To Arbitrate or Litigate? That is the Question

11 June 2013

Nq

What is Arbitration?

Arbitration is a contractually based dispute resolution mechanism that offers an alternative to national courts. Arbitration is a private dispute resolution mechanism which provides arbitrators with the equivalent of judicial power in order to deliver an award which is final and binding.

The mandate of an Arbitrator to resolve a dispute derives from a specifically drafted arbitration agreement, or arbitration clause, which commercial parties draft before entering into a contract with each other.

Why choose Arbitration?

  • In arbitration, parties are free to determine how proceedings are to be conducted (subject to basic due process safeguards).
  • Party autonomy is central to arbitration proceedings, allowing parties to tailor proceedings to their commercial needs and unique characteristics of the dispute.
  • Arbitrators are experts jointly appointed by the parties and therefore are deemed to be neutral. As well as this, any awards made are presumed to be reflective of their reasoned and specialist knowledge.
  • Arbitrators owe ‘allegiance’ to the parties involved and not to a nation state. Therefore, their priority is to reach a fair decision and not be constrained by rules, procedures or particularly policy issues of the state where the arbitration takes place (subject to any rules agreed to by the parties n.b. Institutional Arbitration).
  • There are commercial benefits to arbitration awards and proceedings being private and confidential.

Arbitration vs. Alternative Dispute Resolution (ADR) Methods

Arbitration is not strictly a type of Alternative Dispute Resolution (ADR). ADR is a non-adversarial attempt to seek resolution of an issue while Arbitration results from an agreement to be bound by the decision of a third party arbitrator.

  • Arbitrators have the power to grant internationally enforceable awards which are final and binding on the parties. Arbitration has the benefit of certainty.
  • Arbitration can be perceived as taking place in ‘neutral’ territory rather than in the national courts of one of the parties when a multi-jurisdictional issue arises.
  • Disclosure can take place in a bespoke manner to suit the parties involved. The parameters of disclosure can be defined by the parties, for example : to disclose only the documents the parties will rely on rather than any document which is relevant to the issue at hand. Further disclosure can take place as and when necessary, speeding up the process but also keeping the process as confidential as possible.

ADR methods, such as mediation, cannot issue binding and final decisions on parties. Mediators work with parties to reach an agreed voluntary settlement and as a result, if none can be reached, then the parties must look to either arbitration or litigation to resolve disputes.

Arbitration offers: the certainty of Court proceedings, commercial confidentiality and the flexibility to tailor the proceedings to the particular parties involved and the issues contested.

Types of Arbitration

Ad Hoc arbitration

Parties are completely free to draft rules for any proceedings can adapt existing arbitration templates as they see fit. This may be a cheaper alternative to paying fees in Institutional arbitration but relies upon comprehensive agreement on rules by the parties involved.

Institutional arbitration

Parties agree to have the arbitration proceedings conducted by, and under the rules of, a particular neutral arbitration institution. While more expensive, this type of arbitration is popular because of the recognised experience of arbitrators which in turn lends weight and authority to any awards granted. Examples of arbitration institutions are the International Chamber of Commerce (ICC) and the London Court of International Arbitration (LCIA)

It is clear that parties who are from a single jurisdiction, and who are seeking arbitration within that jurisdiction, will be subject to the laws of that jurisdiction which regulate arbitral proceedings. However, arbitration can involve parties from many different jurisdictions. The principles of International Arbitration are the same as for domestic arbitration but there is the added complication of multi-jurisdictional parties and legal systems.

Legal Basis for International Awards

The issue of the legal validity of awards granted in a foreign jurisdiction was dealt with by the United Nations in 1958. From 20th May – 10th June 1958 a Conference of Plenipotentiaries met at the Headquarters of the UN in New York to draft a convention for the purpose of recognising the enforcement of foreign arbitral awards.

The New York Convention, in principle, created an internationally harmonised regime for the enforcement of arbitral awards and was signed on 10th June by representatives of 39 States. Currently there are 142 signatories to the Convention (73.3% of all recognised states).

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958)

Article 1

“This Convention shall apply to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal. It shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.”

Enabling Legislation

In the UK, enabling legislation must be implemented in order to give legal effect to the principles that the UK signed up to in the New York Convention. This is similar to the European Communities Act 1972 giving effect to EU and ECHR law within the UK.

ss. 100 – 104 of the Arbitration Act 1996 recognise and incorporate the New York Convention into UK law.

In particular, s. 101(2) states:

“A New York Convention award may, by leave of the court, be enforced in the same manner as a judgement or order of the court to the same effect.”

Crucially this applies even if the award was made in a foreign jurisdiction as long as it was made in accordance with the requirements of the New York Convention.

Arbitration and Appeals

The New York Convention does not have a specific framework for appeals against the decision of an arbitration panel. As a result, any appeal or contestation of the arbitrator’s decision must be done through the legal system at the seat of the arbitration.

There are a number of disadvantages to this:

  • What was once a dispute determined by specialist arbitrators, chosen by the parties and according to an agreed procedure becomes the responsibility of domestic judges of varying degrees of capacity and competence.
  • What was once private and confidential potentially becomes open to the public.

By having an appeal at a national court level the unique advantages of Arbitration are lost, namely that the process is: private, predictable and free of national bias.

A key concern relating to existing appeals procedures is that there is a lack of consistency over how international arbitration awards can be challenged.

The New York Convention is silent about what issues a national court should consider when reviewing the award of a tribunal. There will therefore be a disparity between the outcomes of appeal proceedings due to the different legal systems of the different nation states carrying out the appeals.

There has been a somewhat sporadic attempt to impose uniformity on appeals procedures across multiple jurisdictions. The United Nations Commission on International Trade Law (UNCITRAL) drafted the UNCITRAL Model Law on International Commercial Arbitration [1985] (The ‘Model Law’) to provide guidance notes for states on modernizing and harmonizing their arbitral procedures, including appeal processes.

Art. 34 of the Model Law states:

“…a party may move to have an award set aside on the basis of the tribunal having had a lack of jurisdiction, violations of principles of procedural fairness or violations of public policy of the state where the arbitration takes place.”

However, this Model Law does not remove all of the uncertainty and lack of consistency in appeals proceedings.

Arbitration and Appeals - The problem with Art. 34 Model Law (1985)

Incorporation

UNCITRAL has acknowledged that the New York Convention holds a different position and level of legal authority within signatory state legal systems. Some states will have given direct effect to the Convention, some will have used enabling legislation to give effect to all or part of the Convention (e.g. UK) and some states will have entirely rewritten the Convention into a piece of domestic legislation in their own words.

Interpretation

National courts interpret the New York Convention in different ways. Some states seek guidance from domestic arbitration cases, some from foreign cases and some seek the guidance provided by UNCITRAL such as the Model Law. The lack of universally enforced guidelines can lead to perceptions of unfairness, particularly in relation to appeals procedures as already identified.

Other Concerns about International Arbitration

International, and indeed domestic, arbitration is increasingly perceived to be more expensive and time consuming than litigation. There are two categories of costs in International Arbitration:

  1. Fees for the Counsel / Arbitration

  Fees for the arbitrators, administrative fees of the institution (if Institutional Arbitration is used)

  2. Fees for Expenses

All fees relating to the hearing are to be paid by the parties (unless a party is compensated as part of the award), including but not limited to: hiring the venue, translation costs, travelling costs for witnesses, fees for experts appointed by the tribunal, etc.

Arbitration is not necessarily cheaper or quicker than seeking a resolution through National Courts. Many arbitrators are ex-legal professionals and can habitually adopt practices such as: requiring written pleadings, expansive disclosure and lengthy examination of witnesses. Often the uniquely flexible and appealing features of arbitration can be lost, to the detriment of all the parties involved.

Summary

Due to the certainty, confidentiality and flexibility the proceedings offer, arbitration is a particularly useful dispute resolution tool both domestically and for parties involved in business in more than one jurisdiction

The acceleration of Globalization in the later part of the 20th century and early 21st century has brought into sharp focus the importance of arbitration as a potential solution when commercial disputes arise in today’s modern and increasingly interconnected world.

There are undoubtedly clear benefits to arbitration for clients due to the certainty, commercial confidentiality and the flexibility to tailor the proceedings to the particular parties involved. However, the high costs, or at least the possibility of high costs, of this dispute resolution tool will be a concern for parties seeking resolution of disputes. Arbitration will not be suitable for all clients but, when utilised expertly by specialist legal advisors, it can lead to a quicker, cheaper and more equitable solution for the parties involved

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