The importance of clearly and properly drafted arbitration clauses in sale contracts is obvious: the parties need to know where to go and how to resolve problems if things go wrong. Arbitration clauses may be expressed in a variety of ways and with different degrees of particularity. Identification of the place where the arbitration will be located in case a dispute arises between the parties under the contract, i.e. the "seat" of the arbitration, is one of the most important features of arbitration clauses. The selection of a "seat" will determine which country's laws will govern the arbitration process and also the extent of any right of a party to challenge the Arbitral Award in Court.
One would expect that parties would expressly set out in their contract the selection of the place where any dispute were to be heard and not leave open the possibility of more than one place in different countries exercising jurisdiction over any dispute arising out of the contract. However, it is not uncommon that parties agree to incorporate into their contract an arbitration clause which does not provide for an exclusive "seat" of arbitration. Is this however good practice? Does it provide the necessary safety to the claimant on the choice of the place to hear any dispute or leave the door open to the respondent to challenge any such choice by the claimant?
ANEC ARBITRATION CLAUSE
A good example of such non-exclusive choice of the "seat" of arbitration is found in the standard contracts of the National Association of Grain Exporters of Brazil, the ANEC contracts, which are widely used in the international trade of Brazilian origin agricultural products by way of incorporation into the relevant sale contracts. The arbitration clause (16) in the ANEC contracts reads: -
ARBITRATION CLAUSE :
A) To be as per Federation of Oils, Seeds and Fats Associations Ltd. - FOSFA Rules which Buyer and Seller hereby expressly accept and admit full notice and knowledge. Or,
B) To be in accordance with Brazilian Law no. 9307/96 and through "Associação Brasileira de Arbitragem – ABAR, Chamber of Arbitration in São Paulo, Brazil". Execution of arbitration awards shall be handled through the Central Forum of the City of São Paulo, if necessary. Buyer and Seller formally declare their full notice and knowledge to the terms herein stated.
The intention, clearly, is that the parties should (at the time of the making of the contract) chose (A) or (B). In practice, most forget to do so.
FOSFA IN LONDON OR ABAR IN SÃO PAULO?
The ANEC arbitration clause has caused and is causing some difficulties to claimants who wish to bring before a FOSFA tribunal a dispute arising out of or in connection with a sale contract incorporating the ANEC standard contract and thus the above arbitration clause. Would FOSFA have the substantial jurisdiction over such dispute or should ABAR in São Paulo be the appropriate place to hear the dispute? The wording of the ANEC arbitration clause may give the opportunity to the respondent party to challenge the jurisdiction of the place in which the claimant party has brought its claim. Often, when a claimant has chosen to refer the dispute to the FOSFA jurisdiction, a respondent will seek to discontinue such proceedings by raising as a defence a challenge to the FOSFA jurisdiction and seeking to bring the dispute in Brazil on the grounds that there is a link with Brazil (usual arguments are that the respondent is a Brazilian based company and/or the contractual goods are of Brazilian origin and therefore there is closer connection with Brazil rather than England).
These challenges to jurisdiction generally delay the merits of the case and are costly in terms of legal and arbitration fees.
Resolution of Challenge to Jurisdiction?
The ANEC contracts typically incorporate the terms and conditions of FOSFA standard contracts to the extent that the latter are not in contradiction with the ANEC terms. As a result of such incorporation, the governing law is the English law. The FOSFA Arbitrators will therefore apply English law rules to determine whether they have the substantial jurisdiction to hear any dispute under the sale contract.
Under English law, it is unlikely that the challenge to FOSFA jurisdiction will be successful for the following reasons: -
- The claimant generally has the right to choose where it litigates within the identified jurisdictions. The test as to whether the Court or the Arbitral Tribunal should interfere with the claimant's general right is whether the claimant is guilty of or has threatened conduct which is in breach of any right enjoyed by the respondent or is otherwise unconscionable, vexatious or oppressive. This is in practice very unusual.
- The fact that the parties have agreed in their sale contract that a neutral foreign forum, such as an Arbitral Tribunal in England, shall have jurisdiction (albeit non-exclusive jurisdiction) creates a strong case that the jurisdiction is an appropriate one; it should be in principle a jurisdiction to which neither party to the contract can object as inappropriate; they have both agreed that it is appropriate.
- Where an English court/tribunal is the identified non-exclusive forum, the English court/tribunal will not necessarily choose itself as the appropriate forum, but will apply the necessary considerations in order to determine whether it is indeed the most natural and appropriate forum to hear the disputed issues, such as the wording of the arbitration clause (eg. FOSFA Rules are incorporated into the ANEC contract) and other terms in the contract (eg. English law agreed to be the applicable law), as well as the conduct of the claimant.
It is important that the parties to a sale contract are clear about the selection of the place/arbitral body in which they want any dispute to be resolved under their contract. A non-exclusive choice of the "seat" of arbitration is best avoided, as it gives the opportunity to the respondent party to seek to displace or escape from the forum chosen by the claimant. A non-exclusive choice of the "seat" of arbitration is easier to challenge than an exclusive choice. To avoid arguments with the respondent party, delay, and costly proceedings to resolve the matter, certainty and clear wording on the choice of the "seat" of arbitration is essential. In cases where the ANEC standard contract is incorporated into the sale contract, parties should specify in their contract which sub-clause of the ANEC arbitration clause is to be incorporated.