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Introduction to the New Arbitration Law in Azerbaijan

Introduction to the New Arbitration Law in Azerbaijan

Introduction to the New Arbitration Law in Azerbaijan

31.01.2024

General information

Azerbaijani Parliament adopted the new draft law “On Arbitration” in the third reading on 26 December 2023. It has been signed by the President of Azerbaijan on 25 January 2024 and has already entered into force (hereinafter referred to as the “New Arbitration Law” or simply the “Arbitration Law”). Consequently, the previous Law On “International Arbitration” dated 18 November 1999 ceased to have effect.   

The New Arbitration Law consists of 59 articles and 8 following chapters:

Chapter I – General Provisions;

Chapter II – Arbitration Agreement;

Chapter III – Composition of Arbitration Court (tribunal);

Chapter IV – Interim Measures;

Chapter V – Conduct of Arbitral Proceeding;

Chapter VI – Making of Award and Termination of Proceedings, Setting Aside of Arbitral Award;

Chapter VII – Recognition and Enforcement of Arbitral Awards;

Chapter VIII – Final Provisions.

This article mainly analyses general provisions of the New Arbitration Law (Chapter I).

 

Scope and definitions

It is important to note that the content of the New Arbitration Law is mainly based on the UNCITRAL Model Law on International Commercial Arbitration 1985 (with amendments as adopted in 2006) (hereinafter referred to as the “Model Law”). 

The following definitions are used in the Arbitration Law:

  1. “Arbitration” means, the process of hearing a dispute carried out for the purpose of making a legally binding decision by an arbitration court, regardless of whether or not administered by a permanent arbitral institution;

  2. Arbitration courtmeans, a sole arbitrator or a panel of arbitrators (although the meaning is similar to the definition used in Article 2(b) of the Model Law, the New Arbitration Law does not use the word “tribunal”, but instead uses the word “court” in Azerbaijani text);

  3. “Arbitration agreement” means, an agreement of the parties to submit to arbitration disputes (or part thereof) that arise or may arise between the parties, regardless of whether they arise from the contract or not; (this is also similar to the definition used in Article 7(1) of the Model Law which reads as follows: ““arbitration agreement” is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.”. The same wording is also used in Article II (1) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (hereinafter referred to as the “New York Convention”).

  4. International arbitration” has the meaning ascribed thereto in Article 4.3 of the Arbitration Law (it will be discussed later in this Article).

  5. Domestic arbitration” means an arbitration not related to the international arbitration.

  6. International arbitration court”, arbitration court which the place of arbitration is abroad;

  7. Domestic arbitration court”, arbitration court which the place of arbitration is in the Republic of Azerbaijan;

  8. Electronic information” means, “information created, sent, received or stored by electronic, magnetic, optical or similar means, including but not limited to electronic data interchange, electronic mail, telegram, telex or telefax”;

  9. Place of residence of a personmeans “the place where a natural person usually lives, and the place where the permanent body of a legal person is located”. The expression of “habitual residence” is used in the Model Law.

Interpretation of the New Arbitration Law (Article 3 thereof)

Where a provision of the Arbitration Law, except Article 48 (Rules applicable to substance of dispute), leaves the parties free to determine a certain issue, such freedom includes the right of the parties to authorize a third party, including an institution, to make that determination (identical to Article 2(d) of the Model Law).

Where a provision of the Arbitration Law refers to the fact that the parties have agreed or that they may agree or in any other way refers to an agreement of the parties, such agreement includes any arbitration rules referred to in that agreement (see Article 2(e) of the Model Law).

Where a provision of the Arbitration Law, other than in articles 44.1.1 (the claimant fails to communicate his statement of claim as a result of which, the arbitral tribunal terminates the proceedings) and 52.2.1 (when the claimant withdraws his claim), refers to a claim, it also applies to a counter-claim, and where it refers to a defence, it also applies to a defence to such counter-claim (see Article 2(f) of the Model Law).

Receipt of written communications

Any written communication is deemed to have been received if it is delivered to the addressee personally or if it is delivered at his place of business, habitual residence or mailing address. If none of these can be found after making a reasonable inquiry, a written communication is deemed to have been received if it is sent to the addressee’s last-known place of business, habitual residence or mailing address by registered letter or any other means which provides a record of the attempt to deliver it (Article 5.1.1 of the Arbitration Law; Article 3(1)(a) of the Model Law).

The communication is deemed to have been received on the day it is so delivered (Article 5.1.2 of the Arbitration Law; Article 3(1)(b) of the Model Law).

These provisions do not apply to communications in court proceedings (Article 5.3 of the Arbitration Law; Article 3(2) of the Model Law).

The parties may agree otherwise with respect to the receipt of written communications and calculation of periods of time (Article 5.4 of the Arbitration Law).

For the purpose of calculating a period of time under the Arbitration Law, such period shall begin to run on the day following the day when a notice is received. If the last day of such period is a non-business day, the period of time shall expire at the end of the first following business day.

 

International arbitration

The New Arbitration Law applies to international and domestic arbitration, the place of arbitration of which is Azerbaijan.

In accordance with Article 4.3 of the Arbitration Law, an arbitration is international if any of the following circumstances exist (the provisions are the same where the definition of the “international arbitration” is set out in Article 1(3) of the Model Law):

 

  • the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different states;
  • one of the following places is situated outside the state in which the parties have their places of business:
  • the place of arbitration is determined in, or pursuant to, the arbitration agreement;
  • any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject-matter of the dispute is most closely connected;
  • the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.

 

The following rules shall apply for the purposes of Article 4.3 of the Arbitration Law:

 

  • if a party has more than one place of business, the place of business is that which has the closest relationship to the arbitration agreement;
  • if a party does not have a place of business, reference is to be made to his habitual residence (place of a residence of a person).

 

Issues related to the subject-matter of the Arbitration Law, but not directly addressed therein, should be regulated in accordance with the general principles on which arbitration is based.

Relations with respect to the conduct of arbitral proceedings in the Alat Free Economic Zone (AFEZ) are regulated in accordance with the requirements of the Law on Alat Free Economic Zone, dated 18 May 2018.

 

Procedural issues in the Arbitration Law

The Arbitration Law does not only address substantive issues, but also procedural issues, specifically “Notice of arbitration” (Article 6 of the Arbitration Law) and “Response to the notice of arbitration” (Article 7 of the Arbitration Law). The referred provisions thereof are based on the respective articles of the UNCITRAL Arbitration Rules (2021) (hereinafter referred to as the “UNCITRAL Rules”).

In accordance with Articles 6.1 and 6.2 of the Arbitration Law, the party or parties initiating recourse to arbitration (the claimant) shall communicate to the other party or parties (the respondent) a notice of arbitration. Arbitral proceedings shall be deemed to commence on the date on which the notice of arbitration is received by the respondent (referred Articles are identical to the provisions of Articles 3(1) and (2) of the UNCITRAL Rules).

Moreover, Article 6.3 of the Arbitration Law is similar in content to Article 3(3) of the UNCITRAL Rules and both articles deal with the information to be included into the notice of arbitration.

Article 7.1 of the Arbitration Law sets out that “within 30 days of the receipt of the notice of arbitration, the respondent may communicate to the claimant a response to the notice of arbitration.

Article 4(1) of the UNCITRAL Rules uses the similar wording, except for the modal verb “may” and instead it uses “shall”.  

Article 8 of the Arbitration Law is identical to Article 4 (Waiver of right to object) of the Model Law which stipulates that “A party who knows that any provision of this Law from which the parties may derogate or any requirement under the arbitration agreement has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time-limit is provided therefor, within such period of time, shall be deemed to have waived his right to object.”

In Article 9 of the New Arbitration Law the same approach of the Model Law (Article 5) with respect to the “extent of court invention” has been accepted and it is stated that “In matters governed by [the Arbitration] Law, no court shall intervene except where so provided in [the Arbitration] Law.

 

Court for certain functions of arbitration assistance and supervision

  1. Commercial courts of Azerbaijan are competent to perform the following functions:
  1. Grant interim measures (Articles 18 and 34 of the Arbitration Law; Article 17(1) of the Model Law);
  2. Appoint an arbitrator, if parties fail to do so (Articles 20.3.1 and 20.3.2 of the Arbitration Law; Articles 11(3)(a) and (b) of the Model Law);
  3. Take the necessary measures with respect to appointment procedure, if (i) a party fails to act as required under the agreed procedure, or (ii) the parties, or two arbitrators, are unable to reach an agreement expected of them under the procedure, or (iii) a third party, including an institution, fails to perform any function entrusted to it under such procedure (Article 20.4 of the Arbitration Law; Article 11(4) of the Model Law); A decision on a matter entrusted by Articles 20.3 and 20.4 of the Arbitration Law to the court shall be subject to no appeal. The court, in appointing an arbitrator, shall have due regard to any qualifications required of the arbitrator by the agreement of the parties and to such considerations as are likely to secure the appointment of an independent and impartial arbitrator and, in the case of a sole or third arbitrator, shall take into account as well the advisability of appointing an arbitrator of a nationality other than those of the parties (Article 20.6 of the Arbitration Law; Article 11(5) of the Model Law).
  4. Decide on the challenge (which decision shall be subject to no appeal). If a challenge under any procedure (whether it is contractual or statutory) is not successful, the challenging party may request, within thirty days after having received notice of the decision rejecting the challenge, the court to decide on the challenge (Article 22.3 of the Arbitration Law; Article 13(3) of the Model Law).
  5. Decide on the termination of the mandate of an arbitrator. If an arbitrator becomes unable to perform his functions or for other reasons fails to act without undue delay, his mandate terminates if he withdraws from his office or if the parties agree on the termination. Otherwise, if a controversy remains concerning any of these grounds, any party may request the court to decide on the termination of the mandate, which decision shall be subject to no appeal (Article 23.1 of the Arbitration Law; Article 14(1) of the Model Law).
  6. Decide the matter related to jurisdiction of arbitral tribunal. The arbitral tribunal may rule on a plea (whether it has jurisdiction or not) either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court to decide the matter, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award (Article 25.3 of the Arbitration Law; Article 16(3) of the Model Law).
  7. Assist in taking evidence. The arbitral tribunal or a party with the approval of the arbitral tribunal may request from a competent court assistance in taking evidence. The court may execute the request within its competence and according to its rules on taking evidence (Article 46 of the Arbitration Law; Article 27 of the Model Law).
  8. Set aside an award. The court has no power to question the decision of the arbitral tribunal on the merits (Articles 54.2 and 54.6 of the Arbitration Law; Article 34(2) of the Model Law).
  9. Suspend the setting aside proceedings (Article 54.4 of the Arbitration Law; Article 34(4) of the Model Law).
  10. Ensure the mandatory enforcement of the domestic arbitral award (if an award-debtor does not timely execute the domestic arbitral award being in force and not set aside by the court) (Article 57.2 of the Arbitration Law).

If the place of arbitration is outside the territory of Azerbaijan or has not been determined, then the functions of the court with respect to Articles 18, 34 (granting interim measures) and 46 (assistance in taking evidence) of the Arbitration Law is performed by Baku Commercial Court.

In relation to an international arbitration, if the place of arbitration has not been determined and habitual residence or place of business of at least one party is located in Azerbaijan, upon agreement of the parties, the functions of the court stated in Articles 20.3.1 and 20.3.2 (appointment of an arbitrator),  20.4 (taking the necessary measures with respect to appointment procedure), 20.6; 22.3 (deciding on the challenge); and 23.1 (deciding on the termination of the mandate of an arbitrator) of the Arbitration Law is performed by Baku Commercial Court.

 

2. Baku Court of Appeal is competent to perform the following functions:
  • Recognition and enforcement of interim measure (Article 32 of the Arbitration Law; Article 17 H (1) of the Model Law). An interim measure issued by an arbitral tribunal shall be recognized as binding and, unless otherwise provided by the arbitral tribunal, enforced upon application to the competent court, irrespective of the country in which it was issued.
  • Refusing recognition or enforcement (Articles 33.1.1 and 33.1.2 of the Arbitration Law; Article 17 I (1) of the Model Law). The court where recognition or enforcement is sought shall not, in making that determination, undertake a review of the substance of the interim measure (Article 33.3 of the Arbitration Law; Article 17 I (2) second sentence of the Model Law).

 

 

3. The Supreme Court of the Republic of Azerbaijan is competent to perform the following functions:
  • Recognition and enforcement of arbitral awards (Article 55.1 of the Arbitration Law; Article 35(1) of the Model Law);
  • Refusing recognition and enforcement of arbitral awards (Article 56.1.1 and 56.1.2; Article 36(1) of the Model Law)
  • Suspension of the proceedings on recognition and enforcement of arbitral awards (Article 56.2 of the Arbitration Law; Article 36(2) of the Model Law).

 

The Supreme Court has no power to question the decision of the arbitral tribunal on the merits (Article 56.3 of the Arbitration Law).

 

Permanent arbitral institutions (Article 11 of the Arbitration Law)

The permanent arbitral institutions perform the functions of management of arbitration proceedings, organisational support of arbitration, including the appointment of arbitrators, challenge to the arbitrators, termination of the mandate of arbitrators, clerical works, arrangement of payment of arbitration fees and other arbitration costs, with the exception of the issues within the competence of arbitral tribunal connected with dispute resolution.  

A permanent arbitral institution is a non-commercial legal entity registered in the State Register and accredited by the Ministry of Justice of Azerbaijan. It is not allowed to establish permanent arbitral institutions by state bodies, municipalities, legal entities owned by the state and municipalities, public legal entities (exception: public legal entities with the mandate to protect the rights and legitimate interests of the entrepreneurs are entitled to establish permanent arbitral institutions if set out in the law), political parties, religious organisations, the Bar Association of Azerbaijan, the Chamber of Notaries and the Mediation Council.

During the accreditation of the permanent arbitral institutions, it must have the rules and the initial list of arbitrators, which includes at least 3 arbitrators. For accreditation purposes, the independence of the permanent arbitral institution, the organisation of its activities, the structural divisions, including the internal rules regulating the activities thereof, the existence of human and financial resources and the necessary infrastructure for the management of arbitration proceedings, existence of the documents on ethical behavior rules for employees, transparency and effective internal control are assessed.

 

Ad hoc arbitration (Article 12 of the Arbitration Law)

Ad hoc arbitration is arbitration that is not administered by a permanent arbitral institution. Ad hoc arbitration can only be arranged in relation to international arbitration.

 

Requirements in relation to the arbitrator in domestic arbitration

Individuals who meet the following criteria can be an arbitrator in accordance with Article 14.1 of the Arbitration Law:

 

  • Who is not interested in the outcome of the case (impartiality);
  • Who is independent of the parties (independence);
  • Who agrees to perform the functions of arbitrator;
  • Who is 25 years old;
  • Who has higher education;
  • Who has at least 3 years of work experience in his/her respective field.

 

In addition to the requirements set out above, a sole arbitrator must have a higher education in law. Unless otherwise agreed by the parties, the presiding arbitrator must have a higher education in law (when the case is resolved by panel of arbitrators).

 

Arbitrability

Both the New York Convention (Articles II (1) and V(2)(a)) and the Model Law (Articles 34(2)(b)(i) and 36(1)(b)(i)) are limited to disputes that are “capable of settlement by arbitration”. It is the discretion of each state to decide which matters may or may not be resolved by arbitration in the light of its policy (such as economic, political or social).

Article 13.1 of the Arbitration Law states that “commercial disputes, as well as all disputes in which the parties have the right of disposal [“jus disponendi”] in relation to the subject-matter of the dispute and do not affect the rights and legitimate interests of third parties, may be settled by arbitration.”

In Article 13.2, the Arbitration Law sets out which disputes are “capable of settlement by arbitration”:

 

  1. Cases related to criminal and administrative offenses;
  2. Cases arising out of administrative and other public relations;
  3. Disputes arising out of family relationships;
  4. Cases related to the legal status of a person;
  5. Employment disputes;
  6. Disputes in the area of environmental protection;
  7. Inheritance cases;
  8. Disputes related to determination of intellectual property rights and registration thereof;
  9. Disputes connected with competition law and protection of consumer rights, as well as consumer loans;
  10. Disputes related to right of ownership or other proprietary rights on the real estate located in Azerbaijan;
  11. Insolvency and bankruptcy cases;
  12. Cases related to the liquidation of a legal entity or annulment of its decisions (if the legal entity has a legal address (place of business) in Azerbaijan);
  13. Disputes to which natural persons are parties (if these disputes are not related to the business activity of natural persons);
  14. Cases in relation to claims against carriers arising out of contracts of carriage (Article 13.2.14 of the Arbitration Law);
  15. Disputes related to the lease of real estate located in the territory of Azerbaijan (Article 13.2.15 of the Arbitration Law).

 

The last two matters (cases specified in Articles 13.2.14 and 13.2.15 of the Arbitration Law may be resolved in a domestic arbitration).

 

Conclusion

In this article, I covered articles 1-15 of the Arbitration Law (Chapter I) and provided an introduction thereto. The provisions of the Arbitration Law have also been compared to the other international sources, such as the Model Law, New York Convention and UNCITRAL Rules. As seen, the New Arbitration Law is mainly based on the Model Law as in other pro-arbitration states, which makes it easy to refer to the international best-practices in relation to the arbitration. I will continue my efforts and write series of articles to cover all other chapters of the Arbitration Law.

 

About the author: Fuad Gashamov is a professional lawyer with over 14 years of experience in consulting industry. He mainly specializes in dispute resolution, real estate, contracts, regulatory, intellectual property and compliance. He is the founding partner of Legalize Law Firm.

He is a member of the Bar Association since 2014 and also a member of the newly established Business Committee of the Bar Association. Fuad Gashamov is also a member of the Commission on Business Environment and International Ratings of the Republic of Azerbaijan “Enforcement of contracts, resolution of disputes, closure and bankruptcy of an enterprise, judicial system and rule of law”.

Since August 2023, Fuad Gashamov is a Fellow of the Chartered Institute of Arbitrators and is entitled to use the following designation after his name “FCIArb”. Сurrently, he continues his LLM in “Dispute Resolution” at the University of Aberdeen, UK.

For more information about the author please see the following link: https://www.legalize.az/en/team/fuadgashamov