Insights on arbitration clauses in agreements part 1

October 21, 2021

 

FUNGAI CHIMWAMUROMBE & LEON GONA

 

As a rule of thumb any agreement/ contract, more so one pertaining to a business transaction, is not complete without clauses prescribing how either party should proceed in case of a dispute.

The authors hereto have noted a tendency to incorporate terms which suggest such terms have been incorporated as a matter of style and form as opposed to the utility and relevance thereof.

This has been predominantly reflected in arbitration clauses that either elects a seat of arbitration which make it impracticable to exercise such option or that circumvents alternate dispute resolution mechanisms on the proverbial altar of arbitration as a result of the agreement solely prescribing/limiting the avenues for dispute resolution.

Historically, arbitration rose to become a viable avenue for dispute resolution due to the speed, cost and privacy relative to litigation which continues to prove lengthy in most situations.

Commercial transactions and the business ecosystem as whole depend on certainty, hence arbitration has been the preferred method elected by transacting parties to resolve any related disputes.

However, with time arbitration has become an equally costly and lengthy process.

The following discourse wishes to raise key considerations for any person concluding any agreement vis-à-vis arbitration clauses.

As an extension of the well-founded principle of privity of contract; parties to an agreement are free to elect their preferred seat of arbitration (commonly referred to as the place of arbitration) as the exclusive forum to which disputes emanating from the agreement shall be referred.

In practice local agreements may elect Zimbabwe as the seat of arbitration and further note that the arbitration process shall be conducted in terms of the Arbitration Act [Chapter 7:15].

As is the prerogative of contracting parties; some agreements may elect different seat of arbitration, in particular transnational transactions, and common amongst preferred arbitral seats include the London Court of International Arbitration, the International Court of Arbitration in Paris and the Singapore Arbitration Centre.

Whichever seat of arbitration the parties choose to refer their dispute for resolution, parties should be cognisant of the modalities attached exercising recourse provided under the agreement.

These should include due consideration on the issue of costs, both in terms of referring a dispute for resolution as prescribed by an agreement and legal costs for representation.

Such consideration is imperative and averts situations where parties contract to resolving a matter through arbitration but are incapacitated to effect such contractual provisions owing to lack of financing.

Furthermore, parties should be alive to the fact that between the time of a dispute arising and when the dispute may be settled; either party may require interim relief pending such settlement.

Legal innovation has promoted mediation, which is largely informal, as a pre-emptive avenue to resolve disputes before resorting to either lengthy or costly processes which are now synonymous with arbitration regardless of the elected seat of arbitration.

Upon referring a matter to arbitration the default position in terms of the applicable law is aptly captured by the latin phrase Lex Fori  Lex Arbitri , which translates to the law of the place of arbitration is the applicable law.

Notwithstanding the fact that the clause may (and often does) state the applicable law, the rule of thumb particularly in transnational transactions provides as noted above, the law of the place of arbitration is the applicable law however this does not preclude an arbitral seat applying different laws as prescribed under the agreement.

An example includes an agreement could state any dispute arising should be dealt with in accordance with the LCIA rules where the arbitral seat is Zimbabwe. This again is consistent with the principle of privity of contract.

The clarity of the applicable law is desirable to avoid disputes devolving into further ancillary disputes on issues such as the seat of arbitration or more pertinently; the applicable law of the agreement.

While international arbitration may be governed by a plethora of rules including the UNCITRAL Arbitration Rules 2016 or the International Chamber of Commerce Rules; globally the arbitration laws have been transposed from the UN Model Law on Arbitration 1985.

Indeed the aforementioned model law was largely co-opted in Zimbabwean law and more aptly styled the Arbitration Act [Chapter 7:15].

Overall arbitration has historically changed the landscape vis-à-vis legal recourse upon disputes arising.

The preference and frequency with which parties to agreements continue to opt for arbitration as the preferred manner to resolve disputes in commercial transactions may have inadvertently led to an increase in the cost of opting for such recourse and increased delay in obtaining conclusive resolutions.

Nevertheless arbitration for a present a convenient way of resolving disputes in commercial matters. Parties should also be aware of the increased reliance to resolve disputes through mediation, though such determinations are not binding, before referring disputes to arbitration.

Knowledge of the arbitration/dispute resolution clause, and ancillary issues, is a key consideration before giving effect to the entire agreement.

Fungai Chimwamurombe is a registered legal practitioner and Senior Partner at Chimwamurombe Legal Practice and can be contacted for feedback at fungai@zenaslegalpractice.com and WhatsApp 0772 997 889. Leon Gona is an Associate and can be contacted on leon@zenaslegalpractice.com

 

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