Investors are currently negotiating with the government of Ethiopia to establish acceptable dispute resolution procedures to govern disputes that might arise in the context of the significant infrastructure (and other) investments they are making in the country. We considered some of the background to these discussions in Part 1 of this blog.
To ensure an independent process and an enforceable arbitration award, investors need to carefully consider where the arbitration should take place. The place, or legal ‘seat’, of the arbitration determines two critical aspects: the nationality of the arbitral award, and therefore its enforceability in the various countries where the assets of the parties are situated, and which country’s arbitration laws will be the fallback if the agreed arbitration rules are silent on a particular procedural issue.
Here investors would do well to recognise that the physical location of the hearings can be separated from the legal seat, so it is possible for hearings to take place in Addis Ababa, with the parties agreeing that another jurisdiction, with a developed and tested arbitration law, will be the legal seat of the arbitration. This could go a long way to giving the Ethiopian government comfort that the costs of the hearings will be reduced.
Then comes the critical question of deciding which jurisdiction will be the legal seat. Investors need to consider two things:
- What rules will govern the arbitration process? Under institution-administered processes like the LCIA or ICC the arbitration process is managed by an independent, internationally recognised, and experienced arbitral body, and each institution has its own set of detailed procedural rules. In comparison, an ad hoc arbitral process, such as under the UNCITRAL Arbitration Rules, whilst giving the parties the flexibility to tailor the process to suit their needs, is less prescriptive and can therefore hamper the efficient conduct of the arbitration if one party is uncooperative. In these circumstances, the other party will want to be able to seek support from the national courts and arbitration laws of the country which is the legal seat to give directions and, effectively fill in the gaps. This is partly why recognised international arbitration centres such as London, Paris or New York are commonly seen in arbitration agreements. If the legal seat is not in a recognised centre, a compromise for investors may be to select the more prescriptive LCIA or ICC rules to the govern the arbitration.
- Will arbitral awards with that nationality be enforceable in Ethiopia? If Ethiopia were party to the New York Convention, having the legal seat in any other contracting state would give comfort that arbitral awards would be enforceable in Ethiopia. However, since it is not, investors need to find this comfort in another way. The biggest factor which will determine enforceability in Ethiopia is whether Ethiopia and the relevant state have an agreement for mutual recognition of court and arbitral awards. Ethiopia has entered into one such treaty, with Djibouti for the mutual enforcement of court judgments. This raises the possibility of choosing Djibouti as the legal seat of arbitration.
Having Djibouti as the legal seat of arbitration has two advantages. Firstly, there is a greater prospect that a Djiboutian arbitral award, if it is confirmed and ‘judicially recognised’ by a Djibouti court, will be enforced in Ethiopia, due to the treaty. Secondly, Djibouti is a party to the New York Convention, so Djibouti arbitral awards are enforceable in other New York Convention states. This takes us back again to the question of rules: Given that the international investment community has less experience with Djiboutian arbitration rules and court processes, they would likely prefer to choose a comprehensive set of institution-administered rules to govern the procedure, such as ICC or LCIA, if the seat is Djibouti.
Given the above considerations, investors in Ethiopia are faced with two options for the legal seat and rules of arbitration:
Option 1: The legal seat is Djibouti, where enforcement concerns may be mitigated by the existence of the mutual enforcement treaty (which should be verified by local law advice at the time of negotiating), and the applicable rules are ICC or LCIA.
Option 2: The legal seat is an international arbitration centre such as London, Paris, or New York, where the more light touch UNCITRAL rules will be acceptable. However, investors would have to find comfort on some other basis that arbitral awards would be enforced in Ethiopia (or that there are assets outside of Ethiopia which may be enforced against). This may come through the political pressure international lenders and DFIs could exert on the government at the time.