Date of publication: 13 August 2024
Roman Protsyshyn, Attorney at Law, Counsel
Source: Yurydychna Gazeta
Arbitration is often described as a mechanism that exists solely by the will of the parties involved.
This concept is best exemplified by ad hoc arbitration, i.e. the one that is formed specifically to consider a particular case, if we speak in the language of the specialized Law of Ukraine “On International Commercial Arbitration” (the Law on ICA).
In ad hoc arbitrations, nearly all aspects rely on the parties’ mutual agreement, free from the external oversight or control typical of institutional arbitrations managed by permanent arbitral institutions.
For an ad hoc arbitration agreement to be recognized by national courts, particularly when it comes to enforcing the award, the parties must, at a minimum, agree to resolve their current or future disputes through ad hoc arbitration.
However, this minimum would shift a number of issues in the arbitration process to the national arbitration law applicable to the place of arbitration.
The ICA Law permits parties to resolve disputes through ad hoc arbitration without difficulty if the arbitration takes place within Ukraine. Upon completion of the proceedings, the resulting arbitral award will be protected from annulment by national courts and will be eligible for enforcement.
To streamline the process, parties to the arbitration agreement might opt to apply the UNCITRAL Arbitration Rules, which are widely used in ad hoc arbitrations. However, this approach may not fully address the issue of appointing a neutral body to select a competent arbitrator. Under the UNCITRAL Arbitration Rules, if the parties do not designate an appointing authority, the procedure requires first approaching the Secretary-General of the Permanent Court of Arbitration in The Hague. This step is needed to determine the appropriate contact for appointing the arbitrator, potentially causing significant delays.
It is widely perceived that the International Commercial Arbitration Court (ICAC) and the Maritime Arbitration Commission (MAC) under the Ukrainian Chamber of Commerce and Industry hold a monopolistic position in Ukraine’s arbitration services market. This perception holds true primarily because they are the only permanent arbitration institutions in the country. The absence of mechanisms for establishing alternative institutions to administer international arbitrations, coupled with the unsuccessful attempt to reform arbitration legislation in 2021 through Draft Law No. 5347, has reinforced this monopoly. The draft law, which is aimed to provide a framework for creating “competitors” to ICAC and MAC, faced criticism from the arbitration community and ultimately failed.
The question of whether such a monopoly is beneficial, especially given the established reputation of the ICAC at the Ukrainian Chamber of Commerce and Industry as the national and international face of arbitration in Ukraine, remains largely rhetorical. This debate is further complicated by recent discussions about establishing an investment arbitration center in Ukraine.
However, the ICAC has faced criticism for its quasi-closed recommended list of arbitrators. Although the ICAC’s own rules do not officially designate it as a closed list, it is effectively treated as such by the institution itself. While closed lists are not inherently problematic, their formal acknowledgment within the procedural framework is crucial for ensuring transparency in the arbitration process. For instance, the Court of Arbitration for Sport in Lausanne uses a closed list, and this is explicitly stated in its rules.
The complete freedom to select an arbitrator is a key appeal of ad hoc arbitration, often making it more attractive to parties than institutional arbitration. This flexibility allows parties to pre-select a specific individual to arbitrate their dispute, offering a level of autonomy that institutional arbitration typically does not provide.
Practitioners of international arbitration generally agree that institutional arbitration’s system of third-party verification of nominated arbitrators offers a significant advantage. This process helps safeguard the parties against the risk of receiving a substandard outcome, such as an ill-conceived or unenforceable award. In ad hoc arbitration, however, parties might face challenges if their agreed-upon arbitrator declines to serve or if disputes arise over the selection of the arbitrator. To mitigate these risks, parties can seek assistance from individuals or institutions with expertise in appointing competent arbitrators and managing related functions, such as reviewing challenges.
This approach is widely used in the realm of ad hoc arbitration. A prominent example is the Secretary-General of the Permanent Court of Arbitration in the Hague, who frequently serves in this capacity. While the Permanent Court of Arbitration typically administers institutional arbitrations, particularly interstate and investment disputes (such as several “Crimean” arbitrations against Russia whose awards were recognized and enforced in Ukraine), it also plays a crucial role in facilitating arbitrator appointments in ad hoc settings.
In Ukraine, there are institutions that specialize in facilitating ad hoc arbitrations, provided that the parties have selected them in their arbitration agreement.
Foremost among these is the ICAC, which has established its own rules for facilitating arbitration, including offering services related to the appointment of arbitrators. Additionally, the Ukrainian Arbitration Association is well-known for its initiatives aimed at supporting ad hoc arbitration, offering similar services to assist in the arbitration process.
Both institutions benefit from maintaining a public list of selected international arbitration practitioners, allowing parties to choose a competent arbitrator from a vetted pool of professionals.
However, it is worth noting that national jurisprudence currently lacks decisions that authorize the enforcement of ad hoc arbitral awards where the ICAC or the Ukrainian Arbitration Association (UAA) served as the appointing authority.
In recent years, national courts have received applications to set aside or grant enforcement of ad hoc arbitral awards where the appointing authority was the Permanent Arbitral Tribunal at the Ukrainian Law Firms Association. This institution is known for its transparent and clear rules governing its role in facilitating ad hoc international commercial arbitration. Arbitral awards issued by arbitrators appointed through this tribunal have been upheld by national courts, demonstrating the tribunal’s competence in selecting qualified arbitrators. This reinforces the viability of ad hoc arbitration in Ukraine as a credible alternative to institutional arbitration, challenging the ICAC’s longstanding monopoly in the arbitration market.
For instance, the ad hoc arbitral award in the case of “EVOR Consulting OU v. L. Hvozdova” successfully withstood annulment proceedings in the national court (case No. 824/83/22) and was subsequently granted enforcement in Ukraine (case No. 824/55/23). This case is particularly notable because the national courts explicitly recognized the ability of a natural person to be a party to an arbitration agreement and to have an arbitral award enforced against them – an interpretation not explicitly stated in the ICA Law, but one that aligns with the principles of the 1958 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
This case is not an isolated example of the recognition and enforcement of international ad hoc arbitral awards involving arbitrators appointed by the Permanent Arbitral Tribunal at the Ukrainian Law Firms Association. Other cases include “Polymerpipe Technologies Limited v. Kalush Pipe Plant LLC” (case No. 824/107/23) and “UAB Generatorius v. Kalush Pipe Plant LLC” (case No. 824/157/23), which are also publicly accessible.
The outcomes of national court proceedings regarding the setting aside and enforcement of ad hoc arbitral awards have demonstrated that ad hoc arbitration serves as a viable and effective alternative to the ICAC in Ukraine.
When it comes to the cost of arbitration, the debate over whether institutional or ad hoc arbitration is more economical can be lengthy. For instance, in ad hoc arbitrations under the LMAA rules, the party that appoints the arbitrator pays the arbitrator’s fee either during or after the award is issued, with the fee structure – hourly or ad valorem based on the claim’s value – being agreed upon at the time of appointment. In contrast, ICAC operates under a fixed fee schedule, with no flexibility in cost arrangements. Additionally, ad hoc arbitrators typically do not require an advance payment to cover their fees, whereas ICAC’s rules generally mandate advance funding before the arbitration can proceed.
Predictability is a key factor that often leads parties to opt for arbitration under the rules of established institutional tribunals like the ICAC. However, whether this predictability is advantageous in every situation depends on the confidential considerations and negotiations of the parties, who may find the flexibility of ad hoc arbitration more suitable for their specific needs.
