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The ABC of Arbitration: Arguable aspects of arbitration as an alternative means of dispute resolution

October 23, 2019

Summary

The blog deals with the controversial aspects of arbitration, an alternative dispute resolution technique. Arbitration may be defined as a developed device to help parties maintain contractual obligation. Because of its reliance on custom, arbitration permits greater flexibility in decision making. Besides, arbitration is considered to be more private, economic, rapid, certain, and conducive to business relationships than conventional courts. Therefore, it is regarded as a good alternative to the latter, if not the substitute for them. Although a lot of has already been done exploring various aspects of arbitration, the author of the blog strongly believes that arbitration deserves closer attention as there is still much to be done.The blog draws a brief comparison between arbitration and court litigation. The blog explores several different types of arbitration, which allows to make the informative decision which type of arbitration to choose in a particular situation. The blog stresses certain aspects everyone should be aware of before recourse to arbitration. It is argued that arbitration should be perceived as an instrument to ensure cooperation in modern society.The blog is concluded by a brief discussion of particular aspects in need of urgent resolution in order to ensure effective arbitration process, right and legal result.

Introduction

Two internationally famous arbitrators, Alan Redfern and Martin Hunter, have noticed that that an attempt at investigating practices of international commercial arbitration resembles straining one‘s eyes into the dark due to scarcity of publications devoted to arbitration-based resolutions [14, p. 920]. Despite this fact alternative ways of dispute resolution, with arbitration to be found with an increasing regularity among them, have recently attracted much scholarly attention to the effect that the past two decades may be referred to as the flourishing era of arbitration. The lawyers make a conclusion that arbitration is gradually becoming a globally recognized and nurtured concept [14, p. 920]. The need for arbitration is stipulated by its peculiarities, which the international community assesses highly taking into consideration the constantly growing number of disputes in such areas as modern technologies, intellectual property, engineering, and construction. The aforementioned peculiarities of arbitration are these: flexibility,confidentiality, and reasonable use of time resources. The market of alternative ways of dispute resolution, which also includes arbitration, has become a certain niche for „suppliers“ to offer various ways of dispute resolution (supply), of which subjects, depending on their needs (demand), can select the one that suits them best [14, p. 920].

This blog seeks to provide a brief overview of the domain of arbitration and critically assess some of its more arguable aspects. A discussion of some of the peculiarities of dispute resolution by means of arbitration will follow below. Arbitration will also be juxtaposed to conventional litigation in court. We shall also discuss and compare several types of international commercial arbitration so that to allow for an informative decision when selecting a particular type of arbitration. The blog will be concluded by a summary of aspects which one should bear in mind when submitting a dispute to arbitration, an alternative way of dispute resolution.

Commencement of arbitration

Regretfully a stay in the event of lis pendens, that allows to eliminate duplication of the proceedings at a state court and arbitral tribunal or avoid the risk of contradictory judgements [5, p. 441], between court and arbitration proceedings does not reflect common practise. The most significant legal consequence of commencement of an arbitration it is a suspension of prescription periods and other time limits [4, N. 20-10, p. 507].

Essential features of arbitration, main differences to state court litigation, and advantages and disadvantages of arbitration:

a) Arbitration as an alternative technique of dispute resolution

State courts on the contrary to arbitration are maintained by the state. Usually arbitration is a more rapid mean of dispute resolution. Unfortunately, it is not always cheaper as costs which have to be covered by arbitration parties generally are higher than it would cost them to refer the dispute to state courts [1, N. 52, p. 12]. In the state courts as distinct from arbitration court rooms, parties of the procedure ( e.g. experts, witnesses), judges are financially supported by the state [1, N. 52, p. 12] and those costs are not always entirely to be covered by the parties. Though, it is all about the complexity of the case. If arbitration proceedings run smoothly and award is rendered quickly, costs of arbitration proceedings are considerably lower comparing with the state courts litigation due to the long process in the latter. When parties agree to arbitration, they remove their case from the state courts jurisdiction. Arbitration is an alternative technique of dispute resolution compared to national court litigation.

b) The arbitration agreement- cornerstone of every singular arbitration

The foundation of every arbitration- a valid arbitration agreement which may be provided as an arbitration clause in the contract out of which dispute arises or as an agreement of submission to arbitration. Usually an arbitration clause relates to a dispute which may arise in the future though an agreement of submission to arbitration is drawn up to deal with the existing dispute.

c) Constitution of the arbitral tribunal

The parties are free to decide on the qualifications that arbitrators should have in order to be appointed to arbitral tribunal [4, N. 10-43, p. 235; 15, N. 724, p. 258]. These requirements may be determined directly in the arbitration agreement or inderectly by choosing arbitration rules [4, N. 10-43, p. 235; 15, N. 724, p. 258]. If the arbitrator does not fulfill requirements defined by the parties the arbitrator can be challenged on the parties request [4, N. 10-43, p. 236] or the parties may set aside arbitral award on the basis that the arbitral tribunal was not constituted properly [4, N. 10-43, p. 236]. Judicial functions exercise by arbitrators are similiar to national court judges [4, N. 11-1, p. 225] that is why the state requires that the composition of the arbitral tribunal meets certain minimum standarts in order to legal procedure to be fair, e.g. independence and impartiality of arbitrator during entire arbitration procedure [4, N. 11-1, p. 225; 15, N. 1022, p. 561]. Moreover, the arbitrators have a duty to disclose all relevant information which may give raise to arbitrator‘s independence or impartiality [4, N. 11-4, p. 256]. International Bar Association [8] developed IBA Guidelines on Conflicts of Interest in International Arbitration [7]. IBA Guidelines on Conflicts of Interest do not override applicable state law or arbitration rules choosen by the parties, however these guidelines helps making decision matters concerning imopartiality, disclosure, and independence. Other provisions which may ne consulted when it comes to conflicts of interest in international arbitration is the Code of Ethics in international commercial arbitration aprroved by the American Bar Association and American Arbitration Association [22].

Parties are free to agree on the number of arbitrators and appointment of them directly in arbitration agreement or indirectly by referring to the certain arbitration rules. However, it is difficult to think of circumstances when appointment of more than three arbitrators is reasonable as it leads to higher costs and reduced efficiency [10, p. 35; 16, N. 4-19, p. 186]. In theory even number of arbitrators is possible assuch agreements are generally valid [16, N. 4-19, p. 185; 10, p. 35]. Though in order for a deadlock situation not to occure one of arbitrators has to be empowered to make a tie-breaking decision.

Arbitrator is a private subject appointed by the parties [15, N. 889, p. 313]. Reliationship between the arbitrators and the parties is contractual [15, N. 889, p. 313]. It is based on arbitration agreement which is known as receptum arbitri. Contractual reliationship arises when arbitrator accept appointment to resolve the legal dispute between the parties [3]. In legal literature the nature of the arbitral contract is said to be contraversial as the latter considered to be an agency contract, a contract for the provision of services or a contract sui generis [4, N. 12-8, p. 278; 13, N. 1115, p. 605; 5, N. 437, p. 368].

Arbitrators are liable for breaches of contractual duties [4, N. 12-37, p. 288; 15, N. 909, p. 319; 5, p. 373]. Arbitrator‘s mandate is completed when he/she renders an award [13, N. 1131, p.611; 4, N. 12-15, p. 281].

d) The parties choose the place of arbitration

On the contrarary to state court litigations where the dispute determines where the proceedings take place, in the arbitration the parties decides on seat of arbitration. Consequently the place of arbitration can be situated in a country with which neither a dispute, nor the party has any connection. The seat of the arbitration is important for the conduct of the arbitration and the enforcement of the arbitral award.

Advantage of opportunity to choose the place of arbitration.

Having international litigation in national courts at least one of the party will feel discomfort due to a procedure and the language with which he/she is not familiar with. The foreign party is enforced to learn the rules of „local game“ [1, N. 40, p. 10]. Meanwhile, when the seat of arbitration is in a neutral country, none of the parties has a privilege of playing at home [1, N. 41, p. 10].

e) The arbitral award is final, binding and enforceable

The arbitral award is final. It is not the case in court judgements as a court decision is a first step on a ladder of appeals. However, the wording „final“ is relevant as if the court does not enforce the arbitral award it becomes useless. In international commercial arbitration the grounds for challenge of an award are strictly limited which allows to state that arbitration is faster than state court litigation. On average international commercial arbitration proceedings last 0.5-2 years (excluding appealing to local courts) [21].

f) Flexibility and informality of arbitral proceedings derive from guiding arbitral principle- party autonomy and contractual nature of the arbitration

Arbitration derives from a contract and procedural issues are governed by various arbitration rules which are often determined in arbitral agreement as a link to a certain set of arbitration rules. Arbitration exist within legal framework, not in legal vacuum. In order for an arbitral award to become binding at least one coutry‘s national law should permit to solve certain dispute by arbitration instead of court litigation. As a consequence, arbitration proceedings embodies legal and regulatory aspects. The procedures choosen by the parties are subject to imperative provisions of lex arbitri. A vast majority of national arbitration laws establishe imperative procedural requirements that must be satisfied in order to comply with the concept of fairness and the public policy of the state [15, N. 91, p. 35; 15, N. 10, p. 3].

g) Confidentiality

On the contrary to the court proceedings which are generally opened to the press and the public, arbitration is confidential [10, p. 89]. However, there is no uniform standard of confidentiality exists. There is a rethorical question arises as to how the parties can be confident that arbitration will warrant a certain level of confidentiality that they expect. Addicionally duty of confidentiality can be provided by national laws, institutional arbitration rules and the parties can contractually make their proceedings confidential. Outsiders may be entitled to be present at hearings only with a mutual consent of the parties and the arbitrators. The requirement of confidentiality is also applied to an arbitral award which may be published only with consent of the parties. Confidentiality is an important instrument to the enterprises to preserve significant facts from competetive companies and public in general, e.g. business secrets and know-how which protection is not warranted e.g by patents. Naturally it is not possible to interdict disclosure of an arbitral award to the third parties if it is required to protect arbitration party‘s rights and only to extent needed in order to protect latter rights, e.g. in order to enforce arbitral award or use it in the proceedings in contra of the third parties. The parties are free to allow to publish an arbitral award that allows to form precedents, authoritative interpretations, and standard sets of rules.

h) Which subjects are bound by the arbitration agreement?

General rule- an arbitration agreement binds only the parties who have signed it [15, N. 492, p. 170]. Though, there are certain circumstances when arbitration agreement is binding on a third party, who even did not sign it. According to some scholars, the issue does not relate to signatory or non-signatory party because a vast majority of national laws does not require signatures of the parties (the are no form requirements) as written evidence is enough to prove intention of the parties to refere their dispute to arbitration [5, p. 211]. An arbitration agreement may be extended when a company which belongs to a group of companies entered into arbitration agreement, consequently another company of the same group may become a party to the arbitration even the latter has not signed an arbitration agreement. However, this matter may arise only if every company has a separate legal personality as every arbitration agreement signed by legal entity is binding to the affiliate because they are a single juridicial person [13, N. 500, p. 282]. The national laws considering this matter varies a lot. E.g. French courts are in favour of extension of an arbitration agreement to companies of the same group if such extension reflects true intention of the parties. An obligation to arbitrate mainly arises from the interpretation of a party‘s true intension to arbitrate in a particular case not from sole existance of group of the companies 13, N. 500, p. 238; 5, p.212]. Similiar dilemma may arise when talking about complex contracts, e.g. construction projects, where participate several parties but arbitration agreement is not signed by all the participants of the construction project. However, the national laws differ on essential conditions in order to extend an arbitration agreement to third parties [13, N. 500, p. 282].

References

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  26. § 1033 German Code on Civil Procedure http://www.chamber.se/arbitration/shared_files/laws/arbitract_us_cont.html . Accessed: 10/04/2008.
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