Errors in Defense Procurement Contracts: Arbitration Perspective

Roman Protsyshyn, MCIArb, Attorney at Law, Counsel

Kateryna Solodovnyk, Lawyer

Source: Ukrainian Law Firms 2025

War. War never changes. ‘She’ never forgives any mistakes, whether on a battlefield or in a contract, and often takes lives as a penalty for the errors.

The Russian invasion of Ukraine on 24 February 2022 was a milestone in the Russian-Ukrainian war to test the Ukrainian defense procurement system on vulnerability from risky deals, which in normal conditions would have never been made. It also revealed betrayers, who, like moles, came out of holes to feed on budgets allocated for ‘burying’ enemy troops on Ukrainian soil.

The dark date in our history located costly gaps in defense procurement contracts, texts of which were inherited from the practices developed over the years on exports of Ukrainian weapons and military services, but those practices were not ready for imports in times of war.

From a legal point of view, a failure to supply a combat vehicle in time or at all has no direct link to a brave defender’s death on a battlefield, nor does it have a direct nexus with the outcomes of a battle against the enemy, notwithstanding the fighting vehicle’s ability to shield our defenders and kill the enemy. This reflects the real-world ruthlessness of business and the rule of law principle, which mercilessly work in tandem even in wartimes against those who made a mistake.

Ukrainian defense companies faced many problems when purchasing weaponry from foreign counterparties. When claims reached arbitral tribunals, even minor mistakes in contracts were detrimental to Ukrainian parties and their fair compensatory claims because of blind justice, which, like war, never forgives mistakes.

Verification before Ratification

The genuine intent of parties to submit their future dispute to arbitration may not always be clearly expressed in their contract. It has become common practice that parties often underestimate the importance of meticulously drafting an arbitration clause. Initially, when establishing business relations, parties often believe in the success of their agreement and, therefore, see no need to anticipate potential disputes. As a result, arbitration clauses are frequently considered secondary compared to other contractual provisions, such as payment terms, delivery schedules, and product specifications. However, in arbitration, the old saying ‘don’t trouble trouble until trouble troubles you’ can mislead those who rely on it.

Parties are highly required to give arbitration clauses the same degree of necessary scrutiny as they devote to other terms when drafting a contract. A failure to do so might lead to poorly worded and ambiguous arbitration clauses, which unclear and inaccurate language can cause significant hurdles for arbitrating a dispute once it arises and even render an arbitration clause invalid or inoperative.

One of the frequent errors involves incorrect naming of the arbitration rules, which may lead to misidentification of the latter and the arbitral tribunal’s authority to which parties intended to refer for dispute resolution.

Recently, a similar challenge concerning the ambiguity of an arbitration clause arose in one of the arbitration cases counselled by Ilyashev and Partners’ Arbitration Department. More specifically, by referring to the uncertainly worded arbitration clause, a respondent alleged that the parties’ reference to the Rules of the International Arbitral Center (VIAC) at the Austrian Economic Chamber (Vienna Rules) was vague and, thus, could not be readily associated with any existent arbitration rules. Though expressly mentioning the Vienna Rules, the arbitral clause appeared to slightly differ from the one proposed in the VIAC Model Arbitration Clause, particularly the Rules of Arbitration (Vienna Rules) of the Vienna International Arbitral Centre (VIAC).

The above minor linguistic discrepancies gave room to the respondent’s ingenious manoeuvres in claiming the parties’ failure to make an operational choice of rules to govern the arbitral proceedings. The opponent further challenged the genuine intent of the parties to refer exclusively to the Vienna International Arbitral Centre for settlement, saying that the acronym ‘VIAC’ mentioned in the arbitration clause was more akin to the Vietnam International Arbitration Centre.

Eventually, the respondent’s challenge met with no success. The Arbitral Tribunal confirmed that, notwithstanding some minor language discrepancies, the parties have expressly chosen the arbitral institution at the Austrian Economic Chamber, which could be nothing else but the Vienna International Arbitral Centre (VIAC). This decision was, however, preceded by harsh legal debates carried out in three rounds of the parties’ full-scale written submissions on the concerned issue, along with a significant risk of a completely unnecessary bifurcation of the proceedings and issuance of a separate award, which would be neither procedurally, nor financially efficient for the claimant.

The above example vividly demonstrates that even a slight overlook in the arbitration clause when it is drafted may lead to costly delays and complications at the arbitration stage. Clear and correct references to arbitral institutions and their rules are essential to avoid these pitfalls and ensure an efficient arbitration process.

Hostile Consequences of Friendly Negotiations

Defense procurement contracts often include parties’ agreement to negotiate, which typically calls the parties to engage in good-faith friendly negotiations once a dispute occurs, with arbitration being the last resort for settlement. While including such clauses reflects a desire for an amicable settlement, they may not often be adhered to in practice for several reasons.

One of the primary reasons for non-compliance is that the parties frequently view friendly negotiations as a mere formality rather than a mandatory procedural obligation under a contract. As tension between the parties grows, they may wish to neglect the pre-arbitration negotiations phase, though required by the contract, and resort directly to arbitration. Another possible reason is that the parties insert a “friendly negotiations” clause into their contract without having decent knowledge of what this is and what specific requirements it puts on them. Therefore, when a dispute occurs, the parties may simply be unaware that under the agreement to negotiate, they, in fact, have undertaken to resort to some actions of solving a dispute amicably during a certain “cooling-off” period. Any of these scenarios can further impede the arbitration process.

In a recent case that arose within our practice, the parties’ lack of awareness on how pre-contractual mandatory negotiations shall be commenced (whether a formal invitation is required from either party, etc.), conducted (in what form, frequency, etc) and concluded, created circumstances which endangered the admissibility of the entire claim in arbitration. Upon a respondent’s challenge, a claimant was required to demonstrate extra proof of its completed efforts to negotiate a dispute before resorting to arbitration, as required by a ‘friendly negotiations’ clause in their contract. The absence of such evidence could potentially provide grounds for an argument that a party acted in bad faith by failing to exhaust all possible means before escalating the matter to arbitration. Based on this, the Arbitral Turbinal could have declared arbitration claims defective and, thus, inadmissible in their entirety.

Based on the risks described above, before inserting a negotiation clause in a contract, it is highly advisable for the parties to conscientiously agree that friendly negotiations will be an obligatory pre-arbitration stage of resolving a dispute and discuss the terms of such negotiations. A clear understanding of this matter at the time of concluding a contract helps to avoid potential costly complications during arbitration.

Lost in Translation

In the context of defense procurement contracts, which are usually bi- or multilingual, errors in translation can have serious implications. When one version of the contract is given precedence, the correct translation of key terms, clauses, and provisions in it must be done with fair accuracy, especially when the initial draft of the contract was prepared in a secondary language, which is usually the native language of a drafting party. A discrepancy between the two versions can lead to ambiguity or misinterpretation of critical terms, potentially resulting in costly legal challenges in arbitration. Even subtle differences in wording can change the scope of responsibilities, performance expectations, penalties for non-compliance, etc.

The main challenge emerges when a single term carries two conflicting meanings in both languages of the contract. A vivid example of this stems from our experience of representing a state-owned company in a commercial arbitration, where we uncovered a substantial discrepancy in the translation concerning the identity of the end-user specified in the agreement.

In particular, the contract was initially drafted in Ukrainian, and the end-user was defined as a separate state authority, not a party to the contract. This is a golden rule for the arms trade industry when the State purchases foreign weaponry via its intermediary. In a contract, it must be reflected properly to give a third-party observed clear understanding that the goods purchased from a foreign manufacturer would be resold to the State. In the case at hand, the contract expressly read from the Ukrainian version that the buyer would not be the ultimate end-user of the goods.

The English version of the contract was to be a simple translation from Ukrainian and should not have differed from it in the meaning. Unfortunately, this was not the case. The English version provided a radically opposite and false definition of the end-user. It stated that the buyer “acting in the interests of [the state authority, which in the Ukrainian version was defined as the end-user]” shall be considered as the end-user of the goods. However, this was not what the parties agreed on at the time of concluding a contract. After making the contract, the buyer entered into domestic agreements with the designated end-user for the resale of the goods.

The point was linked to the foreseeability of damages resulting from the breach of resale contracts. The tribunal relied on the English version of the main contract, which was prevailing. It made its adverse inferences against the buyer based on the parties’ pre-contractual correspondence and the main contract itself, holding that based on that evidence, a reasonable man would have considered the buyer as the end-user, meaning he or she would not have foreseen any further resales to meet the criteria of the foreseeability of damages rule.

Eventually, the poor translation of one provision from Ukrainian into English put at stake the entire claim for consequential losses, which recovery under the United Nations Convention on Contracts for the International Sale of Goods is only possible when a party in default could have foreseen, among others from the contract, that consequences of its breach would affect an opponent’s performance towards a third party, which can be the end-user.

In conclusion, accurate translation is crucial in defense procurement contracts, as even minor errors can significantly affect the overall success of arbitration. Investing in professional, expert translation at the outset can ultimately save a party both time and money by reducing the risk of costly legal battles.

Equality Sacrifices Costs

An arbitration clause is often called an ‘eleventh-hour’ clause. But when the matters come to negotiating a choice-of-law clause in a rush, it can be fairly labelled as a ‘midnight’ clause.

In a gallop to have an international sales contract executed ‘asap’, parties may skip to thoroughly examine what would happen if a dispute arises and proceed to agree on a governing law clause, which, in their tired-from-negotiating-substantive-terms eyes, should look fair, reasonable, and, most important, preserve the imaginary equality of rights.

It would be a bit of colossal luck for an arbitration lawyer not to find a choice-of-law clause in a contract made in a hurry and proceed to plead that the law of State X shall apply based on the applicable conflict-of-law rules rather than to locate one ‘quick-and-dirty’ sentence that will drastically change the parties’ lives in arbitration when an issue arises what law should govern their contract: Substantive law applied by the VIAC – the substantive law of the plaintiff.

The quoted twelve words are taken from a real arbitration, where that one sentence turned out to be a nightmare for all involved. It caused an increase of approximately 60% of both parties’ legal costs, a challenge to a tribunal’s jurisdiction, and, as the icing on the cake, a jurisdictional counterclaim.

The clause at hand provides for a “floating” (or “deferred”) choice of law, which may vary depending on future developments. It can be argued that the principle “first come, first served” applies in this case and works for a party that sued another first. But the proper question is where (not whether) the “floating” choice of law may be found enforceable. In the distant past, there was some jurisprudence in support of such an approach (see, e.g., OJSC Efirnoe v LLC Delta Wilmar CIS, a Ukrainian case relating to the recognition and enforcement of a Russian arbitral award). However, the Western world will not recognise the “floating” choice of law as a valid outcome of parties’ autonomy in choosing the law governing their contract. The substantive law of the plaintiff is not only uncommon but also disruptive for the contract in its whole to be governed, alternatively, by the law at a claimant’s domicile and by the law of a respondent’s domicile. This would mean that the same contractual obligation and the same contractual right, respectively, in the same contractual relationship shall be governed by and shall produce effects in light of different laws depending on the exclusive decision of one of the parties and depending on who brought a certain claim under the contract. This might lead to an imbalance between the parties and might produce variable outcomes for the same contractual matter.

In the discussed arbitration case, things became complicated when the respondent filed a jurisdictional counterclaim and became another “plaintiff”. That was a very smart – but costly for the unsuccessful respondent – move to have the arbitration delayed. The respondent sought to invalidate the arbitration agreement, arguing that the invalid choice of law applied to the arbitration agreement, making it unenforceable, and requested the tribunal not just rule on its own competence negatively but to issue a declaratory award that would finally resolve the issue of whether the arbitration agreement was invalid in the same way as national courts would have done. Luckily for the successful claimant, the tribunal did not go to answering the debatable question of whether a tribunal is entitled to positively rule on such a jurisdictional counterclaim and issue the intended declaratory award.

War Never Changes

In conclusion, errors in defense procurement contracts, whether due to ambiguous terms, incorrect translations, or misplaced references, can have far-reaching consequences, especially when disputes lead to arbitration. These mistakes may not only prolong claims adjudication process but can also cause significant financial costs. Ensuring clarity, precision, and thoroughness in contract drafting and review is essential to minimising the risk of errors. By addressing potential issues early on, parties can avoid costly arbitration, safeguard their interests, and maintain smoother business relationships.