BSM601: Arbitration Law Topic 1: Introduction to Arbitration
Topic 1: Alternative Dispute Resolution.
The Nature
Arbitration. Sources of Arbitration Rules; Institutional Rules
of
Topic Preview
• Litigation and ADR methods: the position of arbitration
• What is arbitration?
• Other features of arbitration: expense and privacy
• Industry use of arbitration
• Sources of arbitration rules
• Rules for Institutional and ad hoc arbitration
Topic Content
1. LITIGATION AND
ARBITRATION
ADR
METHODS:
THE
POSITION
OF
“Disputes are a reality of modern life. Each of us has our own
perspectives, our own interest, our own resources, our own aspirations,
and our own fears. It is no wonder, that as we run into each other, we
sometimes find ourselves in disagreement about what has happened or
about what ought to happen.”1
Individuals and businesses alike find themselves involved in disputes of
various nature and origins. Over time, mankind has developed a very
sophisticated network of methods to deal with disputes. What follows in
the next sections is a description of some of the most common methods
used for resolution of civil and commercial legal disputes (as
distinguished from criminal and administrative justice and dispute
resolution which will not concern us in this module).
Alternative Dispute Resolution (ADR) is a generic name for a number of
different techniques used to resolve disputes. There are many
definitions of ADR, mainly boiling down to that it is a means of dispute
settlement distinct from litigation in courts of law. ADR comes in many
forms. There are probably around 10-20 main forms of ADR which are
recognised, some of them being variants of others.
Moffitt, Michael L., and Robert C. Bordone, eds. The handbook of dispute resolution. (John
Wiley & Sons, 2012) 1.
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The need for finality
All methods of dispute resolution need either to be final or to have in
the background another, final solution should they fail. How else can
one be sure that the dispute will be laid to rest? In commercial disputes,
the alternatives for such finality are litigation or arbitration, either of
which must be available should prior mediation, conciliation or the like
not succeed.
The critical comparisons are between the final methods and all the
others, and between the two final methods of arbitration and litigation.
a) Litigation
Litigation is the term used for the process of resolving disputes through
the courts, a system of the state in which the jurisdiction is located. The
term “litigation” is from the Latin words ‘lis’ meaning dispute and ‘agere’
which means ‘to set in motion’. Litigation is different from other
mechanisms of dispute resolution in that it is carried out solely by the
court established the by the government. Courts are the manifestation
of the government, they play exemplary roles in the society, keeping in
place and justifying a particular view of how the social world is, and how
it ought to be.
The courts, being organs of the state, must ensure that all their
decisions are consistent with each other and with ‘public policy’, down to
the finest detail. This means that litigation must be held (with very few
exceptions) in public and a court’s decisions, the judgments handed
down by judges, must be so correct and precise that they conform to
the law and, generally, also to all previous decisions of that court or of
any higher court. All the courts’ decisions must, of course, be made in
accordance with the law of that state.
Importantly, justice in the courts is rendered by specially appointed
individuals who normally exercise their functions on a professional basis,
possess a special status, and wield considerable power. Court decisions
must be implemented by the losing party and any other individual or a
company they concern, without delay; if not implemented voluntarily
they can be enforced by designated officials (bailiffs).
Litigation is a ‘default option’ for the disputing parties; even if one of the
parties is unwilling to litigate, it can be compelled to do so through the
court. It is also the ultimate go-to option to which the parties can resort
if all other methods of dispute resolution have failed. Providing the
society with the working system of criminal and civil justice is nowadays
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BSM601: Arbitration Law Topic 1: Introduction to Arbitration
seen as an obligation of every government.
Litigation in the courts is conducted in the specific procedural form
designed to protect the interests of all concerned parties. This
procedural form is often traditional, rigid, formalistic, and has a
symbolic significance; this explains, for example, the complicated
terminology in court documents, or the fact that judges (often) have to
wear wigs and gowns.
Every country in the world has its own system of civil justice. So, for
instance, litigation in England will be in an overwhelming multitude of
respects different from litigation in France.
It can be said that all other methods of dispute resolution are
alternative to litigation, and are therefore termed Alternative Dispute
Resolution (ADR) methods.
b) Arbitration
Arbitration, by contrast with litigation, is private and based upon the
parties’ voluntary agreement to arbitrate. It is conducted by private
individuals – arbitrators who, unlike judges, have not been authorised
by any state or government authority to resolve disputes. However,
arbitral award is final and binding on the parties, and, under some
conditions, can be enforced, i.e. the losing party can be compelled to
comply with the arbitral award. More on arbitration, which is our main
subject in this module, will follow.
Whether or not arbitration should be considered an ADR method has
been a subject of some debate. Some authors prefer to classify it as
such because arbitration is clearly not the same as litigation; others are
reluctant to consider arbitration an ADR method because, unlike other
ADR methods, it produces a final and binding decision (arbitral award).
This discussion is indicative of an ambiguity inherent in the notion of
ADR, rather than of any difficulty in providing a working definition for
arbitration.
Settlement Based Processes
a) Negotiation
Negotiation is rooted in commerce; its root word is the Latin negotium
meaning ‘business’. To negotiate is: to confer for the purpose of mutual
arrangement; to bargain; to traffic. Parties in dispute always can, and
generally should try – at least before taking the matter further – to
negotiate between themselves to reach a settlement of their dispute. It
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hardly needs to be pointed out, of course, that negotiation is the main
and preferred method of resolving disputes. Negotiation can take place
in advance of a court action or arbitration or any other formal process or
during it but before a final decision has been made; negotiations can
take place even after the court or arbitrator has pronounced his decision
but during the appeals process. There are, of course, a number of
theories and techniques around negotiation, and many best-selling
books on negotiation have been written.
The beauty of a negotiated settlement is that the parties choose the
resolution, and so will (to a varying degree) be content with the
outcome. In more formal decision making fora, such as courts and
arbitral tribunals, the decision is imposed in a ‘winner takes all’
environment. This will almost always lead to one party being very
pleased, the loser being very despondent. On the downside, unlike court
decisions and arbitral awards, negotiated agreement is not directly
enforceable. It may be enforced through courts as a contract, but this
will have to be preceded by another, longest and the most expensive
method of dispute resolution – litigation.
Broadly speaking, there are two main theories of negotiation: the
problem solving approach and the competitive theory.
The problem solving approach involves the negotiator trying to resolve
the dispute by suggesting resolutions that can be to the advantage of
both parties; in other words, concentrating not on the negotiating
party’s own position but seeking a mutually beneficial outcome by
focussing on both parties’ interests.
By contrast, the competitive theory involves a tough, powerful and
competitive negotiation. According to this theory, the aim is to obtain
the best outcome for the individual negotiator and the ‘common good’ is
irrelevant. In fact, in this theory, gestures of empathy or attempts to
reach a mutually beneficial solution are seen as signs of weakness. In
this theory, each side is out to gain as much as possible and lose as
little as possible.
These approaches are not the only ones. In fact, during the course of a
negotiation or series of negotiations the approach may alter, perhaps
several times. One side may use one approach, and the other a different
approach.
The question of which approach to use will vary according to a number
of factors, including:
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The relative bargaining position of the parties: a large company can
perhaps easily afford a court battle while the cash strapped smaller
enterprise might be more desperate for much needed cash flow.
The relationship between the parties: if more business is to follow
parties will usually be keen not to be too competitive, although this
will depend on the circumstances since one party might rely on the
other party more for future business, again coming back to the
parties’ relative bargaining positions.
The identity of the negotiating party: what is at stake for them in
the negotiation? If the negotiator is a lawyer, there might be a
sense of detachment, which might not exist if the party is
negotiating on his own.
The value of the dispute: if small, the parties are unlikely to spend
much time negotiating and are more likely to be able to
compromise. The cost of lengthy negotiations, in terms of time or
legal fees might be prohibitive in comparison to the value of the
dispute, however sometimes the value is not the only influence;
there is sometimes a ‘point of principle’ at stake!
The strength of the parties’ legal positions: if one side is in a strong
legal position, their negotiating style might be influenced - they are
less likely to be willing to compromise. On the other hand if the law
is uncertain, this can encourage a more open negotiation since the
parties may wish to avoid a long, expensive drawn out litigation
with appeals etc.
Cultural differences: this can be very important for the negotiator
in an international situation. Cultural differences can be pronounced
and the negotiator must be aware of what is an acceptable style of
negotiation in the country or culture of his opponent, otherwise a
negotiation can be jeopardised if offence is caused.
The personality of the negotiators: this can be very important
where the negotiators have met before and perhaps negotiated
before - their strengths and weaknesses can be anticipated - but
beware! Negotiators sometimes alter their style and approach
depending on the circumstances.
The progress of the negotiation: the style or approach of one of the
parties might have an influence and may even alter the strategy of
the other party. Also, the aims of the parties might clarify as the
negotiation proceeds, or the parties may even gradually agree on
certain points of dispute as the negotiation proceeds. Any of these
factors can alter or influence negotiating style.
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Gender of the negotiator: this is controversial for obvious reasons.
It could be linked with the question of culture. Some negotiators
might alter their style (without perhaps even knowing it!) when
negotiating with a member of the opposite sex.
Reputation: A major factor in a negotiation might be the reputation
of either or both of the parties or their relationship with others in
the same business community. Even reputation with customers can
be an important consideration. If a party is seen as a soft touch,
this might encourage more litigious behaviour by others in the local
commercial community. If he is too inflexible or unreasonable, this
could alienate others in the business community, and influence how
the business is viewed generally and the approach of others to
dispute resolution with the company in the future.
These factors are not exhaustive and there may be others in any
particular negotiation. Also, it is likely that more than one will be
present in any resolution attempt. Some will be more important than
others in each individual negotiation.
b) Mediation
Mediation occurs where a third party assists disputants to settle their
own dispute. In its generic form the mediator does not make a decision,
much less impose it. Whatever the particular procedure, any settlement
made by mediation can generally only have the force of any agreement,
that is, the force of contract. This is the common feature of mediation
and negotiation. Mediation procedures do not need to conform even to
the basic legal principles required in arbitration. For example, a
mediator may meet separately with one disputant (and frequently does)
without damaging the process. In arbitration, such an occurrence would
be a serious breach of the principle of fairness which upholds a party’s
right to know the case against him; all evidence must be provided
openly between the parties, from one in the total knowledge (that is,
copied if documentary) or in the presence of the other (if given orally or
by way of inspection).
c) Conciliation
Unless more specifically defined, conciliation in the commercial sense is
generally understood as an extension to mediation where, when the
disputants are unable to agree despite the conciliator’s assistance, the
conciliator (who has been acting up to this point as a mediator) is asked
to give his opinion as to what should be the terms of a settlement. This
opinion is then presented to the disputants and, unless one or more of
them rejects it within a specified time, it becomes their agreed
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settlement of the dispute. This is what conciliation means in England, for
example. In continental Europe, it usually means the same as mediation
but where all the meetings and communications with the parties are
together, thereby not contravening the arbitral principle of fairness. A
Civilian conciliator may therefore proceed to arbitrate the same dispute,
or parts of it, if the conciliation fails.
Provisional Decisions By A Third Party
a) Adjudication
‘Adjudication’ can have a wide meaning covering any decision-making
process (including litigation) or may have a much more restricted
meaning, as recently in England by statute.
Adjudication is now enshrined in English statute as a mandatory process
in the Housing Grants, Construction & Regeneration Act 1996 (as
amended by The Local Democracy, Economic Development and
Construction Act 2009). This Act covers virtually all construction work
and came into force in mid-1998. Its adjudication provision requires
that, in most circumstances, an adjudicator makes a binding decision on
a dispute submitted to him within 28 days whatever the nature or
extent of the dispute.
While forms of expert evaluation have been used for a long time, this
Act has given this process a specific definition, essentially as an
investigative, evaluative, third-party determination that is binding on
the disputing parties unless one or more of them objects within a
specified time. There are few grounds for challenging an adjudicator’s
decision: whether he has jurisdiction; or if he acts in bad faith or is
negligent in carrying out his evaluation. An adjudicator’s valid decision
must be performed, but may be later reconsidered in arbitration or
litigation.
In general terms, Adjudication or Expert Determination or Independent
Expert Appraisal occurs when an independent expert is appointed by
parties (directly or indirectly) to investigate and report on a matter
within his expertise. His report is usually binding on the parties as an
obligation.
There are many names and varieties of this type of process. For
example, the International Chamber of Commerce [ICC] provides
several kinds of this type of adjudicative process in the services offered
by its International Centre for Expertise and its Pre-arbitral Referee
Procedure. A variety of this process is known as Dispute Boards, or
Dispute Adjudication Boards (DAB) which are becoming more and more
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popular in construction industry over the last decades. Many of you will
study these in more detail in later modules.
Shortcuts, Combinations & Specialities
a) Facilitation
Facilitation is used mostly (but not exclusively) in the public sector for
collective bargaining. A ‘fact finder’ is given information by both sides
and makes additional research into the matter before recommending a
resolution. Facilitation is non-binding.
b) Assisted Negotiation
Assisted Negotiation is a term used where disputing parties are assisted
in their negotiations by a third party who ‘coaches’ or represents them
in their negotiations. There is no formalised structure for this assistance.
The third party may be partisan in that he is often acting on the side of
one of the parties. There is no required qualification for this third party
and there are no formal rules as to how the negotiations are conducted.
c) Early Neutral Evaluation
This process gives disputants a quick valuation of their case by an
expert in the matter of their dispute who is independent of both it and
the parties. Parties are moved away from unrealistic views of their case
and settlement is promoted in a more realistic view of the dispute. Many
jurisdictions allow such a process under their court rules, usually
through a confidential case conference ordered by the court. Early
neutral evaluation generally reduces a case to a manageable size,
clarifies relevant facts, allows a balanced evaluation of strengths and
weaknesses, and provides an estimate of the likely damages. It also
involves the parties, with beneficial effects up to and including
settlement.
d) Fast-track Arbitration
This isn’t a locomotive racing out of control! It is ‘short-form’ arbitration
where parties agree to limit the issues and/or set aside the rules of
evidence and/or exchange short forms of points of claim and/or submit
an agreed set of facts to the arbitrator who may not be required to give
his reasons but must make his award within a prescribed time.
e) Med-Arb
Med-Arb combines some of the features of mediation and arbitration.
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Most med-arb proceedings require a third party first to mediate as many
issues as possible, then to arbitrate the remaining issues. Sometimes,
the same third party performs the two roles, sometimes the roles are
split. A third variant requires a single third party to perform both roles
but restricts the mediation to joint sessions only.
f) Arb-Med
Arb-Med similarly combines features of both arbitration and mediation,
this time using arbitration as a ‘filter’. A major issue –such as the
meaning of a contract term or condition (or even its validity), or
liability– is arbitrated and, once it is decided, any subsequent issues
(quantum etc.) are mediated. This way round, the role of mediator
would not be compromised if the same person were to have been the
arbitrator at the start and it is usually the case that the same person
acts throughout the arbitration and the mediation.
Due to these concerns –about disclosing confidential information and the
potential impact on the fairness of existing arbitration or litigation
proceedings– med-arb is less commonly used in common law and
Western jurisdictions. In Asia, however, med-arb is a relatively familiar
practice. Although parties in Asian jurisdictions will still commence
formal arbitration or litigation proceedings at the beginning of a dispute
as a strong message of their intent, the same parties are often willing to
engage in informal or formal mediation processes, since their
commercial culture tends to favour a negotiated settlement; arbitral
tribunals and courts in Asian and other civil law jurisdictions often
strongly encourage settlement and, in particular mediation, during the
course of the formal proceedings.
g) Expert determination
In this form of decision making, which is becoming more and more
popular, the dispute is referred to an expert who will make a decision
which will usually be a final one. There will be no appeal. An expert
determination agreement is usually appropriate where the contract
subject matter is highly technical, or where a technical dispute is likely
to arise, and where referral to someone other than a specially trained
and experienced individual would be pointless since the technicalities
would be lost on anyone else. The problem with such an agreement as a
clause in the main contract (as opposed to an ad hoc agreement once a
particular dispute arises) is that other forms of dispute resolution for
non-technical disputes will have to lie alongside expert determination.
This becomes very complex, since there might then be a dispute as to
which type of dispute is in question, and so whether the expert
determination clause is triggered or whether (say) the arbitration clause
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applies, or, in the absence of anything other than expert determination
being provided for, whether court action is required. Expert
determination is often chosen where there is an issue of valuation at
stake.
The danger with relying on an ad hoc agreement is, of course, as with
any ad hoc arrangement, that by the time the dispute arises, the parties
are already in a state of disagreement and an agreement as to the form
of dispute resolution might prove to be impossible.
One of the main advantages of expert determination is speed – the
expert need not follow established procedures in the same way as an
arbitrator must (although there are some examples of rules that exist)
and with no danger of an appeal (save where the circumstances are
exceptional), the parties can be sure of a swift, expert and final
decision. The only cases in which an appeal may take place following the
decision of an expert is where it is claimed he has exceeded his remit
(decided something outwith his terms of reference) or where he has
behaved in an extreme way, such as in response to bribery by one of
the parties.
One of the disadvantages of expert determination is that a separate
action will be needed in order to enforce the expert’s decision (unless
the decision is implemented voluntarily). This is the case since the
expert determination clause is simply a clause of the contract like any
other and, if it is breached, a court action will have to be raised to
enforce the remedy that arises as a result of that breach. The decision
of the expert cannot be taken and be recognised and enforced under the
New York Convention (which applies in the case of arbitral awards) or
some regional convention on the enforcement of court decrees (such as
the Rome Convention). Although this court action (if needed) should not
be contentious, as it will normally involve a stamp of approval being
given to the decision of the expert, it is an additional step, which will
add to cost and delay.
h) Mini-trial
Mini-trial is where parties choose a third party to hear their dispute in a
very shortened proceeding, pleadings being brief and to the point, and
evidence being limited, frequently merely detailed submissions with
minimal cross-examination. The ‘judge’ gives a quick decision on what
has been presented and the parties then consider what to do about their
dispute, considering that this purely advisory and non-binding decision
is likely to be in line with what would result from full litigation or
arbitration.
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A common mini-trial format for commercial entities is conducted by a
third party neutral and can ‘compress two years of litigation into two
months’. Each party presents an abbreviated version of its case, not to
the neutral but to panels comprised of executives from each party.
Presentation of the case can be through oral testimony or documentary
evidence, or both. After the presentations, the panels retire to discuss
terms for settling the case. The neutral presides over the mini-trial and
can become an arbitrator or mediator if necessary.
A partial goal of the mini-trial is to have responsible agents for each
party experience the trial presentation of that side’s case first-hand.
Ideally, this should give the parties a better sense of the risks involved
in litigation or arbitration proceedings. A second benefit of such a minitrial is that the work needed to participate can be used in a court trial if
no settlement is reached.
i) Summary Jury Trial
This is a court initiated process that uses a “mock jury” to give an
advisory opinion. It is of particular value where constitutional rights are
at stake, a precedent will be set, where government is a party or where
there are numerous parties. Summary jury trials, where permitted, have
the advantage of being backed by courts and give judges the ability to
assess jury responses. There are the same preparations as for a trial in
court but at no more cost and they give the parties their day in court.
j) Moderated Settlement Conference
This process uses three experienced lawyers to evaluate the legal merits
of a case. It can be applied to an entire case or just part and it is not
promoted by an interest in settlement. It has no precedential value.
Moderated settlement conferences are widely used in, for example, US
state courts with abbreviated presentation.
k) Rent-a-judge or Private Judging
In some jurisdictions, a court can, if parties request it, refer a pending
lawsuit to a private neutral party for trial with the same effect as if the
case were tried in court. The verdict can be appealed through the usual
appellate court system.
Private judging is provided for in statutes of some of the US states and
is used:
− where there is a need for a quick decision;
− for highly technical or complex cases;
− for privacy; or
− if the logistics of the case are difficult or costly.
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It allows parties to choose their judge with particular, relevant
experience. It also allows parties to control their schedule and costs as
well as being confidential, probably the most important commercial
consideration.
l) Court Referrals
Court-annexed Arbitration is generally mandatory and non-binding. This
contrasts it with generic commercial arbitration. Judges refer certain
classes of civil dispute to arbitrators for their decision. If a party does
not accept the arbitrator’s award, most of these schemes allow it to be
appealed to a court hearing though this could result in costs being
awarded against the appellant if the appeal does not achieve a minimum
degree of betterment. In many jurisdictions, courts are required to refer
disputing parties to mediation. While some of these referrals are
nominal, others require actual performance in mediation before parties
can bring their dispute into the court for decision. This is now a potent
force in English civil procedure where it has resulted in a losing party
being awarded its costs because the winning party refused to mediate
before the trial.
In various jurisdictions, most notably the U.S. Canada, United Kingdom
and Australia, the court has a formal role in the non-litigious settlement
of disputes. This role is sometimes optional. In the UK, for example, the
courts can refer a family law case to mediation.
However, we have already seen that in England, there are even specific
court practice rules dealing with the duty on the court to encourage
settlement by ADR methods, and even delay the progress of the case
(with or without the parties consent) for this purpose. In fact, given the
strength of the powers that have been held to vest in the English courts,
parties can virtually be economically forced to go to ADR in terms of the
following provisions and case law:
- CPR England- r. 26.4- order to stay proceedings and general
encouragement- r. 1.4(2) (e)
- Dunnett v Railtrack plc [2002] 1 WLR 2434 - costs
consequences if fail to take chance of ADR (even if win on merits,
can lose costs)
- Hasley v Milton Keynes General NHS Trust [2004] 1 WLR
3002 - parties cannot be forced to use ADR (contrary to some
decisions of lower English courts)
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- The Earl of Malmesbury v Strutt and Parker [2008] EWHC
424 – unreasonable conduct during a mediation can have an effect
on later court costs
- Nigel Witham Ltd v Robert Smith and others (No 2) [2008]
EHC 12
The role of courts in encouraging settlement does not end there. Many
courts informally (and verbally) actively encourage settlement of cases
at all stages verbally. This takes place most notably on the day of the
proof or trial when the parties themselves will be present. This method
can be particularly effective since the parties will not want to irritate the
judge who believes that the case should resolved amicably by insisting
that it goes ahead. The judge must, however, be careful when
expressing his views that he does not show bias.
m)
Ombudsman/Independent Complaints Review
An Ombudsman is a third party neutral who receives and investigates
complaints or grievances against an institution (which may be a
government organ) by that institution’s members, clients or employees.
This is essentially an inquisitorial process whereby the ombudsman (or
Independent Complaints Reviewer, or ‘commissioner’) inquires into the
matter and initially decides when there is sufficient detail and evidence
to form a view on it. This view is then proposed to the complainant. If it
is accepted by the complainant, it becomes binding on the institution.
2. WHAT IS ARBITRATION?
Professor DM Walker defines arbitration thus:
“The Adjudication of a dispute or controversy on fact or law or both
outside the ordinary civil courts, by one or more persons to whom the
parties who are at issue refer the matter for a decision.”
Julian D M Lew et al in the book Comparative International Commercial
Arbitration define international arbitration as:
‘a specifically established mechanism for the final and binding
determination of disputes, concerning a contractual or other
relationship with an international element, by independent
arbitrators, in accordance with the procedures, structures and
substantive legal or non-legal standards
chosen directly or
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indirectly by the parties’
Before moving on, it is pertinent to note that arbitration is a procedural
subject. To put it another way, it will not directly provide the solution to
the dispute but it sets out the procedure to be followed in resolving it.
There are five important features of arbitration which form the very
basis of this dispute resolution process. They are:
➢ the agreement to arbitrate;
➢ procedural freedom of choice;
➢ the binding nature of the arbitrator’s/arbitral panel’s/arbitrator’s
decision
➢ the enforcement of the award
➢the judicial nature of the arbitrator
The Arbitration Agreement
Arbitration will rarely occur unless the parties to a contract agree. There
are some forms of statutory arbitration, but these are rare and need not
concern us in this module.
The agreement will normally provide for arbitration in the event of any
dispute arising out of the terms of the contract. Alternatively, only
certain clauses might be subject to arbitration. We will deal with this
later.
It is, in most systems, possible to agree orally or in writing to refer a
particular dispute to arbitration after it has arisen. Normally, however,
the contract will make provision for arbitration in advance.
Freedom of Choice
Parties are free to select the arbitrators, i.e. third party neutral who
conducts the arbitration (‘arbiter’ was the term traditionally used in
Scotland until 2010). Unlike in public courts, parties can resort to the
expertise, knowledge or authority of a person of their own choosing,
rather than be compelled to accept whatever decision-maker could be
officially assigned within the court to hear their case.
Arbitral tribunal may consist of one or more arbitrators. If the parties fail
to agree on a particular person(s), they can at least agree on a
procedure for their appointment. For instance, it is a common procedure
for tribunals consisting of three arbitrators that each party selects one
arbitrator, and the two arbitrators so selected jointly appoint the third
one (the chairman of the tribunal).
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Thus, the parties do not have to accept the judge who happens to be
in court on that particular day, who might have little or no expertise of
what might be a complex subject area. Where the parties chose a
particular person, there can be an element of trust in that person’s
decision on both sides.
Choice can also be exercised in the area of procedure. The parties can
set their own timetable for lodging documents and for a hearing. There
is greater flexibility as to the means by which each party can present
its case – and the way in which the dispute is managed.
Alternatively they can leave that to the arbitrator, or to a set of
arbitration rules. They are not stuck with the court procedures and
timetables. Party autonomy is the guiding principle of international law
and arbitration which enables parties, by contract, to select their own
methods and procedures for the resolution of their disputes.
Also, the parties can agree the expenses to be awarded by the
arbitrator, and are not required to pay costs according to the fixed
scale in place for court actions (see The Expense of Arbitration,
below).
The Binding Nature of Arbitration
If the contract provides for a genuine arbitration, arbitral award is final
and binding on the parties; the losing party in arbitration is under alegal
obligation to comply with the award.
Arbitration differs from other ‘pure’ forms of ADR such as mediation,
since in the latter case, the mediator tries to persuade the parties to
agree, he cannot force a decision on the parties which they must abide
by.
The Enforcement of the Award
Arbitral award is enforceable against the parties, as if it were a court
decree (order), so the losing party can be compelled to implement the
decision even against its will.
One important feature of arbitration is that arbitral awards, unlike
national court judgments, can be enforced in almost any country of the
world thanks to the New York Convention 1958 “On recognition and
Enforcement of Foreign Arbitral Awards” (we will discuss it in greater
detail later). This is generally not the case with national court judgments
and will depend on there being an international treaty providing for
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enforcement of judgments. Thus, for example, an arbitral award
rendered in England can be enforced in Russia (because both counties
are parties to the New York Convention), but an English court judgment
is unlikely to be enforced (because there is no treaty between Russia
and the UK providing for such enforcement).
The Judicial Nature of Arbitration
Arbitrators cannot act as they like, and ignore basic notions of justice.
They must act fairly towards the parties 2 Subject to that basic
requirement, they have more freedom than judges in the public courts,
particularly as regards procedure. Where the arbitrator does not abide
by the basic rules of fairness, his decision can be challenged in court this is not a popular move, since the whole point of arbitration is to
avoid litigation in the courts. In fact, a common feature of arbitration is
that appealing an arbitral award is a lot more difficult than appealing a
court decree. So, for example, it can be more difficult, or impossible, to
appeal an arbitral award where the arbitrator has made an error in law,
even where, had he been correct, his decision would have been
different.
3. OTHER FEATURES OF ARBITRATION: EXPENSE AND PRIVACY
The Expense of Arbitration
The question of whether arbitration is cheaper than a court action is
not easy to answer. It will depend on the particular case. The following
are influencing factors:
1. Strictly speaking, no lawyer is absolutely necessary for arbitration.
Generally one is required for court, because the right of audience is
provided only to suitably qualified and experienced persons, such
as barristers in England. This could be a saving but means someone
will have to prepare the case - presumably someone in the firm and
this might be more expensive than a lawyer - and less experienced
at presenting and managing a case. Also, often there will be an
arbitral clerk, who is usually a lawyer. This will influence costs. In
commercial cases of any magnitude, it is now an overwhelming
practice to involve lawyers in preparing and presenting the case.
2. Delay can be minimized in arbitration. The case is on its own
procedural track in arbitration. It is not locked into the rigid and
long court timetable - delay can add to cost, particularly where a
2
S 33(1) of the English Arbitration Act 1996
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large sum of money is outstanding. However, if a case is complex,
as much time may be taken in arbitration as in a court action. Much
will depend upon the arbitral rules/regime that applies and how
much power is given to the arbitrator in those rules.
3. Parties can agree to restrict costs between them - in a court action
this is not generally possible - but this is subject to the consideration
of lawyers’ costs and point 4 below.
4. In arbitration, the costs of the venue, the arbitrator and all other
ancillary costs have to be met by the parties - in a court action, the
state meets these costs. Any saving in resolving the dispute more
quickly may be lost on these administrative outlays. The costs can
spiral even further if a central administration is being used to run the
Arbitration, such as in International Chamber of Commerce (ICC)
arbitration.
Overall, it is often the case today that arbitration is more expensive than
litigation, although traditionally costs were listed among the advantages
of arbitration.
Privacy
Almost all court proceedings are held in public. This means that
members of the public can come along and watch, and that includes the
press. In addition, all papers are accessible to members of the public,
including the press.
Some companies value their public image and reputation sufficiently to
wish to protect against any adverse publicity and they enter an
arbitration clause in all (or at least most) contracts for all disputes.
Another privacy consideration might be the desire to prevent market
sensitive information (including pricing information and contractual
conditions) falling into the wrong hands, such as competitors. Where the
desire for privacy is strong, the company may overlook any
disadvantages of arbitration, in order to ensure secrecy.
4. INDUSTRY USE OF ARBITRATION
Arbitration is used across a wide range of industries, as a method of
dispute resolution of disputes arising out of sometimes very complex
and high value contracts. These industries include the construction
industry, engineering and oil and gas. Of course, litigation is also
popular. There is no industry in which arbitration is used exclusively. In
a number of industries, there are arbitration clauses that are used as
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BSM601: Arbitration Law Topic 1: Introduction to Arbitration
standard, and the use of those recommended by arbitral institutions are
common. On the other hand there are many bespoke clauses, and these
are generally more dangerous and more likely to provoke a dispute. We
will look at some examples later in the semester, but for the moment it
is sufficient to say that one of the most prevalent (and unfortunate)
types of arbitral dispute arises out of what is known as a ‘defective’
arbitration or dispute resolution clause.
5. SOURCES OF ARBITRATION RULES
It is one thing to agree to arbitrate, another to determine how the
arbitration is to take place. The rules for the conduct of arbitration can
come from three possible sources:
1. The contract itself. The parties can agree detailed provisions on the
identity of the arbitrator, the timetable, the venue, the powers and
duties of the arbitrator, costs, etc. in the agreement itself. This is
rare, since it clutters up the contract – and requires additional areas
for negotiation.
2. The rules of a body. There are dozens of sets of arbitration rules
which exist to cover all kinds of arbitrations. These rules are usually
maintained by the associations who have written them and they may
also provide a framework within which the arbitration could take
place, at a cost, of course. Alternatively, the contract can make
reference to the rules of a body with the procedure being agreed to
by the parties after the dispute arises. A set of rules may also be
fashioned by the parties (and incorporated in the contract) using the
best parts of various sets of rules. Finally, different rules can be used
in different contracts to suit the individual case. See below the
section on Institutional Rules.
3. Where the parties have not agreed detailed rules and have not
incorporated the rules of an association into their contract, but have
agreed to arbitrate, the general applicable law on arbitration (for
example, Scots Law, English Law) fills the gap. Sometimes, provision
is made in the contract for most of the procedure, but not all. Where
there is a gap, for example, no mention of the arbitrator’s powers in a
particular situation, the background applicable law of the chosen or
lega y appointed country is used.
6. RULES FOR INSTITUTIONAL AND AD HOC ARBITRATION
In many commercial contracts, or in agreements reached after disputes
have arisen, the parties choose a particular set of pre-existing rules to
govern the settlement of all disputes or some disputes or a particular
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dispute between them.
These rules are normally prepared by an organisation and will provide a
complete set of regulations on how the arbitration is to be conducted.
When the parties contract initially, normally the particular institution’s
rules are specified in the clause dealing with the resolution of disputes in
the contract.
It is important to note the distinction between institutional arbitration
and ad hoc arbitration. In the case of institutional arbitration, there is an
established organisation with experience, personnel and resources to
assist the parties. In the case of ad hoc arbitration, there is nothing of a
kind; parties only have their own resources to rely upon. Ad hoc means
“for this” in Latin, so ad hoc arbitration means “arbitration constituted to
resolve this one particular case”.
Whereas in the case of institutional arbitration there is normally a welldeveloped administrative framework (secretariat, venues, administrative
personnel etc.) to assist the parties, in ad hoc arbitration there is none
and parties are essentially left on their own. While ad hoc arbitration
presents a greater challenge from a procedural point of view, it also
presents opportunities for increased confidentiality, absence of any
affiliations whatsoever, and generally greater procedural choices.
Several sets of procedural rules exist to help the parties in ad hoc
arbitrations to deal with the multiplicity of procedural issues, most
notably the UNCITRAL Rules briefly discussed earlier. Still, the
institutional rules remain a popular choice among contracting parties
worldwide.
The choice of institutional rules will depend on a number of factors: the
nature of the contract, the nationality of the contracting parties, the
relative bargaining power of the parties. Generally, institutional rules
come under a number of categories:
•
•
•
“Universal” rules/institutions attempting to cover all kinds of
business and all regions, for example the International Chamber of
Commerce (ICC).
Rules/institutions specific to particular industries, trades or
professions, for example International Centre for Energy Arbitration
(ICEA) or The Grain and Feed Trade Association (GAFTA).
Rules/institutions primarily aimed at particular regions, for example
International Commercial Arbitration Court in Moscow or Hong
Kong International Arbitration Centre.
Each major institution may have different sets of rules for different
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procedural contingencies, e.g.
•
•
•
Rules suitable for international disputes only, for example The
American Arbitration Association (AAA) International Arbitration
Rules;
Rules suitable for both domestic and international disputes, for
example The London Court of International Arbitration (LCIA) Rules
or the Chartered Institute of Arbitrators Rules;
Highly specialised rules for particular kinds of disputes, e.g. AAA’s
Accounting and Related Services Arbitration Rules and Mediation
Procedures; etc.
Normally, each major institution will have its own fairly sophisticated
procedural provisions enshrined in tis Rules; and there is also usually a
recommended arbitration clause based upon the previous experience of
this particular institution, and incorporating the Rules into the parties’
agreement.
Of course, there are thousands of sets of rules across the world that can
be used. We will look at some of the most commonly chosen sets of
rules in commercial contracts.
(a) The Chartered Institute of Arbitrators
This is one of the main arbitral bodies in the UK, with facilities aimed at
training and appointment of arbitrators, set up in 1915. It has around
11,000 members in over 100 countries. It is a registered charity; there
is a Scottish branch as well. It has two main sets of general arbitration
rules:
•
•
General arbitration rules
Controlled cost arbitration rules (2018 edition).
Both sets of rules are based on the English Arbitration Act 1996. They
can therefore apply to domestic or international arbitration. The rules
can be varied by agreement, but not after the arbitration begins unless
the arbitrator consents.
The controlled cost rules are designed to
arbitrator(s) and the parties to keep costs low.
More
information
and
the
Rules
https://www.ciarb.org/resources/rules/
encourage
are
available
Suggested clauses for the activation of the rules are included.
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both
the
here:
BSM601: Arbitration Law Topic 1: Introduction to Arbitration
The website as a whole is worth browsing (www.ciarb.org)
(b) The International Chamber of Commerce (ICC)
The International Court of Arbitration was established in 1923. The ICC
itself was set up in 1919; it does not settle any disputes, this task is
carried out by the various arbitral tribunals who will be appointed and
chosen (either in advance or, more commonly, after a dispute has
arisen) by the parties. The role of the Court, which has around 100
members from around 70 countries, is outlined by Article 1 of the Rules
of Arbitration (current version effective since 2017) and a copy of the
Statute of the Court is attached to the Rules as Appendix 1. This role
includes, unusually, scrutiny of all awards rendered by ICC arbitral
tribunals, and the award does not become final and binding on the
parties until the award has been approved by the Court (Article 34 of
the Rules). The internal rules of operation of the Court are set out as
Appendix II of the Rules of Arbitration.
The ICC rules are among the most commonly used rules for
international arbitration but they can also be used for domestic
arbitrations. The Chamber has its headquarters in Paris where the
administrative office (Secretariat) and the Court are based. Arbitrations
under the rules take place in around 40 countries world-wide. The Court
is independent of the ICC itself.
ICC also provides a number of different ADR alternatives, any one of
which can be chosen by the parties. ADR is dealt with in the next topic.
Also, if an expert witness who is independent is required, the ICC
International Centre can assist.
Finally, the ICC will also act as appointing authority when provided for
by the parties and where the UNCITRAL Model Law applies, or in any
agreed ad hoc arbitration. There is a separate set of rules governing
procedure.
The costs of an ICC Arbitration are outlined in Appendix 3 of the
Arbitration Rules. In the case of an ICC ADR procedure, the costs are
less specifically prescribed, except for certain administrative costs (see
the Appendix to the ADR rules).
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The ICC website carries all sets of rules and further information on the
dispute
resolution
services
offered
by
the
ICC
at:
https://iccwbo.org/dispute-resolution-services/arbitration/
(c) The London Court of International Arbitration (LCIA)
This organisation consists of the Company (non-profit making and
limited by guarantee), the secretariat and the Court and therefore has
similar structure to the ICC. It is the oldest arbitral institution in the
world, dating from 1892.
The Court appoints tribunals, determines challenges to arbitrators and
controls costs. It sits in London and operates a set of stand-alone rules
or can operate in conjunction with the Arbitration Act 1996.
It also operates a mediation procedure and a fast track arbitration
option. It holds an extensive list of arbitrators.
The present arbitration rules were revised in 2014.
Unlike in many other arbitral institutions, arbitrators’ fees in LCIA are
normally charged on an hourly basis.
The website of the Court, including copies of the current rules, costs
and other information, can be found at:
http://www.lcia.org
(e) The American Arbitration Association (AAA)
This association, founded in 1926,
rules to suit various types of
International Arbitration Rules and
under their International Dispute
effective from 2014.
has produced a number of sets of
arbitration. They have produced
International Mediation Rules, both
Resolution Procedures document,
The AAA has many more domestic cases than international ones.
However, this institution is becoming more important in international
terms and is dealing with more and more international cases. It handled
187,500 cases in 2011 and they have 22 offices. They also hold a long
list of subject specific rules – including for large scale construction
disputes. Their website address, where their rules and further
information about their work can be found is at:
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http://www.adr.org/
(f) The Hong Kong International Arbitration Centre
This is the main dispute resolution service in Asia. It was set up in 1985
by business people and professionals in Hong Kong and is self
sufficiently funded (having previous had some government funding).
It operates a number of sets of rules including a short form procedure
and rules based on the UNCITRAL Model Law. It also offers mediation
services and has a separate set of mediation rules, as well as
adjudication procedures and specialist domain name services.
The web address of this organisation is at:
http://www.hkiac.org/
(g) The International Centre for Settlement of Investment
Disputes (ICSID)
This Centre is based in Washington, D.C., in the U.S. It was set up by
the World Bank in 1966 under the Convention on the Settlement of
Investment Disputes between States and Nationals of Other States. It
arbitrates disputes between companies and States only, in other words
not disputes between companies or private individuals. As the name
suggests, it deals with investment disputes only and not commercial
disputes.
There are arbitration and conciliation rules, effective from April 2006.
It used to have a small but economically significant workload. This
particular branch of arbitration (investment arbitration or investor-state
arbitration) is currently very much in the focus of public and scholarly
attention; in 2015 there are some 500 cases being heard by ICSID. Its
website is at:
https://icsid.worldbank.org
For the overview of situation in investor-state arbitration in general,
take a look at UNCTAD’s World Investment Report 2014 (p. 124 ff)
available at this link:
http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=937
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Regional Centres
Some arbitral rules and procedures are not world-wide but are instead
designed to cater for disputes involving countries in a particular
geographical area. For example, there are centres in Europe: Lyon, Lille
and Milan; and in the Middle East Asia and Australia - Cairo, Kuala
Lumpur, Sydney, Singapore, Hong Kong.
Choice of Arbitral Rules
When choosing which arbitral rules to incorporate parties should take
into account certain factors. These include:
•
•
•
•
•
•
•
•
•
•
Cost: compared with litigation and also compared with other
arbitral rules; some rules attached to institutions can lead to the
costs of arbitrations spiralling, particularly where there are
significant administrative costs involved.
Enforceability: if successful, will the award (whether it is for a sum
of money, and/or a non-money decree and/ or an expenses award)
be able to be enforced as desired?
Privacy: are the proceedings open to the public?
Reputation of Arbitral body: is the arbitration likely to be handled
fairly and predictably?
Specialisation: are the rules designed for an international
commercial dispute and/or for a dispute of a certain nature for
example a certain subject matter?
Delay: does the procedure keep this to a minimum? Is delay an
advantage for the company concerned?
Party autonomy: does the arbitral tribunal keep close control over
procedure or do the parties have freedom to agree a timetable and
other procedural rules? Is a tight and inflexible timetable better?
Different Rules: are there available a variety of rules to suit
different situations- fast track rules, mediation rules?
Venue: this is linked to costs, is there a convenient local venue for
the arbitration? Witnesses may have to travel as well as lawyers (if
employed) and this could add considerably to costs.
Relative economic strength: the procedure to be followed might
depend on the bargaining position of the other party - can they
afford to argue about the point? One party could be in a position to
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disadvantage the other by insisting on a set of rules, which suits
them and not their opponent in the event of a dispute.
There are some other general options that can also be considered:
•
•
Tailor made arbitration procedure: a company can produce a set of
rules to suit its needs and can incorporate it in an agreement with
others. It could even adopt several depending on the nature of the
contract and other party.
Adoption of set of rules with amendments: a pre-existing set of
rules could be adopted and altered to suit. It could then be
incorporated into a contract. This would take the arbitration outwit
the procedural framework of the institution and give the parties
freedom to agree on venue, costs procedure etc.
Much arbitration is dealt with by institutional rules chosen by the parties
at the time the contract is entered into. It is important to choose the
right set of rules to cater for the contract and the parties’ contractual
relationship. Many companies use one set of rules for all arbitrations of
all of their contracts. This is probably unwise, since almost certainly,
some contracts would be better suited to a different set of rules.
Consideration should also be given to the fluid nature of the rules.
Unlike legislative arbitration regimes, the rules of an institute will
sometimes alter radically, removing any advantage gained by one of or
both of the contracting parties by selecting the rules. The rules which
apply, unless otherwise provided for in the contract or by the rules
themselves, will be the rules which exist at the time of the arbitration,
not when the contract is concluded or when the dispute arises.
Further Reading
•
•
Nigel Blackaby and Constantine Partasides, with Alan Redfern and Martin
Hunter, Redfern & Hunter on International Commercial Arbitration, (6th ed.,
2015), chapter 1.
Fraser P. Davidson, Arbitration (W.Green, 2nd Revised edition, 2012),
chapter 2.
These are just some suggested titles. As always, you are encouraged to read
around the topic as much as possible.
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Topic Activities
There is no separate activity for this topic; the relevant activity for this week
can be found at the end of Topic 2 Lecture notes.
But please feel free to discuss anything related to the issues covered herein
within the topic forum.
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