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Drawing up an arbitration clause or agreement requires at least being a little familiar with arbitration. If you think that arbitration is a legal process, but at times accelerated, in which the parties appear before a retired judge and discuss the whole legal process for a couple of days, then you are mistaken- in reality everything is much more complicated.
Arbitration is an effective process for resolving disputes arising in international transactions. With proper management, arbitration is a cost-effective way to resolve a dispute, solving of which is legally binding and is valid at an international level. But, unlike the national courts, which are being conferred their authority from the state, the arbitral tribunal are being conferred its “authority” from the parties to the case, the terms of which (trial, place and rules of its conduct) are set out in the arbitration agreement. Therefore, the success of the arbitration and, therefore, the protection of legitimate interests, mainly depend on the correct formulation of the arbitration agreement. Many arbitration bodies provide excellent examples of arbitration clauses or arbitration agreements. But, unfortunately, these examples are not universal and are not suitable for every transaction and dispute. This article will provide a brief overview of international arbitration, as well as a list of advice that the parties and lawyers should be aware of when negotiating an arbitration agreement.
Arbitration has many different advantages that distinguish this trial from the judicial one. With regard for the arbitration agreement or the arbitration clause in the contract, the parties independently establish mutually acceptable terms for the conduct of the arbitration settlement. For example: expert judges, confidentiality and neutrality (the parties themselves choose arbitration judges to resolve the dispute). Such clauses should be given a priority, otherwise a poorly drafted or thought-out agreement can lead to the disruption of the tangible real life benefits of arbitration.
Basics of the arbitration agreement execution
The “Arbitration Agreement” may be a separate agreement or clause in a contract concluded between the parties. Arbitration institutions usually provide model provisions. Such examples of arbitration agreements can be inserted in the contract concluded between the parties that intend to conduct arbitration in accordance with the rules of the arbitration institution. Model clauses are useful for parties that want to conduct institutional arbitration, as they have been repeatedly tested and tried in practice. Regardless of whether you make an institutional reservation or your own, I would like to outline some factors that should be considered.
Institutional or special type of arbitration. Arbitration managed by an institutional authority follows the rules of such an authority and is “institutional one”. If the agreement is not institutional, then it is considered to be “special”. Arbitration institutions are non-governmental bodies with a supervisory function, specializing in the logistical and practical aspects of arbitration.
Institutional rules have repeatedly proved successful in practice. The rules are periodically reviewed and updated in order to keep up with the development of legislation and judicial practice. Parties that agree to arbitration under the guidance of institutional rules automatically include them in their agreement.
Special arbitral proceedings (ad hoc) are administered by the tribunal itself. They may be conducted in accordance with institutional rules (usually the UN Commission on International Trade Law, UNCITRAL) or rules developed by the parties. Thus, “ad hoc” arbitration requires a high degree of collaboration between the parties. Also, it is worth relying on national arbitration laws when drafting an “ad hoc” agreement.
Selection of rules – issues to be considered. Arbitration rules govern the procedural aspects of arbitration, such as the manner and timing of submission of documents; conducting an evidence hearing; and any use of interim measures. At times like this, it is very important to be aware of the differences between the institutional rules. For example, time frames may vary significantly, and tribunals may have different powers. The rate at which an arbitration award shall be issued (or, at least, drafted) can vary from 45 days from the moment of the case closure to six months from the moment the tribunal is formed.
Details of the arbitration agreement execution
The number of arbitrators. If the parties agree on the number of arbitrators in the agreement, it is preferable to choose an odd number. It is undesirable to select two arbitrators, since this can lead to disagreements between the arbitrators themselves. Three arbitrators significantly increase the cost of arbitration, so you can select the minimum of one who has the necessary defining feature and qualifications. A large number of arbitrators do the job faster, and are usually used in extensive and complex cases.
A single arbitrator may sometimes lack either legal or technical expertise to correctly understand the meaning and subtleties of all aspects of a dispute. But, of course, one arbitrator is much easier to be coordinated and the use of his services will be much cheaper than the three arbitrators services .
You have the opportunity to register the selection procedure. Therefore, if you pay special attention to the selection, problems can be avoided.
In case of institutional arbitration, if the parties cannot decide on the appointment of an arbitrator, the management of the institution makes the choice itself.
Applicable law for arbitration agreement. The arbitration agreement is separate and independent of the underlying contract. This ensures that upon termination of the underlying contract, disputes arising from this termination can still be referred and resolved by arbitration. That is, for example, when the underlying contract is recognized as invalid, the arbitration agreement will still have legal force. Thus, an arbitration agreement may even be governed by a different law than the law governing the underlying (basic) contract.
The right of the arbitration agreement governs the interpretation, formation and enforcement of the arbitration agreement as if it were a separate contract.
The parties often cannot make a choice with regard for the “stuffing” of the arbitration agreement. This can lead to problems in the event of a dispute, especially in complex cases involving several parties / contracts, or non-signatories (which are indirectly related to a particular dispute). If the parties take all this into account when drawing up the contract, this will help avoid unnecessary financial and time costs.
Special attention should be paid to the careful selection of the applicable jurisdiction, as this plays a key role in the legal force of the arbitration agreement.
Place of arbitration. The choice of location is an important aspect of the arbitration agreement. The place of arbitration determines “lex arbitri” or arbitration law. The place of arbitration, in fact, is its jurisdiction. Binding to a specific place is important because it can have a significant impact on the arbitration procedure. For example, can any local court intervene in the arbitration court proceeding, and can there be parallel hearings in a national court. In this regard, it is very important to understand in advance the arbitration law of the selected country.
What’s to be avoided ?
Try not to include too many details in the arbitration agreement. Attempting to define the parameters of an arbitration agreement too accurately can lead to its invalidity or deprivation of the tribunal’s jurisdiction over certain issues.
Parties should also consider that, if a contract is valid or belongs to a group of contracts, necessity may arise to consider ways to ensure prompt resolution of disputes in a premature manner. Some institutions provide expedited arbitration rules that facilitate the resolution of disputes over a three-month period.
Business people resort to quick and efficient dispute resolution to avoid the risk of delays. The advantage of arbitration is that it provides flexibility in international law enforcement combined with high speed.
Involve an arbitration specialist to draw up or revise your arbitration clause and be prepared for the dispute, and then make sure your agreement is written in understandable terms that does not jeopardize the arbitration process even before the arbitration begins.
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