Cyprus: European application of UNCITRAL Model Law on Arbitration, Cyprus (Law 101 of 1987)

1. Introduction

Arbitration as a means of settling commercial disputes between parties of different nationalities has been a popular and successful alternative to national courts for decades. Parties entering into economic agreements often include arbitration clauses in their contracts to ensure that any disputes can be solved without recourse to expensive and time-consuming litigation. Moreover, arbitration allows parties to avoid having disputes judged in the national courts of the opposing party. It is not surprising, therefore, that the rise in international commerce and investment in recent years has brought an increased use of arbitration to resolve disputes.

The reasons for choosing arbitration as a means of dispute resolution are obvious. The parties may select a convenient seat for their arbitration in a "neutral" country. If a dispute arises between them, they may choose an arbitrator or several arbitrators who are independent and impartial and have the technical and legal expertise and language skills to resolve their particular dispute. The parties expect these arbitrators to take into account not only legal aspects but also their fair and reasonable commercial expectations while deciding the dispute. Furthermore, arbitration is a secret procedure. Finally, the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which Cyprus has ratified through the Law 84 of 1979, ensures that arbitral awards are enforced in more than 150 jurisdictions all over the world, thus providing a powerful incentive for any party to perform an arbitral award voluntarily. The most important difference between litigation before domestic courts and arbitration, however, is the consensual character of the arbitral process.

This Law was brought as a draft law before the House of Representatives in Cyprus on 21 May 1987. Its aim was to regulate matters of international commercial arbitration in accordance with the Model Law on International Commercial Arbitration drafted by the United Nations Commission on International Trade Law (UNCITRAL), following the example of many other, mostly European, countries. The draft law respected and maintained all the essential provisions of the Model Law. It deviates only in terms of pattern in the first articles from the Model Law, due to respect for the common pattern of laws in Cyprus, as well as by regulating the matter of time limitation, to which I will refer later.

It is probably superfluous to say that this is a practical example of the "internationally useful construction" of domestic law. The concept allows a new era of dynamic statutory interpretation, i.e. an interpretation of domestic law in the light of transnational commercial law. Due to this fact it is our right and duty to interpret the International Arbitration Law of Cyprus from an international point of view, bearing in mind case law and literature of the countries that did embrace the Model Law, and not limit ourselves to the area of Cyprus.

However, the International Arbitration Law of 1987 did deviate from the Model Law and adopt a clause regarding the period of limitation, contrary to the prevailing view of the drafters of the Model Law, according to which such a provision was not to be included in the Model Law, although it was recognised that the problem existed and that a unified solution of the problem would be welcome. Such a provision touched upon issues regarded by many legal systems as matters of substantive law and might therefore be considered to be outside the scope of the Model Law. It was also considered to be anomalous and a source of confusion to have a special rule for the effects on the limitation period arising out of the commencement of an international commercial arbitration. It was agreed, however, that the attention of states should be drawn to that problem of considerable practical importance with a view to inviting consideration of enacting provisions which, in harmony with the principles and norms of the given legal system, would place arbitral proceedings on an equal footing with court proceedings in that respect.

The time limitation provision reads as follows:

"21. (2) Commencement of the arbitral proceedings shall cause suspension of the period of limitation in accordance with the provisions of the following sub-section.

(3) The limitation period in relation to any claims which are referred to arbitration in accordance with the provisions of this Law shall be governed, subject to the provisions of this Law, by the provisions of sub-sections (1), (2), (5), (6) and (7) of section 24 of the Arbitration Law.

(4) The words "is absent from the Republic" in the fifth line of section 8 of the Limitation of Actions Law shall not apply in the case of claims which are referred to arbitration in accordance with the provisions of this Law.

(5) The Limitation of Actions (Suspension) Law shall not apply in relation to claims which are referred to arbitration in accordance with the provisions of this Law."

The above mentioned provisions of the Arbitration Law Chapter 4, read as follows:

"24. (1) The laws on time limitation for actions apply to arbitral proceedings as they apply to court proceedings.

(2) Regardless of the existence of any condition in an agreement, which states that no statement of claim shall emerge regarding any matter, which according to the agreement is to be referred to arbitration, until the arbitration, which is foreseen in this agreement, is held, a statement of claim is considered to emerge at the time that it would emerge, should no such clause in the agreement exist for the purposes of the laws on time limitation, as they were initially instituted or as they are applied to arbitration proceedings.

(5) Should the clause for committal of any future disputes to arbitration foresee that any demands, which are subject to the agreement, are excluded, and a dispute to which this agreement applies appears, the court, if it agrees that under the circumstances of the case another regulation would cause disproportionate damage and despite the fact that the set time limit has expired, may under the conditions that the right of the case requires, if any, and without affecting the previous paragraphs of this article, prolong the period, according to its perception of rightness. This may not take place if directions for the appointment of an arbitrator are given or an arbitrator is appointed or any other actions for the opening of the arbitral proceedings are taken in the period determined in the agreement.

(6)If the court orders an award to be set aside or orders, after the beginning of the arbitral proceedings, the nullity of the arbitral agreement regarding the filed dispute, the court may further order that the period from the beginning of the arbitration until the date of the court decision be exempt from the calculation of time that is set under the laws on time limitation for the beginning of the procedure (including arbitration) regarding the filed dispute.

(7)For the scope of this article, the laws on time limitation include any law or administrative act, which sets the time during which any procedure may start."

It seems ,however, that the Cypriot legislators intended by this regulation to provide parties to the arbitration with more freedom and to avoid any potential complications, due to the fact that the arbitration would take place in Cyprus.

According to Cyprus legislation different regimes apply to domestic and international arbitrations. The International Arbitration Law, 1987 (No. 101 of 1987) applies to international arbitrations and the Arbitration Law Chapter 4 of the Laws of Cyprus applies to domestic arbitrations.

The main and self-evident difference between the two regimes is their applicability. Even if matters regarding international commercial arbitration arise, for which no special arrangement has been made, the applicability of the two regimes remains strictly separate and no analogous application is to be accepted.

The procedural difference is that Chapter 4 allows the national courts to become involved in the arbitration proceedings, resulting in a significant delay in the issue of the award. The trend in favour of limiting court involvement in arbitration is not followed in domestic arbitration.

Law 101 of 1987 is limited to commercial arbitrations. However, following the spirit and the scope of the Model Law, although the notion of commercial arbitration is in fact defined in the text of the law, the term "commercial" is given a wide interpretation. The suggestion of the Model Law is adopted in the text of 101 of 1987, that is:

2. (4) "Commercial" is an arbitration if it refers to matters arising from relationships of a commercial nature, whether contractual or not.

2. (5) The term "relationships of a commercial nature" includes, but is not limited to, the following transactions: any trade transaction for the supply or exchange of goods or services; distribution agreement; commercial representation or agency; leasing; construction of works; consulting; engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture and other forms of industrial or business co-operation; carriage of goods or passengers by air, sea, rail or road.

The relevant article of 101 of 1987 is also a true adoption of the Model Law, except for a slight difference in the structure of the article, that is:

7. (1)" "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. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(2) The arbitration agreement shall be in writing.

(3) An agreement is in writing if it is contained in a document signed by the parties or in an exchange of letters, telefax, telegrams or other means of telecommunication which provide a record of the agreement, or in an exchange of statements of claim and defence in which the existence of an agreement is alleged by one party and not denied by another. The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement provided that the contract is in writing and the reference is such as to make that clause part of the contract."

In the context of Cyprus’ accession the European Union, the European legislation has been adopted and acknowledged. On 5 April 1993 the Council of Europe issued Directive 93/13/EEC on unfair terms in consumer contracts. The Directive’s essential provisions are set out in Article 3. In so far as relevant, this article reads as follows:

As Cyprus’ legislation is, through Law 93(1) of 1996, in harmony with European principles, the key notions of ability of negotiation, bona fidae and a balance of the rights and obligations of the parties are required for a contract and its clauses to be valid. The answer to the question of what type of terms should cause a significant imbalance has been left to the national authorities. Since the legislation does not foresee a concrete definition, the courts bear this responsibility. Unfortunately, they do not so far provide us with an absolutely clear picture of the answer. It has however been judged that the fairness of a contractual term should be assessed by taking into account all the circumstances attending the conclusion of the contract, as Article 4 of the Directive provides. It is stressed that the main criterion is the meaning which an average logical person attributes to this part of the contract.

The principles that can be extracted from the case law are the following:

(a) Contractual clauses that exclude the responsibility of a party for not complying or violating contractual obligations should, in case of doubt, be interpreted against the party who pleads them.

(b) A provision that foresees the exemption of a party from its vital contractual obligation is void to exempt it from liability for violation

(c) Exemption clauses do not include acts of negligence.

The next step is to wonder if this collection of laws, directives, principles and case law can provide us with an answer to the question of the validity of an arbitration clause made by reference in standard business conditions. Considering the nature, the scope and the role of arbitration I should mention here the case of Agros Trading Spolka Z.O.O. v. Dalimpex Ltd. in the Ontario Court of Appeal in Canada, where the basic principle of arbitration is set out: "in cases where it is not clear, it may be preferable to leave any issue related to the existence or validity of the arbitration agreement for the arbitral tribunal to determine in the first instance under article 16".

In the text of 101 of 1987, a broad meaning is attributed to the notion of document. The reference to "other means of telecommunication" seems to encourage this breadth, allowing arbitrators to accept that an agreement has been signed by electronic means of communication. It is universally accepted that in the everyday practice of international economic transactions, contracts are frequently negotiated under heavy time pressure and concluded over long distances through electronic communication media. It would have been contradictory to enact a law on international commercial arbitration and refuse the usage of electronic communication media. Worldwide laws leave room for arbitration agreements concluded through other modern means of telecommunication and data transmission such as "EDIFACT", "Teletex", "Btx", "electronic courier", data transmission via satellite and other means of electronic data inter-change (EDI) which might still be unknown today. These means of communication may establish a formally valid arbitration agreement, if they help to record the body of the agreement for future proceedings and make the parties aware of the fact that they oust the jurisdiction of domestic courts. However, only those agreements that appear on a computer screen and are then saved in the memory of the computer terminals should be included. Only in these cases are the text of the arbitration agreement and the conditions known to the parties at the time of its conclusion and also the agreement can be reproduced in written form later.

According to the provisions of the Model Law the parties are free to determine the number of arbitrators. Should such determination fail, the number of arbitrators shall be three.

We need to consider whether the courts may remove arbitrators during the course of the arbitral proceedings for alleged bias, or may that matter be considered only after the award is made?

At this point there are three questions to be answered. Firstly, do the national courts have the authority to remove arbitrators? Secondly, is that possible during the arbitral proceedings? Thirdly, can the ground of challenge be that of alleged bias? The Cypriot legislation respecting the Model Law has adopted fully the proposed provisions. It should be stressed, that the national courts do not have the power to remove arbitrators, neither during the course of the arbitral proceedings, nor after the award is made. Nevertheless, the parties are free to agree on a procedure for challenging an arbitrator, and should such agreement fail, the specified provisions come into force. Thus, a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of any circumstances that give rise to justifiable doubts as to his impartiality or independence or if he does not possess the qualifications agreed to by the parties, send a statement of the reasons for the challenge to the arbitral tribunal. Unless the challenged arbitrator withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge.

It is evident from the above that arbitrators may be removed only by the arbitral tribunal, and only during the arbitral proceedings. Justifiable doubts may be grounds for a challenge; however, circumstances giving rise to those should exist.

After a successful challenge the need for the appointment of a substitute arbitrator arises, so that the proceedings may continue. The relevant provision foresees exactly the same procedure for appointing a substitute arbitrator as for appointing an arbitrator, and in fact refers to article 11 of Law 101 of 1987, where the relevant procedure is described.

The Supreme Court of Cyprus has repeatedly agreed with the principle of referring the parties to arbitration, when an action is brought before it in a matter which is the subject of an arbitration agreement. It has found for the arbitral jurisdiction in two cases where the parties did refuse the validity of the agreements with the arbitration clause and as a result did not recognise the authority of the arbitral tribunal. The Court made express reference to Law 101 of 1987, article 8, and stressed the lack of its jurisdiction due to the arbitration clause.

No recourse against an interim award on jurisdiction is possible during the arbitration proceedings. The acceptance of any recourse would breach the trend in favour of limiting the court’s involvement in international commercial arbitration. The parties to an arbitration agreement make a conscious decision to exclude court jurisdiction and prefer expediency and finality to protracted battles in court. It would also breach the universally accepted principle that the arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. Those principles were embraced by the Supreme Court of Cyprus on 16 December 2003 while giving judgement in the case of Open Joint Stock Company "Novokuznetsk Aluminium Plant" v. Base Metal Trading Ltd and others.

The article is fully adopted in Cyprus, but there is no case law yet.

As already noted, the article does not deal with enforcement of interim measures ordered by arbitrators; any State adopting the Model Law would be free to provide court assistance in this regard. In Cyprus no special rules for the enforceability of the interim measures were foreseen. It must not, however, be assumed from this that the provided rights should remain inactive. The Civil Procedure Rules may apply in an analogous manner regarding this issue as they offer the proper mechanism. In brief section 32 of the Courts of Justice Law 14/60 confers power on a court to grant an injunction "in all cases in which it appears to the Court just and convenient so to do". However, the justice and convenience of the case is not the sole consideration to which the Court should pay heed in the case of an interlocutory injunction, and no such injunction should be granted, unless the following considerations are justified: (a) A serious question arises to be tried in the hearing, (b) There appears to be a visible probability that the plaintiff is entitled to relief and (c) It would be difficult or impossible to do complete justice at a later stage without granting an interlocutory injunction.

In line with the approach taken in articles of the Model Law the Cypriot legislators adopted the fundamental rights of a party as the basic principle, that the parties should be treated with equality and each party should be given a full opportunity to present his case. All articles of chapter V in the Model Law are adopted in Law 101 of 1987 and among them article 27, which foresees court assistance in taking evidence. Unfortunately no case law is available and no special law has been enacted. Nevertheless the rights provided through Law 101 of 1987 will not remain inactive and via an analogous applicability of the Civil Procedure Rules of Cyprus a solution may be found. Cyprus follows the English tradition on Procedural matters, among others. The trial system in Cyprus is adversarial. Common Law rules of evidence, modified by various statutes, apply. After a recent amendment hearsay evidence is now admissible. Under Cypriot law, the facts open to proof or disproof are facts in issue, relevant facts and collateral facts. Facts in issue in civil proceedings should be identifiable from the pleadings, the whole point of which is to set out the parties’ allegations, admissions, and denials. Relevant facts are those from which it is possible to infer the existence or non-existence of a fact in issue. Evidence of such facts is often referred to as circumstantial evidence. In general the types of evidence by which facts are open to proof or disproof are known collectively as judicial evidence. The types of judicial evidence are as follows: oral testimony, documentary evidence, and real evidence. It should be noted that in order for a document to be admissible in court it has to be recognised or be produced by the person who drafted it.

Article 28(2) is adopted as can be seen from the English translation of the Cypriot text.

Following the example of the Model Law under the International Commercial Arbitration Law of 1987 the parties may authorise the arbitral tribunal to decide the dispute ex aequo et bono or as amiables compositeurs. No specific regulation is enacted in Cyprus. Therefore, failing any special clause in the arbitration agreement, the universal understanding of the notion of these phrases governs the standards, the scope and the spirit of the Model Law to be adopted.

There is no deadline for making an award. The Law on International Commercial Arbitration of 1987 is silent and invites the potential arbitral parties to regulate this aspect in their arbitral agreement, providing them with full freedom.

We must once more repeat ourselves and indicate that the law does not foresee anything regarding this thematic and unfortunately, the case law does not provide us with any answer. Should the parties not meet any agreement, then as evident the Civil Procedure Rules of Cyprus are to apply analogous.

The law does not provide that the arbitrators are required to decide in their award on the costs and legal fees. Should the fees be arranged in the agreement, then they are undisputed, even if they are to be determined by setting a higher and a lower amount.

No provision for the Arbitrators’ right to express in writing a dissenting opinion is to be found in the Law 101 of 1987 and since the awards are published only in order to be executed, no case law is available.

In general the Courts are reluctant to set aside awards. It is no exaggeration to say that Cypriot case law provides us with paradigms of "evolutive" notion of the public interest for not setting aside awards. To be more specific, it has been agreed that the notion of "public interest" incorporates the fundamental values, that a society at any given time period places on the transactions and the expressions of the lives of its members and the set legal order. In this context it must be judged if any antithesis to the public interest exists in the quoted case. The appellant claimed that the arbitral decision not to consider the counter claim was opposed to the public interest of Cyprus. The Court did not share the same opinion and said that since the appellant did not deposit the required sum of money to cover the fees of arbitration, as requested by the procedural laws governing the arbitration (Arbitration Rules of ICC), the arbitral tribunal could and should reject the counter claim. In another case, it was decided that the court’s research regarding the question of setting aside an award for reasons of public interest is supervisory, has a procedural character and although the content of the award is reviewed, this review should be limited only to the question of public interest and the essence is not to be disputed.

The Cypriot legislators once more respected the Model Law and embraced unchanged its provisions, regarding suspension of the setting aside proceedings and resumption of the arbitral proceedings in view of remedying the award (Art. 34 para). The purpose was to give priority to the arbitral tribunal and respect the parties’ wish to solve their dispute through arbitration, even in the case of a violation of the public interest, the main ground for setting aside an award. It is difficult to determine how this provision developed in practice, as no case law is available.

The confidentiality of documents produced in the arbitral proceedings is absolutely respected in Cyprus and awards are not published. The right to obtain documents on the court file of proceedings to which the applicant is not a party came under the spotlight again recently in Glidepath BV and others v. Thompson and Others. It was held that arbitration proceedings and material produced in the course of them are confidential to the parties and the arbitrator, subject to certain exceptions, including where disclosure is reasonably necessary to protect or establish the legal rights of a party to the arbitration against a third party, or otherwise in the interests of justice. There is no authority for any person to have access to materials in an arbitration to which it is not a party so it can use them as evidence in other proceedings to which it is a party. Arbitrators and those parties who chose arbitration clauses should be encouraged by the line taken by the Court in this case in protecting the arbitrating parties’ confidentiality from someone who was not a party to the agreement.

Cyprus has adopted the Model Law of UNCITRAL and has determined provisions about time limitation to achieve a flexible system of regulations that can adjust to the most demanding parties and provide them with satisfying solutions. This is a fact and should not be disputed. However the lack of case law has raised some logical questions.

Could the absolute freedom be equal to absolute limitation? Could it be that too much freedom generates uncertainty and due to this parties are reluctant to choose arbitration in Cyprus? Or should we seek the causes for this absence in another areas? Could the rootes of this absence lie in the domestic legal system and in particular in the procedural one? Which is a desirable legal system for the parties that choose arbitration?

The most certain way to discover the answers is by setting the right questions. This is why I chose to close my speech with questions, which either way seem to have their own voice and speak through the text.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.