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Maritime Arbitration. Typical Mistakes of the Parties that Complicate the Proceedings: the Choice of Applicable Law and the Procedure for Concluding a Contract

Today we invite you to consider the difficulties that are regularly encountered in the conduct of maritime arbitration. These complexities can be avoided by understanding the nature of arbitration.

Let's look at the mistakes:

  • arising in the choice of applicable law,
  • in the course of the conclusion of the contract.

1. Law applicable to the maritime contract

Maritime contracts, such as charters, bills of lading, and marine insurance contracts, usually contain a clear clause about jurisdiction and applicable law. However, sometimes the parties do not specify the applicable law, or include an inconsistent clause, or do not consider restrictions on the choice of applicable law.

Typical mistakes of the parties when concluding a maritime contract:

  • Lack of choice of applicable law,
  • The choice of the law of different countries in different parts of the contract,
  • Ignoring the restrictions on the choice of law contained in national legislation or in an international treaty.

In the event of a dispute between the parties, how will the arbitrators determine the applicable law?

According to English practice, usually the arbitrators choose the law of the place that the parties have chosen as the place to hear the dispute (the jurisdiction of the dispute). Thus, if, for example, a bill of lading provides for jurisdiction in the country of the carrier's principal place of business, it will usually also provide for the application of the law of that country. The point is that arbitrators feel more comfortable to make an award based on the law with which they are familiar.

Applying the law of the place of jurisdiction is faster and cheaper than foreign law. Thus, a direct choice of jurisdiction may also indicate the choice of the applicable law by the parties, if the parties have not stipulated the application of the law of another country.

In Russia, arbitrators tend to take a similar approach, for the same reasons. However, in both English and Russian practice, arbitrators can immerse themselves in the study of conflict of laws rules, which in turn can lead the parties to unpredictable consequences.

In 2019, the Supreme Court of Russia noted that “the choice by the parties of a competent court or place for international commercial arbitration does not in itself mean the choice of the substantive law of the same state as applicable to disputed legal relations. The absence of an expression of will of the parties regarding the applicable law means that it is determined by the competent court or arbitration tribunal on the basis of applicable conflict of laws rules@. (see paragraph 27 of the Resolution of the Plenum of the Supreme Court of the Russian Federation of 9 July 2019 N 24 "On the application of the norms of private international law by the courts of the Russian Federation").

To determine the applicable law, arbitrators may refer to the conflict of law rules of the place of arbitration or international treaties, such as:

- Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (“Rome I”), or

- Convention on the Law Applicable to Contracts for the International Sale of Goods, The Hague, 22 December 1986.

Most often, the parties do not study conflict rules when concluding an agreement, and even more so do not study international treaties that determine the choice of law, so the choice of applicable law after the conclusion of an agreement may come as a surprise to everyone.

Subsequently, in arbitral proceedings, when proving their position, the parties often pay very little attention to the issue of proving the choice of applicable law. Apparently, the parties assume that the arbitrators will independently study the conflict of laws rules and argue the choice of the applicable law.

However, the problem is that the arbitrator does not have the right to argue for the party's position. Such behavior leads to the loss of neutrality and independence of the arbitrator, the main principles of arbitration. In the case of a rigid position regarding his neutrality, the arbitrator will choose what is closer to him, without taking into account the poorly reasoned position of the party.

Thus, if the parties want to simplify their lives, then it is necessary to choose the applicable law and check if there are any contradictions within the contract (appendices to it), if there are any restrictions on the choice of applicable law.

If at the conclusion of the contract the choice of the applicable law did not take place or it is contradictory, then the attorney should prepare his argument as deeply as if it had completely become part of the motives of the arbitral award.

2. Procedure for concluding a contract

Often, when considering international disputes, the situation in choosing the applicable law is complicated by the fact that the parties enter into an agreement by exchanging messages by e-mail, ignoring elementary security rules.

Typical mistakes in the procedure for concluding contracts

Parties make the following typical mistakes:

  • exchange different texts of agreements without specifying which text is final,
  • the contracts do not define the e-mail addresses of persons authorized to conclude the contract, and if they are, then the signed contracts are sent from unknown e-mail addresses, addresses of third parties, secretaries, agents, from the employees financing the transaction,
  • texts of agreements are attached to empty letters without accompanying comments,
  • the parties exchange the last pages of contracts with signatures without the main text.

Such chaotic and hasty actions in the conclusion of contracts extremely complicate the work of arbitrators on the choice of the law applicable to the contract, and, accordingly, on the question of the validity of the contract.

Such actions complicate the work of representatives and lead to enormous legal costs for lawyers who are trying to prove what law the parties have chosen, to collect correspondence, testimonies in favor of the position of their principal.

These typical mistakes occur regardless of the nature and size of the deal. Even in very large disputes worth billions of dollars, such things occur. This is due to the psychology of relationships. At the stage of conclusion of the contract, the parties are in a relationship of trust, they are in a hurry to gain the benefits of the transaction, they rely on the fact that the status of the parties and the amount of the transaction can somehow guarantee the high-quality execution of the agreements.

However, over time, the rosy attitude changes. The key decision makers in companies change, the economic and political environment changes, the financial interests and capabilities of the parties to the contract change, and then disputes arise. These circumstances must be taken into account and minimize their risks when concluding an agreement.
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