30 September 2021 Written by 

Ethiopian Courts’ Stance on Pathological Arbitration Clauses

 

Introduction

 

Let alone in countries with less developed arbitration industries such as Ethiopia, pathological arbitration clauses are common in countries like the Switzerland, UK, Singapore, and France as well. As stated here, “[a]t least 30 percent of cases have a threshold dispute over arbitrability due to poor drafting of the arbitration clause”.

 

But how courts treat these defective arbitration clauses is different from jurisdiction to jurisdiction. Although it depends on the type and effect of the defect, some courts make the arbitration clause work despite the defect, others opt for the invalidation of the arbitration agreement.

 

While the defects in arbitration agreements are of many types, this article focuses on Ethiopia’s courts’ stance on defects related to the reference to a non-existing arbitral institution and arbitration rules. In so doing, this article discusses Ethiopia’s highest court’s decisions on two cases and then puts reflections on what the parameter should be.

 

The article is not a case comment; it rather tries to show how the changes in the law may affect future decisions. It also underscores that pathological clauses are not always invalid and tries to highlight laws and issues that must be considered while deciding on a case-by-case basis.

 

This article is a portion of a full-length article being written by the author.

 

  1. Ethiopian Courts’ Approach: Selected Cases

 

  1. Mekelle City Government Vs. Yotek Construction PLC (Federal Supreme Court Cassation Bench, File No. 128536, 2017)

 

On 26 June 2007, Mekelle City Government and Yotek Construction PLC entered into a building construction agreement. As usual, the construction agreement contains both General Conditions of Contract (GCC) and Special Conditions of Contract (SCC). The relevant part of the arbitration clause in the GCC reads as follows:

 

“25.2: A party aggrieved by the decision of the adjudicator may submit its claim to arbitrator within 28 days.

25.3: The Arbitration shall be conducted with the arbitration procedure published by the institution named and, in the place shown in the special condition of contract.” (Emphasized)

 

And, as per the reference made in Article 25.3 of the GCC, the SCC named the Ethiopian Chamber of Commerce and Sectoral Association (ECCSA) but it failed to state the place of arbitration.

 

When a dispute arose between the parties, Yotek Construction PLC instituted its claim to the ECCSA. However, the ECCSA did not provide arbitration services (at that time) and it did not have arbitration rules. The ECCSA, then, delegated the Arbitration Institute of the Addis Ababa Chamber of Commerce and Sectoral Association(AI-AACCSA).

 

One of the Respondent’s (Mekelle City Government’s) jurisdictional preliminary objections were related to the referral made by the ECCSA. Respondent submitted that the parties did not agree to submit their claims to the AI-ACCSA and there is no legal basis for the ECCSA to delegate AI-ACCSA. According to the respondent, firstly, the parties’ agreement is limited to the use of arbitration rules of ECCSA; they did not agree to institutional arbitration. Secondly, parties did not agree to AI-ACCSA and the ECCSA has no legal basis to delegate AI-ACCSA.

 

The Tribunal, without a detailed discussion, held that it has jurisdiction because parties have agreed to arbitrate, and rendered a final award.

 

Seeking a review for a basic error of law, the Respondent took the case to the Federal Supreme Court Cassation Bench (the Bench). With regard to this specific issue, the Bench held that parties did not choose an arbitral institution; they chose the applicable rules of arbitration and there is no legal basis for the ECCSA to delegate AI-ACCSA. Consequently, parties cannot be forced to submit their dispute to an arbitration institution that the parties did not agree to. Moreover, the Bench stated that parties can submit their disputes only to courts.

 

  1. Ethiopian Shipping and Logistics Service Enterprise Vs. DMC Construction PLC (Federal Supreme Court Cassation Bench, File No. 80722, 2013)

 

Article 67 of the construction agreement signed by the parties contains a long dispute settlement clause. But the relevant part, for this discussion, reads as follows:

 

“All disputes or differences in respect of which the decision, if any of the Engineer has not become final and binding as aforesaid shall be finally settled by MoWUD or his Authorized Representative. The decision of the Ministry or his Authorized Representative shall be final and binding.” (Emphasis added).

 

The clause, as can be seen from above, does not contain a direct reference to arbitration. It only states that it shall be finally settled by the Ministry of Works and Urban Development (MoWUD) or any other authorized by MoWUD,  and the decision will be final, and binding.

 

However, the discussion here is not on whether the dispute settlement can be characterized as arbitration or not. The focus of this article is, and the parties’ argument was, based on the fact that the MoWUD was no longer providing an arbitration service when the dispute arose.

 

DMC Construction PLC requested the Federal First Instance Court to refer the case to an arbitral tribunal with jurisdiction. The Respondent, on the other hand, argued that the matter cannot be settled through arbitration as the selected institution no longer provides the service, and parties have not agreed for a substitute.

 

The Federal First Instance Court applied Article 3336(1) of the Ethiopian Civil Code by analogy and held that parties should arbitrate through a tribunal to be constituted through the court. And following an appeal to the Federal High Court, the Federal High Court rejected the appeal.

 

Respondent took the case to the Bench. Finally, the Bench held that parties cannot be forced to arbitrate and can go to courts.

 

In both decisions, the Bench is of the opinion that the arbitration clause’s reference to a non-existing institution or rules makes the arbitration clause invalid, and parties can only resort to courts.

 

  1. Reflections

 

Interpretation of law rendered by the Cassation Bench of the Federal Supreme Court with not less than five judges is binding from the date the decision is rendered (Article 10(2) of the Federal Courts Proclamation No. 1234/2021). As a result, the interpretations in the above two cases are binding upon all courts. However, due to changes in the law and the approach adopted by the new law, the Bench should not take the previous approach for granted and must decide on a case-by-case basis.

 

Previously, the Bench’s restrictive interpretation emanated from the restrictive approach adopted by the Civil Code. The Civil Code contains provisions that oblige tribunals and courts to interpret the arbitration clauses narrowly. Article 3329 of the Civil Code states that “[t]he provisions of the arbitral submission relating to the jurisdictions of the arbitrators shall be interpreted restrictively”. 

 

Moreover, article 3337(1) of the Civil Code avers that the arbitral submission shall lapse if the named arbitrator (in the arbitration clause) is dead or became incapable and parties could not agree on the replacement.

 

These two provisions were the basis for the Bench to decide in favor of invalidation. Article 3337(1), especially, was interpreted by analogy to mean that if a named institution or a rule does not exist or ceases to operate and if parties fail to agree on its replacement, then the arbitration clause shall lapse.

 

These provisions, however, do not exist in today’s Ethiopia. The above provisions are expressly repealed by the recent Arbitration and Conciliation Working Procedure Proclamation No. 1237/2021 (the Arbitration Proclamation). As a result, the parameter from now on should be the provisions of the Arbitration and Conciliation Working Procedure Proclamation, the Civil Code (if the applicable substantive law is Ethiopian law), and the New York Convention.

 

The Civil Code provides the rules of contract interpretation. The Arbitration Proclamation and the New York Convention, on the other hand, provide guidance on enforceable arbitration agreements and arbitral awards.

 

As stated in Article II of the New York Convention and Article 8 of the Arbitration Proclamation, courts should recognize arbitration agreements made in writing and must refer the parties to arbitration unless they find the arbitration agreement to be null and void, inoperative, or incapable of being performed.

 

Further, Article V of the New York Convention and Article 26(1)(a), 50(2)(b), & 52(2)(a) state interim measures and awards made from an invalid arbitration agreement may not be enforced and/or may be set aside.

 

Deciding on Validity of the Agreement

 

Before the arbitration commences, both an arbitration tribunal and the courts are entrusted with examining the validity of an arbitration agreement. The principle of competence-competence is recognized by the Arbitration Proclamation (art. 19), hence, the tribunal can decide if it has jurisdiction over the case by examining the existence of a valid agreement. The court is also entrusted with the power of examining the validity of the agreement in deciding whether to refer the case to arbitration or not (art. 8). But, if the case is being seen once an award or an interim measure is rendered, then it is the court that has the jurisdiction to determine if the award was made based on a valid arbitration agreement.

 

Thus, the court, if it is the one deciding on the validity of the agreement, examines the validity of the agreement based on the applicable law. Assuming that the applicable law is the Ethiopian law, the court shall decide based on the rules of interpretation envisaged in articles 1732-1739 of the contract law.

 

Regard must also be given to the purpose of the recently enacted arbitration-related laws. Recently, Ethiopia enacted laws that promote arbitration with the purpose of facilitating trade and investment. To comply with the purpose of the law, the interpretation of the arbitration agreement should be made in a way it becomes effective unless the defect is incurable.

 

The above cases, for instance, may be cured by allowing the parties to go to an ad hoc arbitration as far as it can be ascertained that they had a clear intention to arbitrate. But, the absence of chosen arbitral seat in the first case and the dispute that may arise on the characterization of the dispute resolution by MoWUD as arbitration in the second case pose their own problems.

 

To conclude, the arbitration provisions of the Civil Code encouraged a restrictive approach and consequently, the Bench invalidated arbitration agreements that refer to a non-existing institution or institutional rule. The recent laws, however, seem to be pro-arbitration although there are things that must be tested through cases. Hence, courts shall give meaning that renders pathological clauses effective as far as the defect can be severed and the consent to arbitrate is clear.

 

 

Last modified on Thursday, 30 September 2021 17:02
Gidey Belay Assefa

The blogger studied masters in commercial laws and currently working as an associate attorney at ALG LLP and Zee Law Office. He has served as a full-time lecturer of law at Aksum University and a part-time lecturer at Addis Ababa University. His areas of interest include commercial and investment arbitration, taxation, and intellectual property laws.