International Arbitration 2020

Last Updated August 18, 2020

Azerbaijan

Law and Practice

Authors



Ekvita LLC is a full-service legal consulting company with approximately 70 full-time professionals. Its active clients include several Fortune 500 companies operating globally. The leading position of EKVITA in the market has been recognised by international ranking institutions and other relevant international standards. Its dispute resolution experience includes not only domestic litigation practice but also international arbitration and several landmark cases in the foreign courts, as well as recognition and enforcement cases in Azerbaijan. Key highlights are: successfully representing an American company in a USD2.5 million litigation in Azerbaijan, representing a prominent French entrepreneur in recognition of a foreign (Belgium) court ruling in Azerbaijan, successfully representing a UK company in a major controversial employment litigation in Azerbaijan, representing a UK-based company in a loan and real estate-related dispute (amounting to AZN130 million), and acting as a legal expert on the matter of Azerbaijani law in international arbitration (LCIA).

For the time being, as a method of resolving disputes in Azerbaijan, international arbitration is unpopular and underdeveloped. Domestic parties still prefer litigation as the main method of dispute settlement.

Arbitration practice in Azerbaijan is limited to the recognition of foreign arbitral awards by the Supreme Court and their enforcement by the Ministry of Justice.

Although there is an Azerbaijan International Commercial Arbitration Court, at present its activity is very limited. 

However, there have been several arbitration proceedings abroad involving Azerbaijani parties.

The importance of international arbitration practice was highlighted in Section 11 of the Presidential Decree entitled On Deepening the Reforms in the Judicial-Legal System, dated 3 April 2019. This Presidential Decree contemplates developing proposals with regard to the promotion of effective international procedures by learning the most advanced international experience.

Establishment of international and national institutional arbitration is expected to expand the alternative dispute resolution methods with regard to disputes arising out of entrepreneurial activity and create a better business environment in Azerbaijan. 

Arbitration clauses are mostly included in contracts with foreign investors and foreign companies doing business in Azerbaijan. Historically, these include international agreements in the energy sector, which is the most developed industry in the country. Furthermore, in construction contracts as a method of dispute resolution arbitration is used from time to time when the parties choose internationally acceptable model contracts such as FIDIC, etc.

Notwithstanding the fact that arbitration is not a popular method of dispute resolution in Azerbaijan, when the parties refer their disputes to arbitration the following arbitral institutions are most used:

  • the International Chamber of Commerce (ICC);
  • the London Court of International Arbitration (LCIA);
  • the Arbitration Institute of the Stockholm Chamber of Commerce (SCC).

The main sources regulating international arbitration in Azerbaijan are the Civil Procedural Code, effective as of 1 September 2000 (CPC) and the Law on International Arbitration dated 18 November 1999 (Law on International Arbitration).

CPC mainly regulates the recognition and enforcement of foreign arbitral awards.

The Law on International Arbitration is entirely based on the UNCITRAL Model Law. Nevertheless, there are some differences between the Law on International Arbitration and the UNCITRAL Model Law. For instance, while the UNCITRAL Model Law authorises courts to annul or refuse enforcement of an arbitral award if it is against public policy, the Law on International Arbitration provides such authority to courts where an arbitral award violates the Constitution of Azerbaijan.

There have been no changes to the national arbitration law in the past year. The latest change was made on 16 June 2007.

An arbitration agreement must be concluded in written form and it may be concluded via (i) an arbitration clause in a contract or (ii) as a separate agreement.

The Law on International Arbitration further determines that an agreement shall be deemed concluded in writing if it is reflected in a document signed by the parties, or is concluded by exchange of letters, or by using electronic communication, teletype, telegraph, etc, evidencing the conclusion of an arbitration agreement and where the counterparty does not object.

A reference, in a contract, to an arbitration clause shall be deemed an arbitration agreement, provided that the contract is concluded in writing and such reference makes that clause a part of the contract.

In accordance with Article 444 of the CPC, Azerbaijani courts have exclusive jurisdiction over certain types of disputes, which, by definition, may not be brought into arbitration. The following cases fall under the exclusive jurisdiction of Azerbaijani courts:

  • cases relating to property right over immovable property, including cases with regard to lease or mortgage of such immovable property, if their subject matter is located in the territory of the Republic of Azerbaijan;
  • cases relating to recognition of validity or invalidity of legal entity and dissolution of legal entity, or cases on claims for termination of its decisions, if the legal entity has legal address (place of location) in the Republic of Azerbaijan;
  • cases relating to claims in respect of recognition of validity of patents, marks or other rights where registration or application for registration of these rights has been carried out in the Republic of Azerbaijan;
  • if the decision is rendered during court review on mandatory enforcement proceedings, raised or enforced in the Republic of Azerbaijan;
  • cases relating to claims against carriers arising out of carriage contracts;
  • cases relating to dissolution of marriage of citizens of the Republic of Azerbaijan with foreigners or stateless persons, if both spouses have place of residence in the Republic of Azerbaijan.

The enforcement of foreign arbitral awards is possible after proper recognition of the award by the Supreme Court of Azerbaijan.

In general, courts and enforcement officials in Azerbaijan have significant latitude in deciding cases and carrying out enforcements. When it comes to recognition and enforcement of foreign awards, certain aspects of procedural law are even more discretionary than usual. Given that there is no guidance (statutory or otherwise) on the application of these discretionary powers, it is extremely difficult to predict the outcome of most cases brought into courts.

Due to the lack of legislation on domestic arbitration, practices related thereto remains deficient in Azerbaijan.

An arbitration clause in a contract is treated as an agreement independent of the other terms of the contract. A decision by an arbitral tribunal that the contract is null and void does not automatically mean that the arbitration clause is invalid.

The parties may determine the number of arbitrators at their own discretion. If the parties do not determine the number of the arbitrators then three arbitrators are appointed under the Law on International Arbitration.

There is a default procedure if the parties’ chosen method for selecting arbitrators fails.

Where there are to be three arbitrators: each party shall appoint one arbitrator and the two arbitrators so appointed shall appoint a third arbitrator. If the party that has received a request on the appointment of an arbitrator does not appoint an arbitrator within 30 days, or if the two arbitrators appointed by the parties do not come to agreement about the appointment of a third arbitrator within 30 days of their appointment, then the arbitrators shall, upon the request of any of the parties, be appointed by the Supreme Court.

Where there is to be one arbitrator: if parties do not reach an agreement on the appointment of an arbitrator, then the arbitrator shall, upon the request of any of the parties, be appointed by the Supreme Court.

With respect to the appointment procedure agreed between the parties, if:

  • one of the parties does not follow the agreed procedure; or
  • the parties or two arbitrators do not reach an agreement under such agreed procedure; or
  • any third party does not fulfil any function that is vested in it under such procedure,

then any of the parties may request the Supreme Court to take necessary measures, unless otherwise provided for under the arbitration agreement. Any decision taken by the Supreme Court shall be final and may not be complained upon.

The legislation does not specifically establish any default procedure that applies in the case of multi-party arbitrations.

As described above, the Supreme Court may intervene in the selection of arbitrators upon request of the parties:

  • if parties, or party-appointed arbitrators do not come into an agreement on the appointment of respectively the arbitrator(s) or the third arbitrator within 30 days;
  • where one of the parties, two arbitrators or any other third party does not follow or does not fulfil any functions that is vested in him or her with regard to agreed procedure, necessary measures can be taken by the Supreme Court upon the request of the parties.

In the process of the appointment of an arbitrator, the Supreme Court may take into account of all the necessary requirements agreed between the parties in respect of the nomination of an arbitrator, including the independence and impartiality of an arbitrator, and may also consider the desire of the parties to appoint an arbitrator (when appointing a sole or a third arbitrator) whose citizenship is different from that of the parties.

The general rule established in the Law on International Arbitration is that the parties may agree upon procedures for challenging an arbitrator at their own discretion. Where there is no such an agreement between the parties, the party intending to object to an arbitrator shall submit, in writing, the reasons for its objections within 15 days of the moment that such party becomes aware of the organisation of the arbitral tribunal or of any of the grounds for challenging of arbitrators indicated below:

  • there is a reasonable doubt about his or her independence and impartiality;
  • he or she does not have the qualification required by the agreement of the parties.

A party may raise objections against an arbitrator, who has been selected by such party or in whose selection such party has participated, only due to reasons that became known to such party after the appointment of such arbitrator. If an arbitrator to whom an objection is made rejects such objection, or if the other party does not agree to such an objection, then the matter on the rejection shall be resolved by the arbitral tribunal.

When, in the process of the implementation of any of the procedures agreed between the parties or in any of the occasions described above, a request on the objection is not granted, the party requesting such objection may, within 30 days of the receipt of the decision on the rejection of such request, appeal to the Supreme Court with the request to adopt a decision on such objection; such decision shall be final and may not be complained upon.

There are no specific requirements to arbitrator independence, impartiality and/or disclosure of potential conflict of interest under the national law.

Subjects matter that fall under the exclusive jurisdiction of Azerbaijani courts may not be referred to arbitration (described in 3.2 Arbitrability).

The Law on International Arbitration supports the principle of competence-competence. An arbitral tribunal may rule on its own competence, as well as on any objection with respect to the existence or validity of an arbitration agreement.

If the arbitral tribunal rules that it has competence, any of the parties may, within 30 days after the receipt of the notification, appeal against that decision to the Supreme Court. The decision of the Supreme Court in relation thereto is final.

The Supreme Court may not review negative rulings on jurisdiction by arbitral tribunal.

An application that an arbitration court does not have competence shall be submitted before the objection to the claim is made. A declaration that an arbitration court exceeds its authority shall be submitted as soon as any case (matter) in which the arbitration court exceeds its authority becomes evident.

If the court adopts a decision, as a matter of priority, that it has competence, any of the parties may, within 30 days after the receipt of the notification of such decision, request the Supreme Court to adopt a decision on the relevant matter.

The national law does not specifically determine any standard of judicial review for questions of admissibility and jurisdiction.

Normally, if the arbitration agreement is valid and contains explicit choice of foreign seat of arbitration, the court will not allow the proceedings in breach of an arbitration agreement and send the parties to arbitration.

However, sometimes due to the fact that there is no domestic arbitration institution in Azerbaijan, the agreement of the parties on local arbitration may not be enforced by courts and litigation proceedings may be allowed.

Azerbaijani law remains silent on this matter. Nevertheless, it is implied that a party can only participate in arbitration proceedings if it is a party to an arbitration agreement.

The Law on International Arbitration provides for a possibility of an arbitral tribunal, upon the request of any of the parties, to issue instructions to carry out interim measures should the arbitral tribunal deems such measures necessary. An arbitral tribunal may require any of the parties to secure such measures.

However, there is no further explanation of the procedure and no indication of permitted types of relief with respect to an arbitration.

Azerbaijani legislation does not establish any role of the courts with regard to preliminary or interim relief in arbitration proceedings, which means that the Azerbaijani courts cannot grant interim relief in aid of foreign-seated arbitrations.

Also, the Azerbaijani law does not include the concept of use of emergency arbitrators.

Azerbaijani legislation does not include the concept of security for costs both for litigation and arbitration procedures.

The only law governing the procedure of arbitration in Azerbaijan is the Law on International Arbitration.

The provisions related to recognition and enforcement of the foreign arbitral awards are included in the Law on International Arbitration and in the CPC.

The Law on International Arbitration provides for the possibility of parties to agree upon the procedure of an arbitration proceeding at their own discretion. Where there is no such an agreement, an arbitral tribunal may, subject to the provisions of the law, carry out a proceeding in the manner that it deems appropriate. In general, there are the following procedural steps:

  • notification of the respondent;
  • submission of the claim and defence;
  • oral or written examination;
  • expert investigation;
  • court assistance in obtaining evidence;
  • issuing of the arbitral award or confirmation of the settlement;
  • interpretation of or amendments to the arbitral award;
  • appeal against the arbitral award;
  • recognition and enforcement of the arbitral award.

The Law on International Arbitration impose the following powers upon arbitrators:

  • render an arbitral award at its own competence;
  • carry out interim measures;
  • authority to determine the possibility, relevance, substance and importance of any evidence.

Any person, when being requested to participate as an arbitrator, shall submit information to the parties on the cases that may raise reasonable doubts about such person's independence and impartiality. If an arbitrator has not previously informed the parties in this respect, then he or she shall immediately present such information from the moment of his or her appointment as an arbitrator and in the course of the arbitration process. Also, the Law on International Arbitration determines the duty of arbitrator(s) of equal treatment of the parties.

Azerbaijani law does not include any particular qualifications or other requirements for legal representatives in arbitration proceedings.

Parties may, together with their declarations, submit all documents that are supposed to have relevance to the matter, or refer to the documents or evidence that they intend to submit further. All of the requests, documents and other information submitted by one of the parties to the arbitral tribunal as well as all expert opinions and other documents of evidence nature, shall be submitted to the other party. As a general rule, if any of the parties does not submit documented evidence then the arbitral tribunal may proceed with the process and render an award based on the evidence submitted.

The Law on International Arbitration does not provide for any specific rules of evidence.

An arbitral tribunal or a party upon permission from the arbitral tribunal may request the Supreme Court for assistance in obtaining evidence. The Supreme Court may grant such request pursuant to the procedure for obtaining evidence.

The Law on International Arbitration does not specifically address the issue of confidentiality related to the arbitral proceedings. However, this issue may be agreed upon between the parties.

Under the Law on International Arbitration, an arbitral tribunal shall issue an award pursuant to contract conditions and considering trade customs applicable to relevant transactions. Unless otherwise agreed between the parties, where there is more than one arbitrator, the arbitral tribunal shall issue any award by majority. The following legal requirements apply for an arbitral award.

  • An arbitral award shall be issued in writing and signed by the arbitrator or arbitrators. Where there is more than one arbitrator, such an award shall be signed by the majority of the arbitral tribunal members, and reasons for the absence of other signatures shall be indicated.
  • An arbitral award shall indicate motives on which the decision is based, unless there is an agreement between the parties not to indicate the motives or there is a settlement agreed upon between the parties.
  • An arbitral award shall indicate the date and place.

There is no established time limit on delivery of the award under Azerbaijani law.

Azerbaijani law does not prescribe any limits on the type of remedies that an arbitral tribunal may award.

Azerbaijani law does not establish the procedure of recovering interest and legal costs in arbitration proceedings. Although the Azerbaijan International Commercial Arbitration Court is inactive, it has a Regulation on costs which states that if there is no agreement between the parties, the unsuccessful party will be required to pay the arbitration fees.

An arbitral award may be quashed by the Supreme Court in the following cases:

  • if the party submitting a motion proves
    1. that one of the parties to the arbitration agreement did not have a capacity of functioning to this or other extent, or that the arbitration agreement was invalid in accordance with the applicable legislation or, in the absence of the reference to such legislation, with the legislation of Azerbaijan,
    2. that the party submitting the motion was not duly notified about the appointment of the arbitrator or the arbitration process, or that such party was not able to submit its evidence due to some other reasons,
    3. that the award has been rendered on a dispute that is not envisaged by the arbitration agreement, or that the award covers the matters exceeding the provisions of the agreement (in this case, the parts of the arbitral award that does not pertain to the subject of the arbitration agreement may be quashed),
    4. that the composition of the arbitral tribunal or the arbitration procedures were not in compliance with the agreement signed between the parties, or where the parties have not concluded any such agreement, the composition of the arbitral tribunal or the arbitration procedures were not in compliance with the law;
  • if the Supreme Court determines
    1. that the dispute may not be the subject-matter of an arbitration process in accordance with Azerbaijani law,
    2. if the arbitral award contradicts the Constitution of Azerbaijan.

Any motion to challenge an arbitral award shall be submitted not later than within three months upon receipt of the arbitral award.

Azerbaijani law does not set out the possibility of the parties to exclude or expand the scope of appeal or challenge of the arbitral award.

Azerbaijani law does not specifically set out the standard of judicial review of the merits of a case.

On 29 February 2000, Azerbaijan acceded to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards with no reservations.

The enforcement of foreign arbitral awards is possible after proper recognition of the award by the Supreme Court of Azerbaijan. Ordinarily, once the award is recognised, the court will issue it for enforcement by sending its ruling to the Enforcement Agency, unless the party seeking recognition has reasons to defer the enforcement for a later time. Therefore, usually the enforcement of the award would form part of the recognition process itself and grounds for challenging the enforcement are the same as for the recognition. 

The enforcement process itself is regulated predominantly by the Law on Enforcement, dated 27 December 2001.

When it comes to the sovereign immunity, it is a principle of international law, by virtue of which one sovereign state cannot be sued before the courts of another sovereign state without its consent. Despite the fact that states have sovereign immunity, this principle of the international law is not limitless and in accordance with the international law, sovereign immunity of the states cannot be alleged in the commercial contracts, especially in the cases where it is agreed in a written contract between the state and other party.

In general, courts and enforcement officials in Azerbaijan have significant latitude in deciding cases and carrying out enforcements. When it comes to recognition and enforcement of foreign awards, certain aspects of procedural law are even more discretionary than usual. Given that there is no guidance (statutory or otherwise) on the application of these discretionary powers, it is extremely difficult to predict the outcome of most cases brought into courts. 

Further, due to lack of the precedent system, prior decisions of the courts are not binding, not even on lower courts. Therefore, inconsistent rulings on factually similar cases are commonplace. In any case, court rulings are not available to general public, except for decisions of the Constitutional Court of Azerbaijan and some Supreme Court rulings on select matters of law. 

Specifically, the mutuality concept required for recognition of foreign awards, implies that the Supreme Court may refuse to recognise an award if a particular jurisdiction in which the award was rendered (the seat of arbitration) has no bilateral treaty with Azerbaijan on mutual recognition of court decisions and awards. The UK has no such treaty with Azerbaijan. On the other hand, both Azerbaijan and the UK are signatories to the New York Convention, which may – and, in our opinion, should – be interpreted as unilateral commitment from both countries to recognise foreign arbitral awards. However, whether this serves as "a guarantee of mutuality" from the UK is ultimately for the Azerbaijan’s Supreme Court to decide. 

Likewise, the Supreme Court’s discretion in declaring arbitration agreements void on formal grounds appears excessively broad. For instance, the exclusive jurisdiction principle suggests that the parties to arbitration may not include property title claims or other exclusive jurisdictional matters in their arbitration agreement. Legal practitioners in Azerbaijan often argue successfully that the Supreme Court of Azerbaijan may render the whole arbitration agreement void if the agreement purports to refer all disputes to arbitration – "any disputes", "all disputes" or similar expressions may be considered by the judge as an attempt to circumvent Azerbaijani law in the part relating to the exclusive jurisdiction of Azerbaijani courts. This interpretation, however, is not consistently applied and sometimes arbitration clauses using the broad "any and all" wording is still reviewed by the Supreme Court in recognition and enforcements hearings. 

Ambiguity also arises in interpretation and application of the "main principles" concept. That the foreign awards may not contradict the country’s public policy rules is a generally accepted practice in many jurisdictions. It is often argued, however, that this concept should also cover the so-called "imperative" norms of the national law of Azerbaijan, which are not necessarily related to public policy issue in its traditional meaning.

For example, Azerbaijan’s contract law does not allow full exemption of liability arising from negligence. This is considered an imperative provision and may not be altered by agreement of the parties, even if, as it is claimed, the contract is governed by English law (or some other governing law which allows such an exemption). In that respect, a decision of a foreign tribunal awarding damages as part of indemnity for negligence may be challenged in Azerbaijan on the grounds that it contravenes the main principles of Azerbaijani law. There are other imperative provisions, which may not be aligned with the common law principles and therefore the risk of challenging foreign awards issued on the basis of common law rules remains high. 

Finally, the most controversial of all is the application of double jeopardy (dual track proceedings) rule. The contradiction, which arises in application of this rule, is inherent in the respective provisions of the Civil Procedure Code. One of the general grounds for refusal in recognition is when a claim between the same parties, on the same matter and on the same grounds is filed with the Azerbaijani court prior to commencing the court proceedings overseas (Article 465.1.3 of the Civil Procedure Code).

The immediately following provision of the Civil Procedure Code, however, contains a slightly different wording: if there is a case in an Azerbaijani court between the same parties, on the same subject and on the same grounds, then the Supreme Court must suspend the hearing on the recognition and enforcement, or, if the recognition was already granted, must cancel this recognition (Article 465.2).

In other words, Article 465.2 does not require that the case in Azerbaijani court must precede in timing to commencement of foreign arbitration. If taken in isolation, this article can be construed as allowing (in fact, obliging) the Supreme Court to suspend its recognition hearing if the defendant files a case in the local courts at any time during the process. 

We do not suggest that this Article 465.2 should be interpreted in isolation. In fact, we believe articles 465.2 and 465.1.3 should be read together as only allowing suspension of recognition where a case was filed prior to commencing the arbitration process overseas.

The Law on International Law does not specifically set out any norms related to class-action or group arbitration.

There are no approved ethical code or other professional standards in force which apply to counsel and arbitrators conducting arbitral proceedings in Azerbaijan.

Azerbaijani law does not contain any rules or restrictions on third-party funders.

The Law on International Law does not specifically set out any norms related to consolidation of separate arbitral proceedings.

Azerbaijani law remains silent with regard to the possibility of binding third parties by an arbitration agreement or award.

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Law and Practice

Authors



Ekvita LLC is a full-service legal consulting company with approximately 70 full-time professionals. Its active clients include several Fortune 500 companies operating globally. The leading position of EKVITA in the market has been recognised by international ranking institutions and other relevant international standards. Its dispute resolution experience includes not only domestic litigation practice but also international arbitration and several landmark cases in the foreign courts, as well as recognition and enforcement cases in Azerbaijan. Key highlights are: successfully representing an American company in a USD2.5 million litigation in Azerbaijan, representing a prominent French entrepreneur in recognition of a foreign (Belgium) court ruling in Azerbaijan, successfully representing a UK company in a major controversial employment litigation in Azerbaijan, representing a UK-based company in a loan and real estate-related dispute (amounting to AZN130 million), and acting as a legal expert on the matter of Azerbaijani law in international arbitration (LCIA).

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