Arbitration: Commercial Dispute Settlement Mechanism

Legal friction amongst businesses is a naturally occurring phenomenon. However, if there is no equally-dynamic venue and avenue to solve those frictions, business activity will get stuck. The normal court system which handles criminal cases and takes months and years to conclude, is too slow for business.

Though arbitration is globally preferred as the best business dispute settlement mechanism, Ethiopia has not had the necessary legal frameworks in place. Usually, business arbitration awards rendered in any country across the world are acceptable by the highest courts. However, this was missing in Ethiopia until the nation signed the 1958 New York Convention in 2021.

Until now, most business conflicts arising from contracts between Ethiopian businesses and foreign partners, have been arbitrated outside of Ethiopia. This has its costs in terms of undue foreign currency consumption, inability to receive fair arbitration, and misconception of Ethiopia as business unfriendly. Ashenafi Endale explores the new changes after the ratification of the convention, as well as the new local arbitration proclamation.

In 2013, the Ethio-Djibouti Railway Company (EDRC) and Consta JV went to The Hague for arbitration to settle the controversy arisen over repair works the latter rendered to the former. After three years of litigation, the three-member panel of arbitrators ruled in favor of the contractor, Consta JV, and awarded the company EUR20 million. Although both parties went to The Hague with the understanding that the arbitrators’ ruling is binding and final, in 2016, EDRC went to the Court of Cassation of the Ethiopian Federal Supreme Court looking to reverse the ruling citing a fundamental error of law was committed. After months, the court reversed The Hague’s decision and nullified the contract.

This is not the only arbitration award that was reversed by the Court of Cassation. A report published by the Supreme Court last year shows ten similar cases were filled at the Court of Cassation in the last three years. “These ten cases which appeared in the report are just the tip of the iceberg,” explains Michael Teshome, Director of the Ethiopian Mediation & Arbitration Center and also Attorney and Consultant at Law. “The report only published very few and selected cases.”

Arbitration is becoming the major instrument in especially settling commercial international disputes. As a result, the existence of a modern arbitration system is one of the crucial factors which attracts foreign investments. “International investors are willing to invest in countries where the judiciary system and courts accept and implement arbitration awards,” explains Ermias Ayalew, Assistant Professor of law.

Until recently, arbitral awards rendered in other countries were not treated as final in Ethiopia because arbitration had been governed by civil and other codes from the 1960s. In addition, Ethiopia was not a signatory of the New York Convention, until it did so in 2021. The commercial code was amended and ratified in 2020 whilst the Arbitration and Conciliation Working Procedure Proclamation (ACWPP) and the New York Convention were ratified in 2021.

“These changes make Ethiopia an arbitration-friendly investment destination,” says Ermias, who participated in the preparation of the ACWPP. “The proclamation addressed many issues untouched before.”

Arbitration, which is an alternative to a court of law, is a globally widely-used mechanism used to particularly settle commercial disputes. Established by treaty in 1899, the Permanent Court of Arbitration, is a high-level body that internationally provides diverse dispute resolution services. “Courts are inflexible and time consuming since they are usually flooded with many cases. It takes years for courts to pass rulings, especially on complicated business cases,” says Ermias. “Arbitration tribunals, on the other hand, take shorter time, because the tribunal is installed to look into a particular case. Especially when cases are business-related and require timely rulings, courts are less helpful.”

But even after the ratification of the New York Convention and the ACWPP, as well as the amendment of the old civil and commercial codes, Ethiopia’s policy towards arbitration is still ambiguous for many. The proclamation states that the arbitration awarded in any signatory country is taken as the final decision and will be enforced in Ethiopia. However, Ethiopia’s constitution places the Court of Cassation as the final verdict in Ethiopia’s territory. According to Ermias, the major shortcoming of the ACWPP is that it does not say anything about other conflict resolution mechanisms that are used to settle commercial disputes.

“Ethiopian courts and judges do not want arbitration. They think any fully independent system separate from the court system undercuts their power. Judges see arbitration as a threat. They have even been protesting against the introduction of the arbitration proclamation. That is why Ethiopia did not previously ratify the New York Convention,” argues Michael.

The other major challenge is the lack of an arbitration center that can represent Ethiopia at the national level. Many African countries have such an institute. For instance, the Kigali Arbitration Center is widely known in terms of serving as a regional arbitration seat and also provides qualified arbitrators. African arbitration institutions charge reasonable fees but similar centers in Europe, Asia, and America are expensive.

“The new arbitration proclamation states that parties can assign Addis Ababa as a legal seat of arbitration while designating another city as a physical seat,” explains Hafez Virjee, Cofounder and President of Delos Dispute Resolution, an independent arbitration institution based in Paris and operating across the world including in Ethiopia by partnering with Aman Assefa & Associates Law Office. EBR

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Ashenafi Endale

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