Abstract

Together with globalization, an increase of international trades and investments have brought plenty numbers of legal disputes. It is one of the key issues in commercial circles how the professionals handle cross-border legal disputes properly despite the differences of systems among each countries.

Arbitration can be a useful way to resolve the problems efficiently because of its binding power. Once parties in court receives a decision from arbitrators, they should follow the conclusion. Moreover, arbitration has flexibility in legal procedure. All parties in international disputes faces countless number of nationalities, and all of them tend to avoid bringing their issues to a competitors’ country courts. If they choose arbitral procedures, an arbitrator (or arbitral tribunals) can make decisions with neutrality.

For these reasons, this paper will review concepts, formations, and effects of arbitration agreements by analyzing a brief arbitration case of 22nd Vis Moot Question in 2014.

* This study is a revised version of the final research paper, in Cross-border Legal Issues of Korea, Ewha Womans University (June 2015).

 

 

Ⅰ. Introduction

Together with globalization, increase of international trades and investments brought plenty numbers of legal disputes. It is one of the key issues in commercial circles how professionals handle cross-border legal disputes properly despite the differences in systems of each countries.

Arbitration can be a useful way to resolve problems efficiently because of its binding power. Once parties at court receive a decision from the arbitrators, they should follow the conclusion. Moreover, arbitration has flexible legal procedures. All parties in international disputes face countless numbers of nationalities, and all of them tend to avoid bringing their issues to the courts of the competitors’ country. If they choose to proceed with arbitral procedures, an arbitrator (or arbitral tribunals) can make decisions with neutrality.

For these reasons, this paper will review the concepts, formations, and effects of arbitration agreements by analyzing a brief arbitration case of 22^nd Vis Moot Question in 2014.

 

Ⅱ. Facts[1]

1. Parties of the case

CLAIMANT is a broker of rare minerals, in particular coltan, based in a hypothetical country E. the claimant is a 100% subsidiary of Global Minerals Ltd (hereinafter “Global Minerals”), which deals with rare minerals world-wide and is based in country R.

RESPONDENT is a state-owned enterprise based in country M. It operates all mines in country M including the only coltan mine. In addition to coltan the respondent extracts copper and gold. Global Mineral and the respondent have retained good commercial partnership for a decade due to regular purchase of coltan.

Coltan is a semi-singular mineral, which is extremely solid, fragile, easily exfoliates, and opaque with a submetallic shine and reddish reflections. It is insoluble in acids and very difficult to fuse. Coltan is primarily used for production of tantalum capacitors found in many electronic devices. The market condition of coltan is not stable. Supply and demand is highly volatile. Increasing political crises influences the price of coltan.

2. Summary of the event

The claimant originally wanted to buy 100 tons of coltan, but the respondent did not have enough amount of coltan. Instead, the claimant and the respondent made a contract for 30 tons of coltan to be traded on 28^th of March 2014. At that time, Global Mineral signed and endorsed the contract due to its tidy relationship with the respondent.

The parties agreed to include an arbitral provision within the contract in writing, which stipulated  that any disputes that occurs from the contract complies with applicable law of United Nations Convention on Contracts for the International Sale of Goods(hereinafter “CISG”). On 25^th of June 2014, the respondent secured a large amount of coltan thanks to the market situation, and announced on the additional supply of coltan to the claimant. The claimant was satisfied with this notification and sent a request to the respondent for additional trade of coltan via fax on 27^th of June 2014. Also, the claimant received a letter of credit from the bank as payment for 100 tons of mineral.

However, due to sudden demand of coltan, the respondent rejected the claimant’s offer. Instead, the respondent decided to supply coltan to another Company(hereinafter “company X”) of the respondent’s country and offered all the coltan they owned to company X. At the same time, the respondent requested release of the contract: Respondent rejected supply of both contracts entered on 28^th of March 2014 and 25^th of June 2014.

3. Requests of the claimant

As a consequence of the respondent’s acts, the claimant requested for an arbitral tribunal in order to have the respondent deliver 100 tons of coltan to the claimant immediately under the provisions of the contract as amended via fax on 27^th of June 2014; as an alternative to this order, the claimant wanted the respondent to deliver 30 tons of coltan immediately as required by the provisions of the contract on 28^th of March 2014. Also, the claimant ordered the respondent to reimburse all damages it incurred due to the belated delivery. Lastly, the claimant ordered the respondent to bear costs incurred to the claimant arising out of this arbitration.

 

III. Issues to discuss in the case

First of all, it needs to be clear when the contracts were made: in March or in June. The result of this issue is one of the significant factors pertaining to this case, as the date of the contract influences the standard point of arbitral issues of this paper.

Secondly, it is essential whether an arbitration agreement between the parties is secured, not a separate arbitration contract compared to the main trade contract of coltan, but just a provision that implies of the arbitral agreement. This is the point that matters whether a separate arbitration agreement is available or not. Matters of jurisdiction can be incidental issue to discuss relative to this issue.

Finally, limitations and effects of an arbitration agreement can be dealt in this paper, if the arbitral agreement is valid. It is directly connected to the respondent’s breach of actions, because the parties did not discuss on ‘unthinkable breaches.’ It is a matter of ‘general illegal acts.’ According to the result of this discussion, an arbitrator who deals with the case has the right to decide on the limitations of the agreement.

 

1. Study on each legal issues and application for the case
2. Question 1: When was the contract was made?[2]

A contract consists of an offer and an acceptance. Offer is a single expression including adamant willingness to create a particular contract. The contents of each offer should possess the essential factors of a contract: cost, purpose, or methods. Acceptance is an answer to an offer. Once the accepting party agrees to the proposing party’s offer, its results forms a contract as the result of meeting of the minds. Invitation to a contract is an expression to used to attract offers. It doesn’t intend on specific legal willingness, but lures on legal offers from others. Although someone or some company expresses an invitation to other traders, a contract is not made unless there is no response from an addressee. Advertisement can be a good example of invitation to a contract.

In this case, the parties approached on agreement to trade 30 tons of coltan on 28^th of March in writing. They made a consensus for trading specific amount of mineral, the price of the mineral, and other factors, which helps smooth completion of the contract. Therefore, the contract at this time is obviously valid.

According to the claimant’s opinion, the second contract should be valid from 27^th of June 2014. The claimant argued that the respondent made a notification for increase of supply, and it served as an offer to modify its own contract in March. However, there was no evidence that the respondent tried to modify the original contract. Moreover, the announcement from the respondent did not include the essential factors of a general offer offered during contract proceedings. For this reason, the act of the respondent is just an invitation to the contract.

Despite the invitation of the contract, the respondent declined the request from the claimant to adjust the amount of coltan. Therefore, the claimant’s offer did not make any binding power and the content of increasing the amount of the mineral from 30 tons to 100 tons in June does not exist.

In conclusion, the contract in March has a binding power as a trade contract for 30 tons of mineral between the claimant and the respondent. Therefore, the date of this contract is a standard while discussing legal issues in this case.

2. Question 2: The existence and effectiveness of arbitral agreement[3]

• General Principle

An arbitration agreement should fulfill the essential factors helping to avoid annulment, cancellation, impossibility of performance, or inexistence. For example, the Korean Arbitration Act article 36 implies:

an arbitration award may be set aside by the court only if the party making an application for setting aside an arbitral award furnishes proof that a party to arbitration agreement was under some incapacity under the law applicable to him/her; or the said agreement is not valid under the law to which the parties have subjected it, or failing any indication thereon, under the law of the Republic of Korea.

Also, article 38 makes sure that arbitral awards made in the Republic of Korea shall be recognized or enforced, unless any grounds referred to in Article 36.2. Exists. An arbitration agreement should also fulfill general requirements as a legal action such as due diligence, good faith, or estoppel doctrine as an extension of invisible but substantive legal principles

• Application to the case

In this case, the contract between the claimant and the respondent contains a provision stipulating an arbitration agreement. Here is the content of the provision; “All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce(hereinafter “ICC”) by three arbitrators appointed in accordance with the said Rules.”

The article is an arbitration clause for the following reasons. First, this article indicates a consensus about arbitration when the parties are facing any provocative disputes due to the trade. Also, the parties agreed to make an arbitration clause in writing when they signed the contract. Therefore, the article has separate independent power legally although it can be possible that the contract goes to annulment or cancellation. At a minimum, the original contract of 28^th of March 2014 entitles the claimant to receive delivery of 30 metric tons of coltan. Moreover, the claimant fulfilled its obligation in regard to the issuance of the Letter of Credit, 14 days after receiving the Notice of Transport to pay for 30 tons of coltan as mentioned.

3. Question 3: The limitations and effects of an arbitration agreement[4]

• Range of disputes covering a subject of arbitration agreements

The range of arbitration agreements means types or categories that can be the object of arbitrations. In terms of Korea Arbitration Act article 3, ‘The term “arbitration agreement” means agreement between the parties to settle, by arbitration, all or some disputes which have already occurred or might occur in the future with regard to defined legal relationships, whether contractual or not.’ Therefore, the range of an arbitration is dependent on an agreement between the parties of a contract.

There are two theories to understand this issue properly:

Restrictive Presumption and Pro-arbitration Presumption. First, restrictive presumption is the theory that an arbitration agreement restricts the right to a trial. From the perspective of this theory, the limits of arbitrations should be interpreted strictly because of this characteristic of arbitration procedures. On the contrary, pro-arbitration presumption is the theory that the range of arbitrations should be interpreted widely as possible. According to this theory, the parties of disputes are generally trying to solve their problems through single procedures at a stroke. However, using arbitration, ways to solve their problems separate from their original disputes is not common.

• The matter of illegal acts in arbitral situations

Whether or not illegal actions by one party can be regulated under the rules of arbitrations is one of the issues in arbitral proceedings. In Korea, Arbitration Act article 3 mentions terms, ‘defined legal relationships, whether contractual or not’ as subjects of arbitration regulations.

An ‘unthinkable’ breach, which was not originally indicated in the contract, is covered thorough an original arbitration agreement between the parties. Another issue is interpretation of an arbitration agreement. For example, if one of the contractual parties breached their agreement and conducted several illegitimate actions – such as breach, frauds, or threats – during the contractual proceedings, other parties can appeal the violations in front of an arbitrator or an arbitral tribunal. The Supreme Court of Korea made a decision related to this issue in 1992. The court decided that disputes regarded as an existence of responsibility about illegal actions are covered by an arbitration agreement.

• General principle of arbitral effects

A valid arbitration agreement produces important legal effects for its parties, as well as for national courts and arbitrators. These effects of arbitration agreements are both positive and negative: the positive effects include the obligation to participate and cooperate in good faith in the arbitration of disputes pursuant to the parties’ arbitration agreement, while the negative effects include the obligation not to pursue the resolution of disputes that are subject to arbitration in national courts or similar legal forums.

The positive and negative effects of agreements to arbitrate are affected significantly by the means of enforcement of those agreements under applicable international conventions and national arbitration legislations. During some historical periods, arbitration agreements were rendered ineffective because they were not susceptible to enforcement through orders for specific performance and because monetary damages were difficult to quantify and provided inadequate disincentives for breaches.

Contemporary arbitration regimes have fundamentally altered this, making it possible, in varying degrees, to obtain orders of specific performance from national courts of both the negative and positive obligations imposed by arbitration agreements. These remedies vary among legal systems, but, in developed jurisdictions, provide effective means of enforcing international arbitration agreements. Those means of enforcement include stays of litigation, orders to compel arbitration, antisuit injunctions, actions for monetary damages and non-recognition of judgements obtained in breach of a valid arbitration agreement.

• Application to this case

In this case, the respondent denied the effectiveness of the contract with the claimant in March. At the same time, the respondent provided the minerals they owned to another mineral selling enterprise instead of conveying 30 tons of minerals for the claimant. Although an arbitrator in this case believes that the notification of the respondent in June is an invitation to contract, the arbitrator cannot deny the validity of the original contract including an arbitration provision in March.

The claimant was damaged due to the respondent’s breach action. First, the respondent’s action brought the company some profits through the transaction with another company. On the contrary, the claimant was attacked by this transaction, because the claimant had faith for the respondent to fulfill the contract and borrowed plenty of debt from a bank. Therefore, there is an interaction between the claimant’s damage and the respondent’s breach. As a result, the claimant can argue for the damages caused by the respondent’s breach of the contract, although they did not clearly specify about general illegal situations in their arbitration clause.

An arbitration agreement in this case is valid because it achieves the requirements in both formation and substantive field. Therefore, once a decision is made after arbitral proceedings, it has effects and enforcements.

 

1. Conclusion of this case

The contract formed in March is the standard of this case. The respondent’s notification of increase for minerals was merely an invitation of contract. Therefore, the argument that claimant modified the amount of the minerals from 30 to 100 in June is not valid.

An arbitration clause is valid along with the effects of the contract from March as a provision. This fact implies that an agreement is made to use arbitration procedures, if the parties of the contract have some legal disputes. Even if the first contract from March is annulled following the respondent’s argument, it doesn’t affect the validity of the clause due to its separability (independence of arbitration.) Therefore, the claimant can request an arbitrator or other arbitral tribunals to deal with this case properly.

A breach action of the respondent can be the topic of subject for arbitration proceedings. However, it should be clearly noted that liability of the respondent originated from breach of contract from March, not the contract from June. Therefore, although the claimant complains about liability of respondent about 70 tons of coltan, it won’t be accepted in front of an arbitrator.

In short, the arbitrator in this case can accept the claimant’s request:

1) To order the respondent to deliver about 30 tons of coltan as required by the provisions of the contract concluded on 28^th, March, 2014.

2) To order the respondent to reimburse the claimant for all damages it incurred due to the respondent’s breach actions.

3) Order the respondent to bear costs arising out of this arbitration.

* This study is a revised version of the final research paper, in Cross-border Legal Issues of Korea, Ewha Womans University (June 2015).

[1] Twenty Second Annual Willem C. Vis International Commercial Arbitration Moot Problem, Association for the organization and promotion of the Willem C. Vis International Commercial Arbitration Moot (Nov 2. 2014).

[2] Jee, Won-Lim, Civil Law Lecture(Vol 12), Hongmoonsa, p.1319 (2014).

[3] KIM Kap-You, Arbitration Law & Practice, Pakyongsa, (2012).

[4] Gary B. Born, International Commercial Arbitration, Wolters Kluwer, p.986, (2014).