Arbitration

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Arbitration is a method of having a dispute between two or more parties resolved by impartial persons. There are certain laws governing the conduct of an arbitration proceeding that must be considered by those planning to use arbitration to resolve the dispute. Most importantly, perhaps, is the fact that an arbitration award is final and binding, subject to review by a court only on a very limited bases. Parties should recognize, too, that in choosing a private court of arbitration as a means of resolving a dispute, they generally give up their right to pursue the matter through the public courts.

Arbitration is a legal technique for the resolution of disputes outside the courts, wherein the parties to a dispute refer it to one or more persons (the "arbitrators" or "arbitral tribunal"), by whose decision (the "award") they agree to be bound. In the United States and other countries, the term is sometimes used in the context of describing alternative dispute resolution (ADR), a category that more commonly refers to mediation (a form of settlement negotiation facilitated by a neutral third party). It is more helpful, however, simply to classify arbitration as a form of binding dispute resolution, equivalent to litigation in the courts, and entirely distinct from the various forms of non-binding dispute resolution, such as negotiation, mediation, or non-binding determinations by experts.

Arbitration is today most commonly used for the resolution of commercial disputes, particularly in the context of international commercial transactions. It is also used in some countries to resolve other types of disputes, such as labour disputes, consumer disputes or family disputes, and for the resolution of certain disputes between states and between investors and states.

History

It is not known exactly when formal non-judicial arbitration of disputes first began. Under English law, the first law on arbitration was the Arbitration Act 1697, but when it was passed arbitration was already common. The first recorded judicial decision relating to arbitration was in England in 1610. The noted Elizabethan English legal scholar Sir Edward Coke refers to an earlier decision dating from the reign of Edward IV (which ended in 1483). Early arbitrations at common law suffered from the fatal weakness that either party to the dispute could withdraw the arbitrator's mandate right up until the delivery of the award if things appeared to be going against them (this was rectified in the 1697 Act).

The Jay Treaty of 1794 between Britain and the United States sent unresolved issues regarding debts and boundaries to arbitrarion, which took 7 years and proved successful.

In the first part of the twentieth century, many countries (France and the United States being good examples) began to pass laws sanctioning and even promoting the use of private adjudication as an alternative to what was perceived to be inefficient court systems.

The growth of international trade however, brought greater sophistication to a process that had previously been largely ad hoc in relation to disputes between merchants resolved under the auspices of the lex mercatoria. As trade grew, so did the practice of arbitration, eventually leading to the creation of a variant now known as international arbitration, as a means for resolving disputes under international commercial contracts.

Nature of Arbitration

Arbitration is a proceeding in which a dispute is resolved by an impartial adjudicator whose decision the parties to the dispute have agreed will be final and binding. Arbitration is not the same as:

• judicial proceedings, although in some jurisdictions, court proceedings are sometimes referred as arbitrations
• alternative dispute resolution (or ADR)
• expert determination
• mediation

Advantages of arbitration

Parties often seek to resolve their disputes through arbitration because of a number of perceived potential advantages over judicial proceedings:

1. when the subject matter of the dispute is highly technical, arbitrators with an appropriate degree of expertise can be appointed
2. arbitration is often faster than litigation in court
3. arbitration can be cheaper
4. arbitral proceedings and an arbitral award are generally private
5. the arbitral process enjoys a greater degree of flexibility than the courts
6. because of the provisions of the New York Convention 1958, arbitration awards are generally easier to enforce abroad than court judgments
7. in most legal systems, there are limited avenues for appeal of an arbitral award, which can mean swifter enforcement and less scope for a party to delay matters.

However, some of the disadvantages of arbitration can be that:

1. the parties need to pay for the arbitrators, which adds an additional layer of legal cost
2. although usually thought to be speedier, when there are multiple arbitrators on the panel, juggling their schedules for hearing dates in long cases can lead to delays
3. in some legal systems, arbitral awards have fewer enforcement remedies than judgments
4. arbitrators are generally unable to order interlocutory measures against a party, making it easier for a party to take steps to avoid enforcement of an award (such as the relocation of assets offshore)
5. rule of applicable law is not binding, and arbitrators not subject to overturn on appeal may be more likely to rule according to their personal ideals.

Arbitrability

By their nature, the subject matter of some disputes are not capable of arbitration. Matters relating to crimes, status and family law are generally not considered to be arbitrable. However, most other disputes that involve private rights between two parties can be resolved using arbitration. In some disputes, parts of claims may be arbitrable and other parts not. For example, in a dispute over patent infringement, a determination of whether a patent has been infringed could be adjudicated upon by an arbitration tribunal, but the validity of a patent could not (as patents are subject to a system of public registration, an arbitral panel would have no power to order the relevant body to rectify any patent registration based upon its determination).

Seat of the arbitration

Most legal systems recognise the concept of a "seat" of the arbitration, which is a geographical and legal jurisdiction to which the arbitration is tied. The seat will normally determine the procedural rules which the arbitration follows, and the courts which exercise jurisdiction over the seat will have a supervisory role over the conduct of the arbitration.

Arbitration Agreement

See also: Arbitration clause

Arbitration is a consensual process; parties will only ever arbitrate where they agree to do so. Such agreements are generally divided into two types:

• agreements which provide that, if a dispute should arise, it will be resolved by arbitration. These will generally be normal contracts, but they contain an arbitration clause
• agreements which are signed after a dispute has arisen, agreeing that the dispute should be resolved by arbitration (sometimes called a "submission agreement")

The former is the far more prevalent type of arbitration agreement. Sometimes, legal significance attaches to the type of arbitration agreement. For example, in certain Commonwealth countries, it is possible to provide that each party should bear the own costs in a conventional arbitration clause, but not in a submission agreement.

In keeping with the informality of the arbitration process, the law is generally keen to uphold the validity of arbitration clauses even when they lack the normal formal language associated with legal contracts. Clauses which have been upheld include:

• "arbitration in London - English law to apply"
• "suitable arbitration clause"
• "arbitration, if any, by ICC Rules in London"

The courts have also upheld clauses which specify resolution of disputes other than in accordance with a specific legal system. These include provision indicating:

• that the arbitrators "must not necessarily judge according to the strict law but as a general rule ought chiefly to consider the principles of practical business"
• "internationally accepted principles of law governing contractual relations"

Agreements to refer disputes to arbitration generally have a special status in the eyes of the law. For example, in disputes on a contract, a common defence is to plead the contract is void and thus any claim based upon it fails. It follows that if a party successfully claims that a contract is void, then each clause contained within the contract, including the arbitration clause, would be void. However, in most common law countries, the courts have accepted that:

1. a contract can only be declared void by a court or other tribunal; and
2. if the contract (valid or otherwise) contains an arbitration clause, then the proper forum to determine whether the contract is void or not, is the arbitration tribunal.

Arguably position is potentially unfair; if a person is made to sign a contract under duress, and the contract contains an arbitration clause highly favourable to the other party, the dispute is still referred to that arbitration tribunal. Nonetheless, the general rule does allow for commercial expediency; any other solution (where one first had to go to court to decide whether one had to go to arbitration) would be self defeating.

Arbitral tribunal

The term, arbitral tribunal is use to denote the arbitrator or arbitrators sitting to determine the dispute. The composition of the arbitral tribunal can vary enormously, with either a sole arbitrator sitting, two or more arbitrators, with or without a chairman or umpire, and various other combinations.

In most jurisdictions, an arbitrator enjoys immunity from liability for anything done or omitted whilst acting as arbitrator unless the arbitrator acts in bad faith.

Arbitral tribunals are usually divided into two types:

• ad hoc arbitation tribunals, which simply appoints arbitrators approved by the parties; or
• institutional arbitration tribunals, which are professional bodies providing arbitration services, such as the LCIA in London or the ICC in Paris.

Permanent tribunals tend to have their own rules and procedures, and tend to be much more formal. They also tend to be more expensive, and, for procedural reasons, slower.

Duties of the tribunal

The duties of a tribunal will be determined by a combination of the provisions of the arbitration agreement and by the procedural laws which apply in the seat of the arbitration. The extent to which the laws of the seat of the arbitration permit "party autonomy" (the ability of the parties to set out their own procedures and regulations) determines the interplay between the two.

However, in almost all countries the tribunal owes several non-derogable duties. These will normally be:

• to act fairly and impartially between the parties, and to allow each party a reasonable opportunity to put their case and to deal with the case of their opponent (sometimes shortened to: complying with the rules of "natural justice"); and
• to adopt procedures suitable to the circumstances of the particular case, so as to provide a fair means for resolution of the dispute.

Procedure of the tribunal

The most essential matters of procedure -- such as any disagreement over the appointment or replacement of arbitrators, the jurisdiction of the tribunal itself, or the validity of an arbitration award -- are determined by the procedural law of the seat of the arbitration, and may be decided by recourse to the courts of the place that is the seat of the arbitration.

All other matters of procedure are generally determined by the arbitral tribunal itself under its own inherent jurisdiction (depending on national law and respect for due process) and the preferences of the arbitrators, the parties, and their counsel. The arbitrators' power to determine procedural matters normally includes:

• mode of submitting (and challenging) evidence
• time and place of any hearings
• language and translations
• disclosure of documents and other evidence
• use of pleadings and/or interrogatories
• the appointment of experts and assessors

Arbitral Awards

Although arbitration awards are characteristically an award of damages against a party, in many jurisdictions tribunals have a range of remedies that can form a part of the award. These may include:

1. payment of a sum of money (conventional damages)
2. the making of a "declaration" as to any matter to be determined in the proceedings
3. in some jurisdictions, the tribunal may have the same power as a court to:
   1. order a party to do or refrain from doing something ("injunctive relief")
   2. to order specific performance of a contract
   3. to order the rectification, setting aside or cancellation of a deed or other document.
4. In other jurisdictions, however, unless the parties have expressly granted the arbitrators the right to decide such matters, the tribunal's powers may be limited to deciding whether a party is entitled to damages. It may not have the legal authority to order injunctive relief, issue a declaration, or rectify a contract, such powers being reserved to the exclusive jurisdiction of the courts.

Enforcement of Arbitration Awards

One of the reasons that arbitration is so popular in international trade as a means of dispute resolution, is that it is often easier to enforce an arbitration award in a foreign country than it is to enforce a judgment of the court.

Under the New York Convention 1958, an award issued a contracting state can generally be freely enforced in any other contracting state, only subject to certain, limited defences.

Virtually every significant commercial country in the world is a party to the Convention, but relatively few countries have a comprehensive network for cross-border enforcement of judgments of the court.

The other characteristic of cross-border enforcement of arbitration awards that makes them appealing to commercial parties is that they are not limited to awards of damages. Whereas in most countries only monetary judgments are enforceable in the cross-border context, no such restrictions are imposed on arbitration awards and so it is theoretically possible (although unusual in practice) to obtain an injunction or an order for specific performance in an arbitration proceeding which could then be enforced in another New York Convention contracting state.

The New York Convention is not actually the only treaty dealing with cross-border enforcement of arbitration awards. The earlier Geneva Convention on the Execution of Foreign Arbitral Awards 1927 [1] remains in force, but the success of the New York Convention means that the Geneva Convention is rarely utilised in practise.

Arbitration with sovereign governments

Certain international conventions exist in relation to the enforcement of awards against nation states.

• The Washington Convention 1965 relates to settlement of investment disputes between nation states and citizens of other countries. The Convention created the International Centre for Settlement of Investment Disputes (or ICSID). Compared to other arbitration institutions, relatively few awards have been rendered under ICSID.
• The Algiers Declaration of 1981 established the Iran-US Claims Tribunal to adjudicate claims of American corporations and individuals in relation to expropriated property during the Islamic revolution in Iran in 1979. The tribunal has not been a notable success, and has even been held by an English court to be void under its own governing law.

Costs

In many legal systems - both common law and civil law - it is normal practice for the courts to award legal costs against a losing party, with the winner becoming entitled to recover an approximation of what it spent in pursuing its claim (or in defense of a claim). The U.S.A. is a notable exception to this generally applicable rule, as except for certain extreme cases, a prevailing party in a US legal proceeding does not become entitled to recoup its legal fees from the losing party.

Like the courts, arbitral tribunals generally have the same power to award costs in relation to the determination of the dispute. In international arbitration as well as domestic arbitrations conducted in countries where courts may award costs against a losing party, the arbitral tribunal will also determine the portion of the arbitrators' fees that the losing party is required to bear.

Appeals

Generally speaking, by their nature, arbitration proceedings tend not to be subject to appeal, in the ordinary sense of the word.

However, in most countries, the court maintains a supervisory role to set aside awards in extreme cases, such as fraud or in the case of some serious legal irregularity on the part of the tribunal.

"Manifest disregard"

In American arbitration law there exists a small but significant body of case law which deals with the power of the courts to intervene where the decision of an arbitrator is in fundamental disaccord with the applicable principles of law or the contract.

Unfortunately there is little agreement amongst the different American judgments and textbooks as to whether such a separate doctrine exists at all, or the circumstances in which it would apply. There does not appear to be any recorded judicial decision in which it has been applied. However, conceptually, to the extent it exists, the doctrine would be an important derogation from the general principle that awards are not subject to review by the courts.

Nomenclature

As methods of dispute resolution, arbitration procedure can be varied to suit the needs of the parties. Certain specific "types" of arbitration procedure have developed, particularly in North America.

• Judicial Arbitration is, usually, not arbitration at all, but merely a court process which refers to itself as arbitration, such as small claims arbitration before the County Courts in the United Kingdom.

• High-Low Arbitration, or Bracketed Arbitration, is an arbitration wherein the parties to the dispute agree in advance the limits within which the arbitral tribunal must render its award. It is only generally useful where liability is not in dispute, and the only issue between the party is the amount of compensation. If the award is lower than the agreed minimum, then the defendant only need pay the lower limit; if the award is higher than the agreed maximum, the claimant will receive the upper limit. If the award falls within the agreed range, then the parties are bound by the actual award amount. Practice varies as to whether the figures may or may not be revealed to the tribunal, or whether the tribunal is even advised of the parties' agreement.

• Non-Binding Arbitration is a process which is conducted as if it were a conventional arbitration, except that the award issued by the tribunal is not binding on the parties, and they retain their rights to bring a claim before the courts or other arbitration tribunal; the award is in the form of an independent assessment of the merits of the case, designated to facilitate an out-of-court settlement.

• Pendulum Arbitration refers to a determination in industrial disputes where an arbitrator from a government or a specialist agency has to resolve a claim between a trade union and management by making a determination of which of the two sides has the more reasonable position. The arbitrator must choose between the options, and cannot select an alternative position which is not presented by either side.

• This form of arbitration is also known as Baseball Arbitration. It takes its name from a practice which arose in relation to salary arbitration in Major League Baseball.

• Night Baseball Arbitration is a variation of baseball arbitration where the figures are not revealed to the arbitration tribunal. The arbitrator will determinate the quantum of the claim in the usual way, and the parties agree to accept and be bound by the figure which is closest to the tribunal's award.

Bibliography

• Christian Buhring-Uhle and Gabriele Lars Kirchhof. Arbitration and Mediation in International Business, 2nd Edition (2006)
• R David. Arbitration in international trade (1985)
• Yves Dezalay and Bryant G. Garth. Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order, (1998)
• The Permanent Court of Arbitration. International Alternative Dispute Resolution: Past, Present and Future, (2000)
• A Redfern and M Hunter, Law and Practice of International Commercial Arbitration (2003)
• Tibor Varady, John J. Barcelo, and Arthur Taylor Von Mehren. International Commercial Arbitration (2006)

See also

• Arbitral tribunal
• Arbitration award
• Arbitration in the United States of America
• Conflict resolution research
• Alternative dispute resolution
• Expert determination
• International arbitration
• UNCITRAL Model Law on International Commercial Arbitration

External links

• Private Arbitration in Georgia By Tamar Kvintradze, Attorney at Getsadze & Pateishvili Law Office
• Latest Indian judgments on arbitration law
• Introduction to Securities Arbitration