International commercial arbitrations: Electing an arbitral regime

International Commercial Arbitration refers to arbitration processes that are commenced consequent upon a breach in international commercial contracts. Arbitration can be institutional or ad hoc. Institutional Arbitration is conducted under the auspices of an arbitral institution, and will result from the parties’ agreement to apply the rules of a particular institution such as the International Chamber of Commerce (“ICC”). Arbitration will be ad hoc where the parties are responsible for determining and agreeing on their own arbitration procedures rather than being supervised by the procedures of an arbitral institution. Once parties have agreed on an ad hoc arbitration (as opposed to institutional arbitration), the parties choose arbitration rules establishing procedures for conducting the arbitration, location, language, law applied to the arbitration, number and identity of arbitrators.

THE UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW ARBITRATION RULES (“UNCITRAL RULES”)

The UNCITRAL Rules are a set of procedural rules covering all aspects of the arbitration process, which parties may agree to in part or in whole in order to help resolve their international disputes. The UNCITRAL Rules have been used to govern a broad range of procedures, including disputes between private commercial parties where no arbitral institution is involved i.e. ad hoc arbitration; disputes between states and foreign investors (investment arbitration); disputes between two countries (State-to-State dispute). The UNCITRAL Rules are also often used as guidelines.

Most Arbitration statutes and rules empower arbitrators to rule on their own jurisdiction. Article 23 of the UNCITRAL Model Law provides that the arbitral tribunal shall have the power to rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause that forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null shall not automatically entail the invalidity of the arbitration clause. Under the UNCITRAL Rules, the Secretary General of the Permanent Court of Arbitration serves as the appointing authority, unless the parties agree to the contrary.

Article 35 of the UNCITRAL Rules states that an arbitral award, irrespective of the country in which it was made shall be recognized as binding and, upon application in writing to the competent court, shall be enforced subject to the provisions of this article and of Article 36. Also under the UNCITRAL Rules, the challenge and replacement of arbitrators is governed by Articles 10-14 and any arbitrator may be challenged if circumstances exist that “give rise to justifiable doubts as to the arbitrator’s impartiality or independence”. The challenging party shall, within 15 days of the emanating cause of action, send notice of the challenge to the members of the tribunal and other party. That notice must be in writing with reasons for the challenge. Where the other party agrees to the challenge or the challenged arbitrator withdraws, a replacement arbitrator is appointed. Where the challenged arbitrator fails to withdraw or the other party disagrees with the challenge, the decision will be made by an appointing authority.

ICC RULES

There is a prior procedural question on whether the Arbitral Tribunal has jurisdiction to determine the issue before it. Article 6(3) of the ICC Rules provides that, “where there is a challenge to the existence, validity, or scope of the arbitration agreement, the arbitration is to go ahead and the tribunal is to directly decide the matter unless there is a reference to the ICC Court of Arbitration”. This is supported by the well-cited case of Kompetenz v Kompetenz which affirmed that in international commercial arbitrations, the arbitral tribunal has competence to determine whether it has jurisdiction or not and specifically that the tribunal has the power to consider the validity of the arbitration agreement by which they are set up. Also, Article 11 governs the challenge of arbitrators and provides inter alia that “a challenge of an arbitrator, whether for an alleged lack of independence or otherwise, shall be made by the submission to the Secretariat of a written statement specifying the facts and circumstances on which the challenge is based”.

Unlike the UNCITRAL Rules above, which specifies 15 days for challenging an arbitrator (from when a cause of action arises), the ICC Arbitration Rules, specifies 30 days. The ICC Secretariat will notify the arbitrator concerned, other members of the tribunal and the other party and would receive comments in writing from them. Those comments will be communicated to all parties before the ICC Court of Arbitration (“ICC Court”) makes a decision. It does not state the reasons for its decisions and either upholds or rejects a challenge. In 2005, the ICC Secretariat received 37 challenge applications and the ICC Court upheld just 2 applications (ICC 2005 Statistical Report).

The key point to note for both Rules is that they seek to pre-empt and address concerns around potential and/or real bias amongst arbitrators and set the principles on which arbitrators can be challenged. The logical inference which can be drawn from that is the high premium placed by these Rules on natural justice, due process and fair hearing – all cardinal principles in Common Law and Civil Law jurisprudence.

The most salient specifics of arbitration under the ICC Rules are:

i. The requirement that “Terms of Reference” be prepared. This document drawn up by the tribunal defines and summarizes the parties’ positions and the issues the tribunal will decide on. It sets the schedule for the various steps of the tribunal’s proceedings.

ii. The ICC is unique in that the ICC Court “scrutinizes” the arbitral tribunal’s draft of the award, and has the authority to require modifications as to the form of the award and to draw the tribunal’s attention to points of substance. This scrutiny is a valuable safeguard, especially in light of the fact that arbitral awards are most often not subject to appeal (save in a very limited number of jurisdictions). Parties who have agreed to submit disputes to arbitration under the ICC Rules lose their right to appeal on points of law.

iii. Both the administrative costs and the arbitrators’ fees are determined by the amount in dispute in accordance with a scale setting forth ranges of costs and fees per amount in dispute. The ICC Court determines the precise amount at the end of the proceedings and takes into consideration factors such as the complexity of the matter, the diligence of the arbitrators and the time spent by them, and the rapidity of the proceedings.

THE NIGERIAN ARBITRATION ACT

The Arbitration and Conciliation Act (Cap A18, Laws of Nigeria 2004) (“Arbitration Act”) applies to all arbitrations in Nigeria. Specifically, the Arbitration Act applies only to commercial contracts. However, the Courts have consistently held that where there is no dispute (such as an uncontested or admitted claim for a liquidated amount), the Court can assume jurisdiction, despite the existence of an arbitration clause. There are also some local statutes that would apply to the contract to arbitrate irrespective of the choice of law. The Personal Income Tax Act and the Companies Income Tax Act applies to all contracts that have a connection with Nigeria, irrespective of any choice of law clauses, which they may contain.

Most arbitrations in Nigeria are ad hoc and domestic. The rules mostly used are the Arbitration Rules contained in the Arbitration Act, which are mandatory for domestic arbitration. However, parties to an international commercial agreement may agree in writing that disputes in relation to the agreement shall be referred to arbitration in accordance with the Arbitration Rules in the Arbitration Act. The arbitration bodies most commonly employed for the resolution of large commercial disputes are the Nigerian branch of the London based Chartered Institute of Arbitrators and the Regional Centre for International Commercial Arbitration.

Also it is important to note that where the seat of arbitration is Nigeria, Nigerian Laws would prevail over any agreement of parties that is contrary to public policy or that will amount to a contravention of another relevant Law within the jurisdiction. For instance a choice of foreign Law as the Law governing the contract, which is perceived to be intended to evade tax Laws, or as an outright breach of constitutional provisions may not be upheld. Similarly, as a matter of public policy, Courts in Nigeria even in applying foreign Law as the Law chosen by the parties, are not obliged to apply provisions of foreign Law that are incompatible with their own mandatory rules or those of another country with which the contract is closely connected. The doctrine of freedom of contract or party autonomy is exercisable to the extent of statutory restriction or intervention. See the case of M.V. Panormos Bay v. Olam Nig. Plc (2004) 5 NWLR (Part 85).

INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES (“ICSID”)

The International Centre for Settlement of Investment Disputes is established by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. Under the ICSID Convention, the Centre provides facilities for conciliation and arbitration of investment disputes between Contracting States and nationals of other Contracting States. The jurisdiction of ICSID, or in other terms, the scope of the Convention, is elaborated in Article 25(1) of the ICSID Convention which states that “the jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre.” Whereas Article 26 further states that, “Consent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy”.

ICSID is an impartial international forum established by the Washington Convention is 1965. The ICSID provides facilities for arbitration of international investment disputes. It is also considered to be the leading international arbitration institution devoted to resolving disputes between States and foreign investors, or Bilateral Investment Treaties (“BIT Arbitrations”). ICSID was established because it was evident that foreign investment disputes could not be effectively resolved either in the domestic judicial forum of the host

State, or in the national courts of the foreign investors. It was felt that the provision of a neutral forum for the settlement of investment disputes would improve the investment climate by reducing the “fear of political risks *which+ operate as a deterrent to the flow of private foreign capital”.

However, ICSID does not arbitrate disputes, but instead provides the framework for independent arbitration panels to resolve disputes. ICSID Proceedings may take place anywhere approved by a Tribunal in consultation with ICSID Centre. Provisions on ICSID arbitration are commonly found in investment contracts between governments of member countries and investors from other member countries. Advance consents by governments to submit investment disputes to ICSID arbitration can also be found in about twenty investment laws and over 900 bilateral investment agreements. Similarly, ICSID arbitration is one of the primary mechanisms for the settlement of investment disputes under four recent multilateral trade and investment treaties (i.e., the North American Free Trade Agreement, the Energy Charter Treaty, the Cartagena Free Trade Agreement, and the Colonia Investment Protocol of Mercosur).

Also, under the ICSID, The Administrative Council of the Centre has adopted Additional Facility Rules authorizing the Secretariat of ICSID to administer certain categories of proceedings between States and nationals of other States that fall outside the scope of the ICSID Convention. The proceedings are:

i. Fact finding proceedings

ii. Conciliation or arbitration proceedings for the settlement of investment disputes between parties one of which is not a Contracting State or a national of a Contracting State

iii. Conciliation and Arbitration proceedings between parties at least one of which is a Contracting State or a national of a Contracting State for the settlement of disputes that do not arise directly out of an investment, provided that the underlying transaction is not an ordinary commercial transaction.

Unlike the Arbitration Act, ICSID is an international arbitration institution, which facilitates arbitration and conciliation of legal disputes between international investors and host States, while, the Arbitration Act provides a unified legal framework for the fair and efficient settlement of commercial disputes by arbitration and conciliation.

The arbitration system under the ICSID differs in many important respects from the other systems of arbitration. The difference bears both upon the rules governing the proceeding and those governing the challenge of awards and their enforcement. The benefits to investors of ICSID arbitration are as follows:

i. It provides investors with direct access to a form of settlement of a dispute they may have with a host State.

ii. It extends the possibility of dispute settlement beyond the realm of national courts in the host State.

iii. Investors do not depend upon the willingness of their home State to exercise diplomatic protection on their behalf.

iv. The enforcement provisions of the ICSID Convention make it highly probable that final ICSID awards will be effectively enforceable.

v. Conciliation or arbitration proceedings for the settlement of investment disputes between parties one of which is not a contracting State or a national of a Contracting State.

The idea of the ICSID Convention is to stimulate investment and hence economic development by improving the standard of protection for foreign investments and the overall investment climate. Compared to ad hoc arbitration, the ICSID Convention offers not only a system for dispute settlement and rules of procedure but also institutional support for the conduct of proceedings. It assures the non-frustration of proceedings and provides for an award’s recognition and enforcement.

CONCLUSION

Parties’ freedom to agree on an arbitration regime of their choice and to prescribe the procedure to be followed is subject to few limitations. The arbitration agreement must be a valid one according to the law which governs it. In addition the arbitral procedure itself should comply with the mandatory provisions of the law governing the arbitration agreement and the rules of law of the lex arbitri. The lex arbitri is often the law of the place of the seat of the arbitration, but not always so. Other restrictions on party autonomy might arise where the parties select institutional arbitration but attempt to alter the rules of the administering body in a way which is unworkable or is not accepted by the administering body.

Apart from these restrictions, the parties enjoy very broad freedom in selecting the arbitration regime they desire and in prescribing the procedure to be followed. Depending on the place of arbitration and therefore on the applicable legal system, arbitrations are subject to different rules of procedure, their award is subject to different means of recourse and the recognition and enforcement of such award is in principle governed by both domestic and international enforcement regimes including, notably, the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

TOKUNBO ORIMOBI LP is a full-fledged commercial law firm with offices in Lagos, Ibadan and Abuja.