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Execution of Multi-Tiered Arbitration Clauses: Problems and Perspectives


Dmytro Shemelin, lawyer at Ilyashev & Partners Law Firm
Source: Jurist&Zakon

As a Molierian protagonist did not have a clue that he was speaking in prose, the majority of agreement makers are not aware that the reference to the necessity of holding negotiations prior to transfer of a certain case to arbitration has a gallant definition of “multi-tiered arbitration clause”.

Multi-tiered arbitration clauses are quite popular in the international practices as in their “single-celled” form – “negotiations-arbitration”, as in a more developed forms – “mediation – arbitration” (MedArb), “negotiations-mediation-arbitration” or “arbitration-mediation-arbitration”. In relation to the latter case the Singapore International Mediation Centre has even developed special rules SIAC-SIMC Arb-Med-Arb Protocol.

The aim of such elaborate clauses is well understood: to ensure the parties’ ability to settle the dispute without excessive expenses which always pertain to arbitration or court case even at the early stages, or shorten/quicken the arbitration process by reaching an agreement regarding certain key moments.

The principal issue arising in the process of enforced execution of multi-tiered arbitration clause is the degree of obligatoriness of its stages. Or, as in the case with the simplest clause “negotiations – arbitration”, – how the negotiations are really obligatory prior to transfer of the dispute to arbitration.

Due to the widespread nature of such clauses in practice the parties often treat the requirement regarding such negotiations as a mere formality, certain tribute to courtesy. For this reason the claimants do not want to invest their time for useless (at their opinion) negotiations and directly refer their dispute to arbitration willing to save time and effort.

However, more often than not the respondents take advantage of the formal possibility to refer to the literal text of the clause to either drag out the process or, which is much more unpleasant, to challenge the final arbitration award or disallow its acknowledgment and enforcement. Sometimes such tactics bears fruit as in the case of the UN International Court of Justice under the claim lodged by Georgia against the Russian Federation on the basis of the Convention on the elimination of all racial discrimination which was ceased by the mentioned court because of the Georgia’s failure to comply with pre-trial settlement via negotiations.

It is understood that it is better to be on the safe side and formally perform the requirements about negotiations prior to the beginning of the arbitration procedure. As a rule several sheets of paper and some reasonable time will suffice. But what is to be done when such a requirement is unfulfillable?

Foreign countries have a fairly wide practice of differentiation between the clauses that stipulate for compulsory pre-arbitration stage, and the clauses where such stage is mentioned but is not compulsory.

The judges are mainly guided by the following considerations:
– if the text of the clause itself implies that the pre-arbitration stage was mandatory (mandatory language) ot its finalization constituted the condition for transfer of the case to the arbitration (condition precedent);
– if the description of the pre-arbitration stage is fairly clear and if it allows to establish when and how such stage will be finished.

For example, in the case Medissimo v. Logica, decision 12-27.004 as of April 29, 2014 the French Cour de cassation decided that the simple agreement to try to settle the dispute amicably prior to referring it to court upon absence of certain conditions shall not be compulsory for the parties.

Similarly the Swiss Tribunal Federal, in its decision No. 4А-46/2011 as of May 16, 2011 in the case X Gmbh v Y Sarl decided that the provision about pre-trial settlement shall be compulsory only if it is detailed enough to demonstrate the intention of the parties to make negotiations a prerequisite to further application to court or arbitration.

In general the English courts take similar approach: the agreement on pre-trial settlement is valid if it is detailed enough; based on the comparatively recent practice in the case Emirates Trading Agency LLC v. Prime Mineral Exports Private Limited (2014) EWHC 2104 the court issued a decision on compulsory nature of the agreement on “amicable discussion” because it contained all the necessary elements.

In Ukraine the positions of the courts in similar cases are still quite ambiguous.

Following the decision of the Constitutional Court of Ukraine in the case on pre-trial settlement of disputes (also known as Campus Cotton Club, the decision No. 15-рп/2002 as of July 09, 2002) the agreements on compulsory settlement prior to filing application to the court will unlikely be valid.

On the other hand the pre-arbitration settlement is not apparently related to the Decision of the Constitutional Court because there is a widely-spread opinion that the right to apply for arbitration settlement is of a contractual, but not constitutional nature. Thus, certain limitations stipulated by the agreement may exist.

In general the Ukrainian courts have not yet developed certain distinct criteria when the pre-arbitration negotiations in case of multi-tired arbitration clauses are obligatory and their absence may cause dismissal of acknowledgment or cancellation of the arbitration award.

As late as in 2008 in the case under the claim submitted by International Port Services Ltd. the decision of the International Commercial Arbitration Court at the Chamber of Commerce was cancelled for the benefit of Odessa Sea Trade Port under the grounds that the parties had failed to comply with the procedure of pre-trial negotiations (See the Ruling in the case No. 6-18634св07 the Supreme court of Ukraine).

Further in the case under the claim submitted by OJSC Volgaburmash the Supreme specialized court cancelled the decision upheld by the appellate instance court which had ignored the necessity of pre-arbitration settlement of the dispute (Ruling in the case No. 6-34689св12).

However, upon re-consideration of this case the appellate court allowed acknowledgment and enforcement of the arbitration award upheld with incompliance of the pre-arbitration procedure with reference to the mentioned case of Campus Cotton Club (see the Ruling of the Kyiv Court of Appeal No. 22-ц/796/2930 as of March 05, 2013). Such position was also supported by the Supreme specialized court (the Ruling as of July 10, 2013 in the case No. 6-12483св13).

Also at least twice the supreme courts remitted the cases in cases when the courts of lower instances failed to consider the matters of compliance with the compulsory pre-arbitration stage of consideration: the Ruling of the Supreme specialized court as of January 15, 2014 in the case 6-35401св13 under the claim lodged by Skorzonera LLC and the Decision of the Supreme Economic Court as of April 22, 2014 in the case 916/2271/13 under the claim lodged by PJSC “Rybnytska avtokolona 2831”.

In fact Ukrainian courts have not devised any certain criteria when the pre-trial negotiations in case of multi-tiered arbitration clauses are compulsory and their absence may lead to refusal of acknowledgement and enforcement of the arbitration awards. However, the Ukrainian courts also do not consider the pre-arbitration stage as not compulsory in principle.

In practice the International Commercial Arbitration Court at the Chamber of Commerce (prior to taking the case containing the multi-tiered arbitration clause for consideration) also tries to verify observation by the parties of the pre-arbitration settlement procedure. Suchwise the International Commercial Arbitration Court at the Chamber of Commerce is trying to minimize the unpleasant cases when the decision of the court gets cancelled or is not acknowledged on the basis of non-compliance with the pre-arbitration procedure.

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