International Commercial and Marine Arbitration

Georgios I. Zekos

• Publisher: Routledge-Cavendish
• Year: 2008
• ISBN:
  9781134044559
• Edition: 1
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

International Commercial and Marine Arbitration analyses and compares commercial-martime arbitration in a number of different legal systems including the US, the UK, Greece and Belgium. The book examines the role of the courts in arbitration in each of these countries, making reference tothe latest case law, and also makes extensive refe

1 The historical emergence of arbitration as a dispute mechanism and its characteristics

1 Historical background

Dispute resolution has never been, and it is expected will never be, an exclusive function of the state¹. Arbitration² is one form of alternative dispute resolution (ADR)³. ADR is often lauded for its potential to produce “better” quality outcomes, including fairness leading to the same justice outcome, than courts⁴. The ADR boom is motivated by concerns about efficiency, access, and justice⁵. It is worth noting that private arbitration predates the public court system⁶. Arbitration began as an extrajudicial mechanism for resolving disputes⁷. The ancient Sumerians, Persians, Egyptians, Greeks, and Romans all had a tradition of arbitration⁸. In Roman law, arbitration agreements were admissible as a reflection of the recognized principle of freedom of contract⁹. In arbitrations dating back to the Oxyrhynchus Papyri from 427 AD, merchants enthusiastically accepted as final the decisions of fellow merchants with knowledge and expertise in the related field¹⁰. Arbitration has, for that reason, historically functioned as an independent adjudicative dispute resolution mechanism. It is characteristic that arbitration was perceived as superior for resolving price or damages disputes¹¹. Even in the 1800s, arbitration was appreciated for its cost-saving advantages¹².

Arbitration’s popularity has continued to flourish since Biblical times¹³. At the beginning, the regulation of arbitration by national law was nonexistent, and arbitration was crafted particularly to make possible the dispute resolution needs of a specific industry or community, avoiding imitation of the procedures of any judiciary. Arbitrators applied established custom as the legal rules and standards according to which rights and obligations of the parties were determined, and this was an international commercial law applicable to these international transactions—the lex mercatoria – of those times. Maritime arbitration has ancient origins, and additionally, just as maritime law preceded “terrestrial” commercial law, maritime arbitration preceded international commercial arbitration, with its roots dating back to the times of the ancient lex mercatoria¹⁴.

Arbitration “took its rise in the very infancy of society” as a private and self-contained method, distinctive from litigation and not as a postscript to the development of public courts¹⁵. Has this fact been shared by states’ legislation and modern arbitration practice or has arbitration been developed into an appendage of courts? People created arbitration systems designed to settle disputes effectively in accordance with local norms and customs¹⁶. These self-contained arbitration systems served communities for the reason that disputants and courts treated them as final. Merchants established arbitration tribunals because they felt that the courts were not sufficiently knowledgeable about commercial customs and were exceptionally slow and unwieldy¹⁷. The New York Chamber of Commerce established an arbitration system when it was founded in 1768, and the Chamber’s arbitration panels were independent from the judiciary¹⁸. Arbitration developed within trade and merchant groups to privately resolve disputes in accordance with the shared understandings and norms of the community¹⁹. Communities introduced arbitration systems intended to resolve their communal conflicts in accordance with custom, equity, and internal ‘law’²⁰. Arbitration was viewed in the light of practical expediency and decided according to the ethical or economic norms of some individual groups²¹. The New York Chamber of Commerce arbitration committee continued to resolve merchant disputes when the public courts were closed during the American Revolutionary War and British occupation²². Arbitration was the only forum for resolution of civil disputes during the British occupation and continued to flourish after the revolution in both England and North America²³.

Merchants preferred the arbitrators’ equitable determinations and specialized understanding of commercial issues and industry norms. Parties abided by agreements to arbitrate and arbitration awards out of apprehension that they would be ostracized from the commercial community and to maintain ongoing relationships²⁴. Consequently, merchant guilds sought to govern their own affairs according to internal norms, standards, and rules and made compliance to arbitration decisions certain with non-legal sanctions such as expulsion²⁵. Arbitration was meant to be independent from the judiciary, and in effect oust the courts from the process²⁶. The functions of arbitration as a private, flexible, effective, and independent process fuelled its recognition. Arbitration threatened judicial business, as well as judicial jobs linked to the courts’ caseloads. Courts perceived as a threat to their power the growing status of arbitration as a favoured means for resolving business disputes. This sparked their envy and distrust of arbitration systems, which in turn led to inconsistent and confused judicial treatment of arbitration agreements and awards. Thus, it seems that arbitration from an independent dispute mechanism system has been transformed into an appendage of the courts. Courts based their refusal to enforce executory arbitration contracts on the theory that arbitrators are simply agents at the will of the parties who appoint them²⁷. Arbitrators are summoned to settle disputes objectively and are not subject to the parties’ control. Many pre-industrial courts promoted common law rules in support of arbitration²⁸. Moreover, some courts favoured arbitration because of its procedural simplicity and efficiency²⁹. Other courts held that parties could not, by contract, oust the court of jurisdiction³⁰. By contrast, arbitration clauses do not “deprive the court of jurisdiction,” rather, the court being the institution in control of a state’s dispute system, in enforcing a liberally agreed upon contract containing an arbitration clause, is simply enforcing the desire of the parties, not admitting that it lacks jurisdiction over the proceedings.

On the one hand, in Home Insurance Co. of New York v. Morse³¹ the court held that a person who consents to arbitration does not waive the right to a judicial forum. Moreover, the Supreme Court in this case³² held that “[e]very citizen is entitled to resort to all the courts of the country, and to invoke the protection which all the laws or all those courts may afford him. A man may not barter away his life or his freedom, or his substantial rights”, and so arbitration was not an alternative dispute mechanism equivalent to courts. On the other hand, in Port Huron & N.W. Ry. Co. v. Callanan³³ the court held “it is not expected that after resorting to such private tribunals either party may repudiate their action and fall back on the courts”. The Michigan Supreme Court held that “There is power in a court of equity to relieve against awards in some cases where there has been fraud and misconduct in the arbitrators, or they have acted under manifest mistake. … But it is evident that there are greater objections to any general interference by courts with awards³⁴”. This shows a court’s intervention but not its complete conquest of the process which cannot be avoided in some cases if the parties want to use all the facilities of courts’ intervention in arbitration. In the absence of a unanimous agreement, the panel disbanded, and the case had to go to the courts after the waste of time and cost of the arbitral proceeding³⁵. Moreover, in Pierce v. Kirby³⁶ the court held that “a party who replies to a complaint at arbitration, but otherwise asserts that the arbitrators lack jurisdiction, does not forgo his right to a judicial forum” and so the party’s involvement in arbitration did not waive a right to sue, showing arbitration as a non-binding procedure. The fear of prejudice practiced by one side of the trade against another is reported, and so judicial independence was not likely, but the courts did not abandon the test that the expert trade association arbitrators were acting in a “quasijudicial” capacity³⁷.InAdams’ Adm’r v. Ringo³⁸ the court specified that “the ancient niceties and technicalities applied to arbitrations have given way to a more liberal and rational construction. This mode of ending litigation is to be encouraged.”

The ouster theory appeared to be a cause for judicial hostility to arbitration, mainly for the reason that courts continued to enforce proverbial ‘ousters’, including settlement agreements and arbitration awards³⁹. Judge Cardozo explained the ouster principle in Meacham v. Jamestown, Franklin & Clearfield R.R. Co⁴⁰, stating that “if jurisdiction is to be ousted by contract, we must submit to the failure of justice that may result from these and like causes. It is true that some judges have expressed the belief that parties ought to be free to contract about such matters as they please. In this state the law has long been settled to the contrary.” Courts followed the lead of Lord Coke⁴¹ and Blackstone⁴² in holding that an executory agreement to arbitrate would not be enforced by the courts, because the removal of jurisdiction that it entailed was against sound public policy. Initially, courts believed that arbitration usurped their jurisdiction and viewed arbitration as a threat because “ordinary citizens … [made] their own law and disregard[ed] the judicial process⁴³.” Courts, to a large extent, granted themselves jurisdiction to invalidate arbitration awards⁴⁴. Thus, courts have managed to get in the way of arbitration process and to gain a role in arbitration. Early courts protected their jurisdiction from competition with arbitrations and characteristically in U.S. Asphalt Refining Co. v. Trinidad Lake Petroleum Co.⁴⁵ the court held that “The courts will scarcely permit any other body of men to even partially perform judicial work, and will never permit the absorption of all the business growing out of disputes over a contract by any body of arbitrators, unless compelled to such action by statute.” Some judges held that an agreement to arbitrate a dispute could not “oust” a court of its jurisdiction⁴⁶. Joseph Story⁴⁷ thought that “courts will not specifically enforce arbitration agreements if the effect is to divest the ordinary jurisdiction of the common tribunals of justice” which shows a view that arbitration cannot be an equivalent to courts’ dispute mechanism. Additionally, some courts held that public policy prohibits arbitration agreements from precluding litigation, and private tribunals could not be held accountable under the law⁴⁸. Thus, courts have taken the role of the guardian of public policy in a state, and so arbitration is not considered to be a safe, independent, and fully alternative dispute mechanism. Notwithstanding that arbitration predates litigation as a forum for dispute resolution, arbitration has been historically disfavoured by Anglo-American courts. Entirely valid expressions of contractual assent were methodically ignored and refused enforcement by the courts. Peter R. Sonderby⁴⁹ and Robert Coulson⁵⁰ consider that arbitration can deliver effective dispute resolution services, while avoiding the cost, delay, hostility, and public notice of litigation. The question to be answered is why there is a need to involve courts in arbitration agreements and why not allow arbitration to deal with agreements legalising the whole process. Why shouldn’t arbitration be a self-contained method, equivalent to and distinctive from litigation?

Moreover, there has been a long-standing hostility between courts and arbitration⁵¹. In the 17th century, English courts held that arbitration was a non-binding process. English judges were paid fees based on the number of cases they decided, and so arbitration infringed on their livelihood⁵². The Park Const. Co.⁵³ majority considered that English courts in the 1700s protected their jurisdiction against encroachments by arbitration—not for principles, but for self-interest. Consequently, private arbitration was seen as an economic threat to English judges, whose incomes often depended on fees from disputants⁵⁴. The English courts became concerned that arbitration had the potential to displace or oust the courts’ role in society. Through a series of court decisions limiting the effect of arbitration, the English courts began to view arbitration as a non-binding process based on the principle of agency revocability. In the US, federal and state courts both followed ancient rules of English law⁵⁵, that “performance of a written agreement to arbitrate would not be enforced in equity, and … if an action at law were brought … such agreement could not be pleaded in bar of the action, nor would such an agreement be ground for a stay of proceedings until arbitration was had.” Besides, Michael H. LeRoy and Peter Feuille⁵⁶ argue that “courts were not hostile to arbitration, they were not laissez-faire in sanctioning its use. Nor are they today in applying the pro-arbitration signal sent in Gilmer and Circuit...