Protection of exporters’ rights in arbitration, Kostyantyn Kryvopust

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Exporters are one of the key links in the economic activity of many countries. They ensure not only the economic development of their country, but also the strengthening of its status in the international arena. Today, in the conditions of war, the role of enterprises that supply their products abroad and ensure the flow of foreign currency to Ukraine has grown even more.

However, the war brought additional challenges for entrepreneurs. In addition to the usual economic disputes, problems with logistics and fraud, the blockade of ports, problems with bank transfers from a number of countries to Ukraine, disruptions in delivery times due to military actions, “blackouts” and many other problems were added. Due to these reasons, the number of disputes involving Ukrainian suppliers and non-resident buyers has increased significantly. So let’s consider certain aspects of the protection of exporters’ rights in commercial arbitration.

Arbitration Clause – Why is it important?

Judicial processes in different countries have very significant differences. Different procedures, different review periods (sometimes three years or more) — all this significantly complicates the resolution of the dispute for the party to the contract who is trying to protect his rights. Another problem is finding contractors in the country where your counterparty is registered. Therefore, quite often the parties to international contracts agree on consideration of the dispute in a neutral institution – commercial arbitration. Here, the parties can themselves choose the place of hearing the dispute, the order of its hearing, and the people who will decide the dispute – the arbitrators. As well as all other procedural points – the language in which the process will be conducted, the applicable law, etc.

In order to determine the subjectivity of the dispute to commercial arbitration, the parties enter into an arbitration agreement or add an arbitration clause to the text of the contract. In the absolute majority of cases, the arbitration clause itself is used.

Errors in the arbitration clause can significantly complicate the protection of the rights of the parties to the contract. Let’s give a simple example. Consider a typical situation: an exporter from Ukraine uses a template supply contract that contains an arbitration clause. Something like “All disputes related to the execution of this contract are considered by the International Commercial Arbitration Court, whose decision is final and binding on both parties.“. Then the exporter concludes a contract with a Latvian company, and gives the task to a lawyer at the company (and, sometimes, an accountant) to translate the contract into English. Unfortunately, the lawyer or accountant does not speak English, so they translate the name of the court as “Arbitration Court of International Commerce and Industry”. Then a dispute arises between the parties to the contract. The main question is which institution should consider this dispute?

This is a real example that was considered by the Grand Chamber of the Supreme Court in case No. 906/493/16 (decision dated August 28, 2018). And the court came to the conclusion that it is impossible to fulfill this arbitration clause, since it is impossible to establish which arbitration institution was agreed upon by the parties – the Riga International Commercial Arbitration, or the Arbitration Court of the Latvian Chamber of Commerce and Industry, or the International Commercial Arbitration Court of the Chamber of Commerce and Industry of Ukraine . The Supreme Court concluded that a significant mistake by the party in the name of the arbitration (if the contract does not also indicate the place of arbitration) may result in the arbitration agreement being recognized as unenforceable. Therefore, the dispute should be considered in the order of commercial proceedings.

What would be the consequences if the claimant did go to arbitration?

The first option: the arbitration refuses to accept the application for consideration. The plaintiff loses time, money paid as a registration fee and lawyers’ fees, and is forced to go to state court.

The second option: the arbitration accepts the application for consideration and renders a decision. At the same time, the opponent ignores the arbitration process, and only objects at the stage of granting permission to enforce the decision of the international commercial arbitration. And the objection is based on the fact that the arbitration decision was issued by an unauthorized institution. The result is that the Plaintiff loses even more time and money and does not achieve his goal.

The conclusion is simple. A correctly written arbitration clause will save you a lot of time and money. Conversely, mistakes in the clause, or even mistakes in the translation of the name of the court, can be very expensive. By the way, most arbitral institutions offer their own recommended wording of the arbitration clause. Use it exactly, and you will minimize the possibility of the problems mentioned above.

Protection of rights in arbitration

Commercial arbitration is an alternative way to resolve disputes in addition to court. Proceedings in commercial arbitration usually take less time than in court. At the same time, the arbitration decision has the same legal force as a court decision and is subject to enforcement.

If you fully fulfilled your obligations, but did not receive money, and the negotiations did not bring results, you should apply for dispute resolution and forced collection of money from the debtor. Exactly where to turn depends on the contract. If it contains an arbitration clause, it is necessary to refer to arbitration.

By the way, if problems arise with the ZED contract, we advise you not to waste time and immediately consult with lawyers. The fact is that the procedure for considering a dispute in arbitration may differ significantly from the one you are used to in Ukrainian courts. So, for example, according to the general rule, the deadline for applying for the protection of one’s rights in the sectoral arbitration on grain and fodder trade, GAFTA, is one year, in contrast to the usual three years for Ukrainian entrepreneurs.

And under certain conditions, the term of appeal to arbitration can generally be 21 days. In such circumstances, the loss of time for negotiations may result in the loss of the opportunity to protect one’s rights. Therefore, it is fundamentally important to find out all the specifics of the dispute under your contract as soon as possible, even if you do not intend to go to arbitration yet.

In the event that you, as a supplier, cannot fulfill the contract for one reason or another, it is also important to immediately build an appropriate defense strategy. For example, by wasting time and not taking all the actions stipulated by the contract, you may be deprived of the opportunity to refer to force majeure circumstances as a basis for exemption from liability for breach of contract.

The arbitration procedure is less formalized than in state courts. As a rule, it includes several stages – the resolution of procedural issues, the exchange of procedural documents and evidence, sometimes – hearings and, actually, making a decision. But the fact that the procedure is not so bureaucratic does not mean that you can treat the process lightly. If you approach the formation of the evidence base and legal position unprofessionally, you can lose the arbitration, even if there was every chance to win. Therefore, the choice of a contractor to represent interests in arbitration should be approached very carefully.

If the opponent does not comply with the arbitration award voluntarily, it will be possible to enforce it, in almost any country in the world, on the basis of the New York Convention.

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards was adopted in 1958 and has been signed by more than 160 countries, including all the leading trading and industrial powers. The main purpose of the convention is to ensure effective enforcement of arbitration decisions in any country that is a party to the convention and to promote the development of international trade.

According to the New York Convention, countries that are parties to the convention are obliged to recognize and enforce decisions that were made in another country as part of the arbitration process. This means that a decision that was made in the framework of an arbitration process in one country can be enforced in any other country that is a party to the convention.

The procedure for enforcement of an arbitral award under the New York Convention involves confirmation of the arbitral award in the court of the country in which the property to be enforced is located. After the decision is confirmed by the country’s court, the executive body can start the enforcement process.

The procedure for enforcing an arbitral award based on the New York Convention includes the following stages common to any country that is a party to the convention:

  • Appeal to the court. A party holding an arbitral award may apply to the court of the country in which the award is to be enforced. The court must recognize the arbitration award and issue permission for its execution.
  • Enforcement. After the court has issued permission, the party that appealed to the court can start the procedure of enforcement of the arbitration award. Enforcement proceedings may include the assessment of the property subject to the enforcement of the judgment and the compulsory seizure of the property to satisfy the requirements established in the judgment.
  • Resistance to execution. In some cases, the debtor may try to avoid the execution of the decision, referring to its illegality. Then the court may stop the execution procedure until the court considers the debtor’s objections.

As a rule, enforcement of an arbitration decision is no more difficult (and in many countries even easier) than enforcement of a state court decision.

Conclusions

Protection of exporters’ rights in arbitration institutions is an important tool for defending their interests and preserving business. When resorting to arbitration, exporters have the opportunity to collect the debt from the buyer under the delivery contract and receive compensation for the losses caused by the delay in payment.

Arbitrating a dispute can be a faster and more efficient alternative to state courts. However, inaccuracies in the arbitration clause may deprive you of the opportunity to protect your interests.

Arbitration has both common and distinctive features with a judicial process. Therefore, the representation of your interests in arbitration should be entrusted to lawyers who specialize in this.

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