Under Article 21.3 of the UNCITRAL arbitration rules, a challenge to the competence of the arbitrators must be made in the statement of defence, failing which the party is deemed to have accepted the tribunal's competence to hear the dispute.

Section 34 of the Swedish Arbitration Act (the Act) provides grounds for challenging an award. Pursuant to Section 34, second paragraph, a party is not entitled to rely upon a circumstance which, through participation in the proceedings without objection, or in any other manner, he may be deemed to have waived.

SOCAR is an Azerbaijani state-owned company which manages the country's oil resources. In November 1998, SOCAR concluded an agreement with Frontera, and other contractors, relating to the exploitation of certain oil fields in Azerbaijan in exchange for delivery of oil at reduced prices. Disputes between the parties were agreed to be resolved by arbitration in Stockholm in accordance with the UNCITRAL Rules.

Disputes soon arose in respect of the quantity of oil to be delivered and alleged late payment by SOCAR. In July 2003, Frontera requested arbitration and a tribunal was constituted. In its first written submissions in the arbitration proceedings, SOCAR submitted that the relevant claims had been settled amicably between the parties and resolved by a binding agreement between them. At that stage the argument was submitted as a material point of defence, and SOCAR failed to clarify that the argument was also intended as a challenge to the competence of the arbitrators to try the claims which were alleged to have been settled by the agreement in question.

Only a minor part of Frontera's claims were accepted by the tribunal. In consequence, Frontera was ordered to pay part of SOCAR's costs.

SOCAR challenged the award in the Svea Court of Appeal in Stockholm (the court), requesting that part of the award should be set aside because the relevant claim was not covered by the alleged arbitration agreement between the parties.

The court initially noted, in its reasoning, that section 34 of the Act does not set out a decisive time limit as to when a party must submit an objection in order to avoid waiving its right to challenge the award. This issue depends on all the relevant circumstances in the specific case. In relation to challenges to the competence of the arbitrators, the court concluded that a protest should be made in the statement of defence. Reference was made to the provisions of the UNCITRAL Rules.

The court further noted that, in order for a party to retain a right to challenge the award, it is not only necessary that the party expressly raise its objections during the arbitration proceedings but, also, that such objection corresponds to any later ground of challenge.

Consequently, if a party submits a claim to the tribunal which is not covered by the arbitration agreement, the other party must lodge an objection and clarify that the claim falls outside the competence of the arbitrators, if that party wishes to retain a right to challenge the competence of the arbitrators - or their conduct of the proceedings - as a basis for challenging the award. It is simply not sufficient to deny the claim on material grounds as SOCAR had done in the present arbitration. Hence, SOCAR's challenge failed.

It is, of course, no surprise that parties are obliged to lodge objections to the competence of the tribunal without undue delay and that the respondent should do so, at the latest, in the statement of defence. It is important for the parties to understand that the obligation to react and lodge objections in good time is relevant throughout the proceedings - for example, if new claims or arguments are submitted in the course of the proceedings which allegedly fall outside the scope of the competence of the tribunal. If the party wishes to retain a right to challenge the competence of the arbitrators to try that claim and/or argument then he must react, lodge an objection and clarify the reasons for the protest.

This also applies where a party considers that the arbitrators have conducted the proceedings incorrectly - for instance if the party considers that he was not afforded a reasonable opportunity to present his case and his evidence. If so, that party is obliged to make this clear to the tribunal by lodging an objection without undue delay.