereof which cannot be resolved by the parties shall be decided by Arbitration in accordance with the terms contained in Annexure ‑‑‑. [This Annexure will contain details of the specific arrangements relating to Arbitration agreed to by the two parties] This agreement so to arbitrate shall be enforced under the prevailing arbitration law. The award rendered by the Arbitrator shall be final, and judgments may be entered upon it. in any Court having jurisdiction thereof. 37.5 Notice of the demand for Arbitration shall be filed in writing with the other party to the Contract in accordance with the conditions contained in the Annexure referred to in Article 37.4 above. The demand for Arbitration shall be made within the period specified in Article 37.3, after the claim, dispute other matter in question has arisen,, and in no event shall the demand for Arbitration be made after institution of legal or equitable proceedings based on such claim, dispute or other matter in question if it would be barred by the applicable statute of limitations. 36.6 The CONTRACTOR and the PURCHASER shall continue the work and undertake their obligations under the contract in accordance with Article 37.2 and the CONTRACTOR shall maintain the progress schedule during any Arbitration proceedings, unless otherwise agreed by the PURCHASER in writing. 37.6.1 Before commencement or continuation of the work which is the subject of the dispute under Arbitration, the CONTRACTOR may request, at his discretion, a Bank guarantee from the PURCHASER to cover the CONTRACTOR's estimate of the additional costs involved. The Bank guarantee shall be payable in part or full only as a result of Arbitration proceedings in favour of the CONTRACTOR, and shall be valid until 30 days after the Arbitration award. 37.7 In the event of Arbitration, the CONTRACTOR and PURCHASER agree that the Arbitator(s) shall have unrestricted access to the Plant (notwithstanding the secrecy provisions of Articles 7.8 to 7.13) for the purpose of the said Arbitration. 37.8 Arbitration shall be at (town) and all proceedings will be in the‑‑language. The governing law shall be in accordance with Article 36." 17 Now, Article 36 in both these Model Contract Forms provides that the laws applicable to the contract shall be the laws of (the country to be agreed) in conformity with the laws of the country where the plant is located. 18. These model provisions relating to arbitration and settlement of disputes indicate the range of possibilities from a short general provision relating to arbitration or settlement of disputes to a much more comprehensive mechanism's which are provided in the UNIDO Model Form of Turkey Lump sum Contract for the Construction of a Fertilizer Plant and UNIDO Model Form of Cost Reimbursable Contract for the Construction of a Fertilizer Plant. The parties have an option to provide for arbitration in accordance with the Arbitration Law of a Country or the Arbitration rules of the U.N. Commission on International Trade Law or the Rules of Conciliation and Arbitration of the International Chamber of Commerce etc. Actual choice would, however, depend upon the bargaining strength of the parties and the strength of their preference for any particular option. Applicable law, except where law of Country requires the application of its own Laws either for deciding the substance of the dispute as the procedure of arbitration, also depends upon the choice of the parties. It may, however, be observed that the parties from the Third World countries who may not be able to keep in mind the detailed provisions relating to arbitation and settlements of disputes incorporated in the contracts they have signed may find that the requirement of having to avail of arbitration mechanism within the specified number of days of certain eventualities may work against their interests. And they may get bound by the decision of the other party on account of their lapse in this respect. 19. Awareness of these developments in the area of international arbitrations and the various options available to the parties would thus enable the businessmen from the Third World and their lawyers to incorporate in the international contracts suitable provisions for settlement of international economic and commercial disputes to ensure not only an expeditious and efficient mechanism of settlement of disputes but also safeguarding their rights adequately. This would also strengthen confidence in arbitration as a mechanism for the settlement of international commercial and economic disputes.