Arbitration: the preferred means of resolving disputes between business partners in Uzbekistan

CMS Cameron McKenna’s Igor Sidelnikov looks at the crucial importance to Uzbekistan’s foreign investors of providing for an effective mechanism for resolving potential disputes between business partners and elucidates on the preferred variant.

How exactly a dispute may be settled is of particular importance in countries like Uzbekistan where, despite the tireless work of the country’s legislators, a basic legal framework is very much in the developmental stage. Many a misguided foreign investor has come to grief by assuming that the legal norms existing elsewhere in the world also exist here.

Therefore, the wise investor, seeking to avoid the reefs upon which grand designs may falter, sails warily into the uncharted waters of Uzbekistan’s investment law. This is done by continuously plumbing the depths in an effort to locate unlikely positioned rocks; and in practice, by the laborious business of seeking official clarifications on all points conceivably open to more than one interpretation (of which there are many) and only proceeding once official clearance has been granted from one or another of the organs of state power.

Nevertheless, even the most cautious foreign investor can still run into troubled waters, where a commercial dispute with a local partner may arise. To protect against this eventuality, the parties to any investment project need to ensure that they have taken this possibility into account, and have envisaged how such a dispute shall be settled in the event that they are unable to settle it among themselves. Disputes may be resolved in various ways.

Dispute resolution variants

Generally, disputes involving foreign investors may be considered either within the country that is receiving the investment, or outside that country. In either case, it is possible to apply to the relevant country’s courts, and/or to have a case considered through arbitration. The preferable course depends upon the circumstances of each investment.

In Uzbekistan, commercial disputes involving a foreign element can be considered at international arbitration, in the event that the parties have agreed to this effect, or by the country’s commercial courts, in the event that the parties have not.

Various reasons drive the type of mechanism chosen for settling potential disputes. For example, an investor may distrust the national courts of the host country; while, host parties may not believe that consideration of disputes abroad will be a reliable way to protect their interests, perhaps, due to a lack of relevant experience in such proceedings or a lack of skilled staff. Host parties may also deem such procedures to be extremely expensive; although, in Uzbekistan, claims to the commercial courts must be accompanied by an application fee equivalent to 10 per cent of the claim, which is not particularly cheap either.

International arbitration

In recent times, international arbitration has become recognised as the favoured means for resolving dispute situations; Uzbekistan’s legislation allows for the same; and, notwithstanding the different approaches of local and foreign parties, the vast majority of investment contracts in Uzbekistan include provisions envisaging international arbitration as the means for resolving investment disputes.

Where a dispute is to be heard overseas, arbitration is almost always the better choice, because, while foreign arbitral awards can be enforced in Uzbekistan under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, [see article headlined: “Positive precedent established as Uzbekistan’s legal system upholds foreign arbitration award”], no such bi-lateral treaties exist with western countries in relation to foreign court judgements.

Uzbekistan signed the New York Convention on 20 December 1995. Since, it has been obliged to recognise arbitral awards as binding, and to enforce them in accordance with domestic procedural legislation. Such procedural legislation, may not impose substantially more onerous conditions or higher fees or charges when recognising or enforcing international arbitral awards than exist for the recognition and enforcement of domestic arbitral awards.

Recognition of an arbitral award

At present, in the absence of other legislation, a resolution of the Presidium of the Uzbekistan’s Supreme Commercial Court, dated 28 March 1998, governs the procedure for the recognition of arbitral awards. This legislation provides for the party seeking to have an arbitral award enforced making an application to the commercial court in the region where the respondent resides, or where his or her property is located. The resolution also sets out the limited grounds upon which the commercial court can refuse to enforce a foreign arbitral award.

So far, the practice of recognising and enforcing foreign arbitral awards made under the New York Convention is undeveloped, and this, itself, hinders the growth of international investment in Uzbekistan. Negotiations with state authorities or state-owned companies of Uzbekistan, in practice, are always very difficult. This is because local parties invariably seek to envisage the competence of the local commercial courts in respect of the consideration of potential disputes, as well as seeking to envisage that local legislation be applied in all cases.

Another obstacle is the approach of the Ministry of Justice when it is registering founding agreements and charters of joint ventures. The ministry is very reluctant to give its consent to the possibility of arbitration proceedings being held. The same is true of other empowered state authorities. However, given that no relevant practice is present, even when an understanding has been attained, of how a dispute shall be settled, a foreign investor cannot be absolutely confident that a legitimate arbitral award shall be enforced within Uzbekistan without delay. Inertia in the apparatus of the state and court, a lack of the relevant experience, and simple bureaucratic procrastination may make the actual recognition and enforcement of the relevant award extremely difficult.

Positive precedent

Nevertheless, I believe that a positive development within the framework of the Uzbek court system is present. Uzbek legislators are known to regard positively the idea of developing commercial arbitration in Uzbekistan; and, naturally, foreign entrepreneurs in Uzbekistan hope that concrete development is possible in this direction. But more importantly, it is impossible to overvalue the positive meaning of the precedent set by the recent upholding by Uzbekistan’s courts, on the basis of the New York Convention, of an award made by a foreign arbitration proceedings. [See article alluded to above.] Until recently, as far as we are aware, such precedents existed in Uzbekistan only with respect to the court and arbitration authorities of CIS countries.

Therefore, while an enormous amount remains to be achieved, it is possible to say that another crucial stage has been passed on the road to establishing Uzbekistan’s legal system.