Data

Date:: 00-08-1999
Country:: Arbitral Award
Number:: 9759
Court:: ICC International Court of Arbitration 9759
Parties:: Unknown

Keywords

ARBITRATION AGREEMENT - BETWEEN A FINANCIAL INSTITUTION BASED IN A EUROPEAN COUNTRY AND A COMPANY BASED IN A SOUTHWEST ASIAN COUNTRY

ARBITRATION AGREEMENT – TO BE INTERPRETED SO AS TO GIVE EFFECT TO IT RATHER THAN TO DEPRIVE IT OF ANY EFFECT (ARTICLE 4.5 OF THE UNIDROIT PRINCIPLES).

Abstract

Claimant, a financial institution based in a European country, and Defendant No. 1, a company based in a Southwest Asian country, entered into a credit agreement which was guaranteed by Defendant No. 2, another company based in the same South West Asian country. When Defendant No. 1 failed to make the due repayments, Claimant commenced arbitration proceedings against Defendants No. 1 and No. 2.

Claimant invoked a clause contained in the credit agreement entitled “Law and jurisdiction” and stating that the credit agreement was governed by the law of country X and any disputes arising out of the contract that could not be settled by mutual agreement were to be “submitted to the International Chamber of Commerce for settlement under their rules and regulations in Paris”. According to Defendants No.1 and No. 2 the clause in question did not represent a valid arbitration agreement since arbitration was not expressly mentioned therein and also the reference to the ICC rules and regulations was ambiguous on account of the fact that the rules in question make provision for two alternative means of dispute resolution, i.e. arbitration and conciliation.

The Arbitral Tribunal decided in favour of Claimant. According to the Arbitral Tribunal in interpreting the contract clause in question it had to look for the parties’ real intent, taking into account inter alia the consequences which they had reasonably contemplated, and to give effect to such intent. Such an approach was in accordance not only with no further specified “principles of interpretation of an arbitration agreement” but also with the UNIDROIT Principles and to this effect the Arbitral Tribunal expressly referred not only to Article 4.5 which states that contract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect, but also to Article 1.6(2).

Fulltext

[Defendant No. 1]’s position

[Defendant No. 1] contends that (i) there exists no arbitration agreement under the provisions of the Credit Agreement and (ii) alternatively, such arbitration clause is invalid under the rules and practices of international arbitration.

[Defendant No.1] contends that the Credit Agreement contains no arbitration agreement since no reference to arbitration as a mode of settlement is made under article 14.2 of the Credit Agreement. Furthermore, the reference to the ICC Rules and Regulations is not a sufficient indication since it does not specify what exact mechanism of settlement of disputes within ICC is referred to: no guidance was given as to which of conciliation or arbitration mechanism had been agreed upon...

[Defendant No. 1] further refers to legal authors who indicate that a clear expression of intent, not only to arbitrate but also to have the arbitration take place under the ICC Rules, is required. [Defendant No. 1] also refers to the ICC Model Clause and to article II of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards to conclude that article 14.2 contains no express reference to arbitration as a mode of settlement of disputes...

[Defendant No. 1] adds that, contrary to Claimant’s allegations, there exists no common will of the parties for arbitration under the provisions of the Credit Agreement since “there is no explicit or even implicit expression by the parties of their consent on that issue”. . . It contends that the parties’ consent should have been given in writing and that the wording should have been precise and exact on the real intention of the parties, i.e. no ambiguity and no doubt about the parties’ intention. It concludes that article 14.2 does not respond to any of these requirements and no provision of article 14.2 leads to the conclusion that the real intention of the parties was to solve their dispute byway of arbitration...

[Defendant No. 1] adds that it is to [Claimant] to prove the existence of an arbitration agreement and to demonstrate that the proper interpretation to be given to the provisions of said article 14.2 is such that it should be deemed to establish the common will of the parties to arbitrate... [Defendant No. i] contends that, in the instant case, there is no fact, even prima facie evidence, that it could operate in a way to suggest a reversal of the burden of proof...
Alternatively, should the Tribunal decide to interpret the provisions of article 14.2 of the Credit Agreement as constituting an arbitration agreement,
[Defendant No. 1] contends that article 14 of the Credit Agreement contains pathological elements:
- an ambiguity results from the fact that it is not specified whether the dispute shall be settled by ICC Rules of Conciliation or Arbitration;
- while article 14.2 provides for the submission of any dispute between the parties to the ICC, article 14.3 reserves the right of [Claimant] to start any legal proceeding for the protection of its right in the courts of [country Y];
- tile parties have combined submission of their dispute to the ICC and to a state jurisdiction. Article 15(1) (5) of the Credit Agreement provides that said Agreement once signed “shall constitute legally valid and binding obligations, and that if necessary the Bank [[Claimant]] could enforce judicially the said obligation in [country Y]”...

[Defendant No. 1] contends that, in view of this ambiguity, judicial proceedings should prevail as an incontestable proceeding left for the parties to settle their dispute. It further refers to the legal opinion dated . . . whereby judicial proceeding should be considered as the main way of resolving disputes provided by the parties...

[Defendant No. 2]’s position:

[Defendant No. 2] contends that article 14.2 does not constitute an arbitration agreement, and alternatively that there exists no valid arbitration agreement capable of extension:

- on the burden of proof:

[Defendant No. 2] claims on the basis of a principle recently reconfirmed by an ICC Arbitral Tribunal sitting in Zurich, that the burden of proof “for the scope and reach of an arbitration clause is incumbent on the party which intends to rely on it (here: on Claimant)”. Claimant has not discharged its burden of proof according to [Defendant No. 2]

[Defendant No. 2] alleges that article 14.2 of the Credit Agreement “does not refer at all to arbitration as a mode of settlement”, and since there exist two mechanisms of settlement of disputes at the ICC, i.e. conciliation and arbitration, article 14.2 of the Credit Agreement does not provide a clear guidance as to what mechanism is referred to...

[Defendant No.2] contends that [Claimant] has failed to discharge its burden of proof as to the validity of the arbitration agreement and that its reasoning is based on a chain of wrong assumptions and confusions since it confuses two mechanisms of settlement of disputes, i.e. direct negotiation, on the one hand, and conciliation, which requires the intervention of a third person, on the other hand. [Claimant] thus allegedly implicitly admits that article 14.2 provides for conciliation as a referral of settlement of disputes...
Finally, [Defendant No.2] contends that [Claimant] ignores article 14.3 of the Credit Agreement which provides for the jurisdiction for [the courts of country Y] while giving “no explanation of how its interpretation could be reconciled with the express wording of article 14.3”...

- on the arbitration agreement:

[Defendant No. 2] maintains that article 14.2 lacks the fundamental elements of an arbitration agreement, i.e. the intention to arbitrate the dispute, since in the absence of such an intention “no valid and binding agreement comes into existence”. [Defendant No. 2] refers to Craig, Park and Paulsson in their Commentary on the ICC Arbitration Rules stating that “if the parties want arbitration, they should say so clearly” (Part II, p. 90), and contends that the word “arbitration” appears neither in the title, nor in the wording of article 14.2, nor anywhere else in the Credit Agreement. It adds that “the absence of any reference to arbitration as the mode of settlement of dispute is not at all remedied by the fact that article 14.2 provides that the dispute ‘will be submitted to the International Chamber of Commerce for settlement under their rules and regulations, in Paris” since the ICC is engaged in settlement of disputes by conciliation as well as by arbitration, as demonstrated by the existence of two separate sets of rules, and accordingly any inference in favour of arbitration is absolutely impossible...

It adds that, when compared with tile ICC Model Clause, the absence of the words “arbitration” and “finally” is “of paramount importance as they affect the validity of article 14.2 as an arbitration agreement and its binding character”...

[Defendant No. 2] further contends that, according to the rules of interpretation of both Unidroit principles and French scholars, an ambiguous clause has to be interpreted against the drafter, i.e. against [Claimant]
Moreover, [Defendant No.2] contends that the wording of article 15.1.5 of the Credit Agreement, which provides only” [...] that if necessary the Bank could enforce judicially the said obligations in [country Y] “, shows the parties’ intention of no settlement other than a judicial one in [country Y]...

[Claimant]’s position:

[Claimant] contends that, in article 14.2, the parties “intended to solve their dispute by mutual agreement in order to avoid litigation. Should mutual agreement not be possible, (either reached by direct negotiation between the parties, or by conciliation by a third person), the clause foresees a solution which is compulsive for the parties, that is, it conclusively resolves a dispute arisen. Such method is arbitration.”... It alleges that [Defendant No. 1] and
[Defendant No.2] ‘s interpretation, i.e. converting this clause into a conciliation clause, negotiation or any other alternative method, would only tend to “perpetuate the actual situation, that is their non payment of the outstanding amounts”...

Accordingly, the only possible method in order to solve the dispute in an ICC Rules frame which would be final and compulsory for the parties is arbitration...

As to the rules of interpretation (Unidroit principles and jurisprudence and legal scholars) mentioned by [Defendant No. 2] in order to interpret article 14.2, [Claimant] alleges that should the Contract be interpreted as being of an onerous character, the doubt should be resolved in favour of the reciprocity of interest. In this case, reciprocal interest of all parties were best protected in an international arena, avoiding a party being involved in a litigation in tile territory of the other party...

Additionally, [Claimant] alleges that should the parties have intended to submit their litigation to [the courts of country X or country Y], they would have stated so clearly: on the contrary, article 14.3 reserves only to [Claimant] the right to claim before [a court of country Y]. Besides, should the parties have intended to solve their disputes before [the courts of country Y], they would have selected [tile law of country Y] instead of [the law of country X] in the Credit Agreement and would have expressly so provided in tile Letter of Guarantee instead of only referring to the terms and conditions of the Credit Agreement...

Discussion of the Arbitral Tribunal:

The Tribunal notes that article 14.2 of the Credit Agreement provides that the “parties to the Agreement” were to submit their dispute “to the International Chamber of Commerce for settlement under their Rules and Regulations, in Paris”. Accordingly, it is clear to the Tribunal that the parties’ will, failing a settlement by mutual consent, was that the dispute be settled before the ICC according to the “Rules and Regulations” of the ICC.
The Tribunal also notes that the terms “arbitration” or “arbitrator” or ‘Arbitral Tribunal” are not set forth under article 14 “Law and Jurisdiction” of the Credit Agreement. However, the Tribunal considers that arbitration agreements which do not include the word “arbitration” may still be deemed as constituting an arbitration agreement if the interpretation of the Contract shows that such was the parties’ intent.

The Tribunal further notes that the principles of interpretation of an arbitration agreement lead the Tribunal (i) to look for the parties’ real intent, taking inter alia into account the consequences which they have reasonably and legitimately contemplated, and (ii) to give effect to the parties’ intent. This approach falls in line with the Unidroit Principles on International Contracts, article 4.5 of which providing that “[c]ontract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect”. Applying a similar reasoning, article 1.6(2) of Unidroit Principles states that “[i]ssues within the scope of these Principles but not expressly settled by them are as for as possible to be settled in accordance with their underlying general principles”. There are several ICC awards which have decided that the appreciation of the validity and effectiveness of an arbitration agreement goes beyond the requirements of a strict literal interpretation. On the contrary when the parties insert an arbitration agreement in their contract, one should presume that their intent was to establish an effective machinery for the settlement of disputes contemplated in the arbitration clause (see inter alia ICC award no. 2321 rendered in 1974 in JDI 1975, p. 938; award rendered in ICC case no. 1434 in 1975 in JDI 1976, p. 978 and award rendered in ICC case no. 5103 in 1988 in JDI 1988, p. 1206).

In the present case, [Claimant], a party [from country X], executed the Credit Agreement with [Defendant No. 1], a party [from country Y], for the purpose of financing an international project in [country Y]. Both the Bank ([Claimant]) and the Borrower ([Defendant No. 1]) were perfectly aware of the importance of ICC for the settlement of disputes and of the fact that should their dispute be submitted to the ICC for settlement under its “Rules and Regulations”, the normal process of settlement is then arbitration under the Rules of Arbitration.

As to the alternative mentioned by Respondents between conciliation and arbitration, the Tribunal confirms that the normal procedure of settlement of dispute is arbitration. A survey of ICC’s practice clearly shows that arbitration is by for the prevailing method of settlement before the ICC: in 1997, there were 452 arbitration cases, as compared with 8 conciliations (433 arbitrations in 1996, as compared with ii conciliations). (See ICC International Court of Arbitration Bulletin, May1997, p.6 and May 1998, p. 4,) Accordingly, on the basis of the principle of effectiveness, article 14.2 can only be construed as referring to arbitration. Furthermore, conciliation, even as considered as prerequisite to arbitration, requires the consent of all parties. By filing a request for arbitration, [Claimant], as Claimant, is deemed to have renounced any preliminary step for conciliation. Defendants have pointed out the apparent contradiction between article 14.2 of the Credit Agreement [the arbitration agreement] and its articles 14.3 and 15.1.5. Article 14.3 provides that “the Bank ([Claimant]) reserves the right to start in the courts of [country Y], any legal proceeding that maybe required for tile protection of its rights”, thus enunciating clearly the parties’ intent to leave open an option to the Claimant only (i.e. [Claimant]) between the recourse to arbitration or to the state jurisdictions. Article 15.1.5 (“[...] if necessary the Bank could enforce judicially the said obligations in [country Y]”) emphasizes a similar intent of the parties to also leave such an option open. Accordingly, the Tribunal’s decision is that the parties’ intention was that their dispute be settled through arbitration under ICC Rules of Arbitration.’}}

Source

Excerpts of the award published in
ICC International Court of Arbitration Bulletin, Vol. 12, No. 2 (Fall 2001), 84-88.}}