The cost of initiating an arbitration proceeding is significantly higher than the cost of filing a lawsuit in Iraq. It may take several years to issue an a
Ali Al DabbaghAssociate,Litigation
Zainab Hassan Trainee Lawyer,Corporate Commercial
In previous Law Update articles we have addressed contract drafting questions (“Contract Drafting Insights from Iraq”); parallel proceedings (“Parallel Proceedings: An Iraqi Perspective”); and recent developments in relation to Iraq’s arbitration law (“Iraq’s Ratification of the New York Convention on Recognition and Enforcement of Foreign Arbitration Awards”). This article explores the main practical differences between arbitration and the Iraqi court proceedings and aims to provide a guide to avoid common mistakes in drafting arbitration agreements meant to be enforced in Iraq.
The cost of initiating an arbitration proceeding is significantly higher than the cost of filing a lawsuit in Iraq. It may take several years to issue an arbitration award while Iraqi courts typically reach a final decision within 18 months on average. Iraqi procedural law and judicial practices in relation to taking evidence are more restrictive than the typical arbitration rules and practices. For example, arbitrators may take evidence virtually but Iraqi judicial practices still have not developed to accommodate this.
Unlike the Iraqi judicial system, most arbitration rules do not contain a mechanism for appeal and arbitration decisions are thus meant to be more final than court decisions.
Arbitration proceedings are generally confidential and held in private, while court proceedings are public by default unless the court determines otherwise at the request of interested litigants. It may be argued that the private nature of arbitration and lack of a formal appeal process offer a limited opportunity to address bias and mistakes. On the other hand, Iraqi courts defer to factual statements made by officials and tend to accept the same as official evidence. In contrast, arbitration proceedings are more likely to be neutral when a government entity is involved.
A good arbitration agreement will keep disputes out of national courts and provide for less opportunity to challenge the arbitration award. This is important when choosing non-Iraqi laws because, while the choice of a foreign law is possible in principle, the reality is that Iraqi courts are not well equipped to apply foreign laws. We will specifically address the following common mistakes we have seen in our legal practice in Iraq.
The Iraqi legislator has specified the instances where an Iraqi court would have jurisdiction over a non-Iraqi party in Articles 14 and 15 of the Civil Code No. 40 of 1951 (the “Civil Code”). These articles are mandatory and thus courts do not consider party autonomy when it comes to choosing a forum for dispute resolution For example, choice-of-court clauses cannot exclude the jurisdiction of Iraqi courts. However, arbitration agreements are an exception to the above rule. For this reason, Iraqi courts sometimes take a restrictive view of what constitutes a valid arbitration agreement. An “exclusive” arbitration agreement leaves no room for argument that the parties intended to keep their despite out of court while a “non-exclusive” arbitration agreement opens the door for complex procedural argument, parallel proceedings, and conflicting judgements in the same dispute.
An asymmetrical jurisdictional clause provides one party more options than the other. Iraqi laws do not expressly prohibit or regulate asymmetrical jurisdictional clauses. However, if such a clause allows one party to go to court, then there is a risk that an Iraqi court will take the position that the other party has the same right and that would make the arbitration element of the jurisdictional clause ineffective in preventing a dispute from being heard in an Iraqi court. The same could be said, albeit to a lesser degree, if the asymmetrical option does not include a choice of court. In addition, it may be argued that an asymmetrical option to seek interim relief does not affect the arbitration agreement even if the interim relief is sought in court because the Iraqi Code of Civil Procedures No. 83 of 1969 (the “Code of Civil Procedures”) allows the courts to assist the arbitrators without affecting the validity of the arbitration agreement. The key takeaway for drafting a good arbitration agreement is to be clear that the parties only intend to allow interim relief and do not intend to resolve any dispute in court.
There are two basic forms of arbitration: ad hoc and institutional. An ad hoc arbitration agreement needs to specify an appointing authority to select the arbitrator(s) if the parties do not agree on a selection procedure. Failure to specify an appointment authority would result in the courts of the seat of arbitration taking on this role. An institutional arbitration agreement should specify one arbitration institution because having more than one option can create problems when enforcing the arbitration agreement.
In ad hoc arbitrations, the parties are on their own without the aid and convenience of an arbitral institution with ready-made rules. Thus, parties who resort to ad hoc arbitration must rely primarily on the arbitrator(s) to manage the case and handle all administrative affairs.
In ad hoc arbitrations, the parties are on their own without the aid and convenience of an arbitral institution with ready-made rules. Thus, parties who resort to ad hoc arbitration must rely primarily on the arbitrator(s) to manage the case and handle all administrative affairs. The parties are then wholly reliant on seeking the assistance of the courts at the seat of arbitration if one party wishes to form a tribunal in the face of a lack of co-operation from the other party, or a party seeks the removal of an arbitrator. The primary advantage of ad hoc arbitration is saving the fees of the administering institution; however, that may not be justifiable if case administrative or management issues arise with which an ad hoc tribunal has difficulty handling and/or given the size of the dispute.
In addition to the rules of arbitration, the parties must determine the seat of the arbitration (the procedural law). The seat is an important legal concept. It usually determines the nationality of the award, which is relevant to enforcement. It is important to choose a seat of arbitration because it is not possible to use the substantive law of the contract as a substitute for the procedural law that would supplement any arbitration rules. It is important to understand that the substantive law of the contract does not normally extend to the arbitration clause because the arbitration clause exists independently and is separable from the other contract terms. Matters governed by the law of the arbitration clause include the formation, validity, and interpretation of the arbitration clause. Thus, not selecting a seat can affect the enforcement of the arbitration award later.
In addition, the seat of arbitration specifies the court system that is responsible for supervising the arbitration process, and having a clear choice of a seat of arbitration can prevent the Iraqi courts from interfering in the arbitration process. It should also be noted that that Iraq does not have a freestanding arbitration law; instead, arbitration rules are contained in the Iraqi Code of Civil Procedures, which are outdated and may contain some unexpected or unrealistic requirements. For examples, the Iraqi Code of Civil Procedures requires the arbitrators to resolve the dispute within six months from accepting the appointment as arbitrators unless agreed otherwise.
An arbitral award is valid and enforceable only if the dispute's subject matter is arbitrable according to the law of the state where the award is enforced. Some disputes may not be settled by arbitration under Iraqi law. For example, Iraqi labour law gives Iraqi courts exclusive jurisdiction over labour disputes. In addition, some types of disputes may not be suitable for arbitration in practice even if there are no express legal barriers. For example, disputes over title of real property, which must be governed by Iraqi law and determined on the basis of the record of the real estate registry, are typically more efficient to resolve in courts than in arbitration.
Iraq ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 in May 2021, which removed some barriers to enforcement of foreign arbitration awards and made international arbitration more attractive in Iraq. In order to take advantage of this improved legal environment for arbitration in Iraq, it is important for parties to ensure that they have a strong and effective arbitration agreement. An ideal arbitration agreement that is easiest to enforce in Iraq is simple, exclusive, and symmetrical. It should clearly specify the seat of arbitration and the applicable arbitration rules; select an arbitration institution or appointing authority; prescribe the language of the arbitration; and provide for a type of arbitration that would be practical for the transaction at hand. Some complexity may be tolerated in the arbitration agreement to tailor it to the party’s needs; however, providing too many options opens the door for arguments and challenges that would be avoided otherwise.
For further information, please contact Ali AlDabbagh or Zainab Hassan.
Published in October 2022
