The scarcity of literature on the international arbitration regime of the Republic of Azerbaijan is quite surprising. This oil rich state, independent since 1991, has in recent years enacted modern legislation on international arbitration and acceded to major international arbitration and related conventions. That these developments have gone virtually unnoticed is even more surprising as Azerbaijan has attracted and continues to attract large international investments that could give rise to international disputes and require close scrutiny of the state's international arbitration regime. The fact that Azerbaijan is a littoral state to the Caspian Sea, where exploitation of some of the world's largest undeveloped oil and gas reserves has begun without any agreement yet reached on the legal regime thereof, further increases the possibilities of both public and private international disputes, 1 and the need for information on Azerbaijan's international arbitration regime.

Previous arbitration regime

Foreign investors had from the very outset of Azerbaijan's independence the possibility to, and did, include arbitration agreements in their contracts, including with state entities. 2 The problem, however, was that no meaningful Azeri arbitration laws or conventions could be relied upon until very recently for the conduct of arbitrations, or the enforcement of resulting awards, in Azerbaijan. The former Azeri Code of Civil Procedure did authorize arbitration involving legal entities. 3 But no rules for the conduct of said arbitrations were provided. 4 The former Azeri Code of Civil Procedure did provide for the possibility of enforcement of foreign arbitral awards in Azerbaijan pursuant to applicable international treaties. Yet there were no such treaties in force in 1991 when Azerbaijan became independent. 5 There was thus room for improvement of Azerbaijan's international arbitration regime. This was achieved through the following six steps.

The ICSID Convention

The first major step taken by Azerbaijan to improve its international arbitration regime was on 18 October 1992 with the signature of the 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States. By becoming party to the ICSID Convention, Azerbaijan undertook to recognize an ICSID award as if it were a final judgment of an Azeri court. 6 As the scope of the ICSID Convention, [Page28:] however, is limited to investment disputes between states and nationals of other states, further measures were obviously required.

The European Convention

The second step taken by Azerbaijan was accession to the 1961 European Convention on International Commercial Arbitration. Azerbaijan is not listed as a party state to the 1961 European Convention. 7 Yet, there exists an Azeri law dated 31 May 1996 on accession to this Convention. This law seems, however, never to have been brought to the attention of the United Nations. Notwithstanding this absence of notification to the United Nations, one could argue that this important Convention, which contains provisions on arbitration and enforcement of foreign arbitral awards more favorable than those of the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards ('New York Convention'), is in force in Azerbaijan.

The Energy Charter Treaty

The third step taken by Azerbaijan to enhance its international arbitration regime was the ratification of the 1994 Energy Charter Treaty, which offers a well-developed dispute resolution system, including arbitration, for the settlement of energy related investment disputes between states and nationals of other states. The Energy Charter Treaty was ratified by, and entered into force in, Azerbaijan on 23 December 1997. But again, further measures were required as this treaty was limited to energy related investment disputes between states and nationals of other states, and thus did not apply to arbitrations involving ordinary commercial disputes between non-governmental entities.

Azeri Law on International Commercial Arbitration

The fourth step consisted in the enactment of legislation on international commercial arbitration. Like the large number of states that have enacted modern legislation on international arbitration during the last decade to encourage foreign investments and the conduct of arbitration proceedings within their territory, Azerbaijan enacted in 1999 a statute on international commercial arbitration, which entered into force on 15 February 2000.

The Azeri Law on International Commercial Arbitration is a replica of the 1985 UNCITRAL Model Law. Yet Azerbaijan does not figure among the Model Law states listed on the official UNCITRAL web site. 8 Azerbaijan is in fact one of the rare states that have adopted the Model Law without making any modifications thereto. This is both fortunate and regrettable. It is fortunate as a number of states, purportedly inspired by the Model Law, have made adverse modifications thereto, for example by [Page29:] adding annulment grounds that could lead to a review of the merits of the award. 9 It is regrettable as Azerbaijan could have (i) added modern provisions, for example on multi-party arbitrations, non-existent in the Model Law and (ii) reassured foreign investors through certain clarifications, e.g. that an award would be annulled or refused enforcement under Articles 34(2)(b)(ii) and 36(1)(b)(ii) of the Model Law or Azeri Law on International Commercial Arbitration only if contrary to 'international public policy' as opposed to 'public policy'.

The New York Convention

The fifth step taken by Azerbaijan was accession (without any reservation) on 29 February 2000 to the New York Convention, which entered into force on 29 May 2000. This accession, however, did not add anything to the enforcement of foreign awards in Azerbaijan as the Azeri Law on International Commercial Arbitration already contained identical provisions on the enforcement of foreign arbitral awards. The only practical benefit thereof was that it facilitated, in states that have ratified the New York Convention under the reciprocity reservation, the enforcement of awards rendered in Azerbaijan.

Bilateral investment treaties

The listing would not be complete if no mention were made of the bilateral investment treaties entered into by Azerbaijan during recent years, including with China, France, Georgia, Germany, Iran, Italy, Kazakhstan, Kyrgystan, Lebanon, Pakistan, Poland, Turkey, United Kingdom, Ukraine, United States and Uzbekistan. These treaties provide for settlement by arbitration of investment disputes (broadly defined in general) between a state and an investor of another state enabling investors of a contracting state to initiate arbitration proceedings against Azerbaijan irrespective of the existence of a separate arbitration agreement. There are, however, a few differences among these treaties, the most important of which concern the issue of retroactivity. Most Azeri bilateral investment treaties seem to apply only to 'investments existing at the time of entry into force as well as those established or acquired thereafter'. Such is the case, for example, of the bilateral investment treaty between Azerbaijan and the United States. 10 According to the United States, this treaty 'does not apply to disputes with respect to acts or facts which took place before the treaty came into force or to any situation which ceased to exist before the date of entry into force of the Treaty'. 11 This, however, may not be the case with other bilateral investment treaties, such as the bilateral investment treaty between Azerbaijan and France as it expressly covers investments made 'prior' to, as opposed to only those existing at the time of, the entry into force of the treaty, 12 a provision certainly aimed at protecting prior French investments.

* * *

Azerbaijan has, by the enactment of a modern international arbitration statute, accession to the major international arbitration conventions and signature of bilateral investment treaties, greatly enhanced its international arbitration regime. These [Page30:] efforts may, however, be insufficient to reassure foreign investors. This is because adopting a law is one thing, applying it correctly is another. As one puts it, 'le meilleur texte peut être neutralisé par un mauvais juge'. 13 The provisions of the above arbitration norms, e.g. 'public policy', are sometimes so ambiguous that the parties are in fact at the mercy of national courts.

A number of international arbitrations involving Azeri public entities have taken place during recent years. They do not seem, however, to have given rise to any applications before the Economic Court of Azerbaijan, vested with jurisdiction over applications in aid of arbitration and for the enforcement of foreign arbitral awards. 14 Some of these arbitrations did result in awards, including default awards, against Azeri parties. These awards were, however, enforced outside Azerbaijan against overseas bank accounts. There are thus no reported cases as of this date on the Azeri Law on International Commercial Arbitration or any arbitration-related international conventions entered into by Azerbaijan.

The risk exists that Azerbaijan may face the problem of the proper application of these norms, not necessarily because of its possible unwillingness to apply them according to the international practice but due to the unfamiliarity of most national judges with international arbitration, let alone the proper application thereof within the judiciary. Azerbaijan, which obviously would like to attract further investments, must reassure the international business community by creating the judicial and political environment required for the proper application of these norms. Pending such developments, foreign investors in Azerbaijan may be better off (i) providing or placing themselves under the protection of a treaty providing for the settlement of their investment disputes by ICSID arbitration so as to benefit from the exclusive annulment and enforcement mechanism of the ICSID Convention; (ii) holding the seat of their non-ICSID arbitrations outside Azerbaijan so as to avoid jurisdiction of local courts over applications in aid of arbitrations and the annulment of the resulting awards; and (iii) favouring the enforcement of resulting awards against the overseas' assets of their Azeri counter-parties.

1
In July 2001, for example, an Iranian gunship ordered two Azeri research vessels hired by British Petroleum to retreat from a Caspian Sea oilfield claimed by both Azerbaijan and Iran. Azerbaijan has a number of other boundary disputes, including continued demarcation of its boundary with Russia, a separatist conflict with Armenians of Nagorno Karabakh in Azerbaijan (under mediation by the Organization for Security and Cooperation in Europe), and a dispute with Georgia over the Alazani River boundary.

2
Article 42 of the 1992 Azeri Law on the Protection of Foreign Investments, for example, expressly provides for this possibility.

3
The 1964 Azeri Code of Civil Procedure was replaced in 2000 by the New Code of Civil Procedure.

4
A. Bati & R. Alloyarov, 'New Opportunities for Arbitration in Azerbaijan', Russia/Central Europe Executive Guide, September 2000, Vol. 10, No. 16.

5
ibid.

6
See ICSID Convention, Article 54(1).

7
See e.g. www.untreaty.un.org

8
See www.uncitral.org

9
H.G. Gharavi, The International Effectiveness of the Annulment of an Award (The Hague: Kluwer Law International, 2002) at 36ff.

10
Bilateral investment treaty between Azerbaijan and the United States dated August 8, 2000, Article 16.

11
Letter of transmittal dated September 12, 2000 of the White House to the Senate for ratification of the bilateral investment treaty between Azerbaijan and the United States.

12
Bilateral investment treaty between Azerbaijan and France dated September 14, 2000, Article 1(e).

13
J. Paulsson, 'L'exécution des sentences arbitrales dans le monde de demain', [1998] Rev. arb. 648. [Translation: 'the best of laws may be neutralized by a bad judge'.]

14
Azeri Law on International Commercial Arbitration, Article 6.