Understanding International Arbitration

Tony Cole, Pietro Ortolani

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781317616429
• Edition: 1
• Topic: Jura
• Subtopic: Schlichtung, Verhandlung & Mediation in Rechtsangelegenheiten

Understanding International Arbitration introduces students to the primary concepts necessary for an understanding of arbitration, making use of illustrative case examples and references to legal practice throughout.

This text offers a comprehensive overview of the subject for those new to arbitration. Making use of a unique two-part structure in each chapter, Understanding International Arbitration provides a clear and simple statement of rules, followed by detailed discussion of the ideas underlying those rules, illustrated with relevant comparative law and case examples.

Designed with students of arbitration in mind, this text provides both a clear introduction to the subject and a comprehensive course text that will support students in their preparation for exams and practical assessments.

1 What is arbitration?

Rules

1. Arbitration is a private, third-party mechanism of rule-based adjudicatory dispute resolution

Arbitration is private in nature: proceedings need not take place in public, arbitrators do not act as government officials, and the parties have the power to decide how they want to arbitrate. Arbitrators perform an adjudicatory function: they hear the opposing parties’ arguments and apply agreed rules to decide the disputed issues, binding the parties with their decision, rather than merely advising them.

2. Party autonomy is central to arbitration

Parties cannot be forced to arbitrate, but must agree to do so. The rules governing an arbitration are ultimately determined by the contents of the parties’ agreement to arbitrate.

3. Arbitration precludes litigation

If parties have agreed to arbitrate a dispute, that dispute can only be taken to court if both parties agree to do so.

4. Arbitral awards are final and binding

A decision in which arbitrators resolve one or all of the substantive issues submitted to arbitration is called an “award”. Arbitration is fundamentally a “one-stop shop”: once an award has been delivered, there are very few grounds on which it can be challenged (simply being wrong is not enough). Parties must comply with an award, and if they refuse to do so, it can be enforced through the courts.

5. Not all disputes can be submitted to arbitration

National laws place limits on the types of disputes that can be submitted to arbitration. If parties arbitrate a dispute that is not “arbitrable” under the law governing the arbitration, courts applying that law will refuse to assist the arbitration or enforce any resulting award. Courts elsewhere in the world may refuse to enforce awards arising from that arbitration as well.

6. Arbitration can be domestic or international

Arbitration can be used to resolve both domestic and international disputes. Local law will determine whether an arbitration qualifies as “international”, and in some jurisdictions different laws will apply to an “international” arbitration, than apply to a “domestic” arbitration.

7. Arbitration is not always between private parties

Although arbitration is private in nature, the parties to it are not necessarily private themselves, and States and State entities now regularly use arbitration.

8. Arbitration comes in different varieties

Arbitration can be used to resolve different types of disputes, and different laws may apply depending on the type of arbitration in question.

9. Arbitration can be institutional or ad hoc

Parties who have agreed to arbitrate can do so with the assistance of an arbitral institution, which will provide administrative support and rules to assist their arbitration. However, use of an arbitral institution is voluntary, and parties can also arbitrate ad hoc, or without the involvement of an arbitral institution.

10. Arbitration offers potential advantages

Arbitration can offer significant advantages over other forms of dispute resolution. In particular: (i) neutrality, (ii) speed, (iii) finality, (iv) enforceability, (v) expertise, (vi) flexibility, and (vi) confidentiality.

11. Arbitration has potential drawbacks

Arbitration also has drawbacks that can make it less desirable for a particular dispute than other forms of dispute resolution: (i) cost, (ii) limits to arbitral jurisdiction, (iii) limits to arbitral power, (iv) lack of appeal, and (v) lack of expertise of arbitrators in arbitration.

Analysis

1. Arbitration is a private, third-party mechanism of rule-based adjudicatory dispute resolution

One of the first difficulties faced by anyone encountering arbitration for the first time is getting a clear idea of what exactly “arbitration” is. That is a significantly harder task than it might seem to be, as there really is no such “thing” as arbitration. It is a mechanism for resolving disputes, but what exactly that mechanism is, it is very hard to say. Rather, there are just many things that are not arbitration. “Litigation” is not arbitration. “Mediation” is not arbitration. Flipping a coin or engaging in armed combat are not arbitration. But beyond this process of gradually setting limits to arbitration by listing things that are not arbitration, it is virtually impossible to describe with any precision what arbitration actually is.

One reason for this is that “arbitration” is a very old and widely used label, and it has been used and still is used to describe a very wide range of approaches to dispute resolution. “Arbitration”, that is, has often served as a label that means little more than “the resolution of a dispute through recourse to a third party, other than a court”.

Even this very basic definition, though, does give us some important insight into what arbitration is. Firstly, arbitration is a third party dispute resolution mechanism. Flipping a coin or engaging in armed combat might qualify as arbitration if you believe that a god or other higher power will determine the winner. But so long as you believe that the coin toss will be decided by luck, and the armed combat by whoever fights better, then there is no third party involved, and hence there is no arbitration. Similarly, then, negotiation between two parties is not arbitration – and even if a settlement agreement is reached, it cannot be enforced in court as an arbitral award.¹

Notably, though, both litigation and mediation involve a third party – yet they are not arbitration. Clarifying why they are not gives us additional details about arbitration.

Litigating in national courts is, by its very nature, an unusual activity, a departure from the way that people normally interact with one another. It is a dispute resolution mechanism created by a State,² and used by people when either they do not have a relationship, or when that relationship has broken down so badly that they want formal, governmental validation of their position and enforcement of their rights.

Arbitration, on the other hand, is far more intimately connected to human relationships. It is a form of dispute resolution that is controlled by the parties to the dispute, and so can occur in almost any form that they wish to use. It varies in its form, in accordance with variations in the identities of the parties in the dispute.

Litigation, that is, involves a government effectively saying: “I will resolve your dispute, but I can’t make up new rules for every new case, so you need to use the same procedures as everyone else.” It is a “one size fits all” dispute resolution mechanism. Arbitration, on the other hand, has no rules, only limits. As long as the parties stay within those limits, they can resolve their dispute in any way they wish, and it still constitutes arbitration. The second principle, then, is that arbitration is a private dispute resolution mechanism. It need not be “confidential”, as some arbitrations are held in public. But it is “private” in the sense that it is controlled by the parties to the dispute, and can vary its form to match their wishes and needs.

Mediation, though, is also private in this way. Distinguishing mediation from arbitration, then, gives us our third basic principle: Arbitration is an adjudicatory dispute resolution mechanism. In other words, while mediation involves a third party (the mediator), and is controlled by the parties (and so is private), it is based on the idea that the third party should help the disputants to reach an agreement. The mediator does not decide the dispute: she facilitates settlement, but it is up to the disputing parties to decide whether they want to settle, and on what terms. In arbitration, on the other hand, an arbitrator is appointed to consider the arguments and evidence presented by the parties and then deliver a decision (called an “award”), just as does a judge in litigation. One or even both parties may be unhappy with that decision, but by agreeing to arbitrate their dispute they agreed to allow the arbitrator to decide the dispute on their behalf. Consequently, if their procedure is to count as arbitration, they are bound by that decision even if one of them disagrees with it.

There is one final basic principle that is always true of arbitration: Arbitration is a rule-centered dispute resolution mechanism. That is, while an arbitrator will have to make decisions on facts when resolving a case, if the dispute is resolved purely on the facts, it is not arbitration. So, for example, suppose that Ezra and Sufyaan agree that under their contract the wood used to build a house had to come from a particular species of tree, and they hire a third party to determine whether the wood actually used to build that house was the correct type. This is a dispute that can be resolved entirely by a decision on the facts. The decision on the facts has legal consequences, but the third party has only been asked to make a decision on the facts, not on the law. In many jurisdictions this procedure is known as “expert determination”, and it serves as another boundary to what constitutes arbitration. An arbitrator need not actually base her decision on the law, and can for example be authorised by the parties to decide ex aequo et bono, or on the basis of her own perception of rightness and fairness. However, whether the arbitrator is applying the law or making a judgement of fairness, a dispute resolution procedure can only qualify as arbitration if it involves a decision-maker applying a guiding rule to the facts of a dispute.

We have, then, four basic principles that can serve as guidelines as to what arbitration actually is: (1) Arbitration is a third party dispute resolution mechanism; (2) Arbitration is a private dispute resolution mechanism; (3) Arbitration is an adjudicatory dispute resolution mechanism; (4) Arbitration is a rule-centered dispute resolution mechanism.

Within the boundaries of these four principles, arbitration can be anything that the parties want it to be. In this way, arbitration is the essence of “private justice”.

2. Party autonomy is central to arbitration

Perhaps the most commonly used expression in discussions of arbitration is “party autonomy”. It is invoked on a regular basis to describe how arbitration operates, to justify procedural decisions taken in arbitration, and to praise or criticise governments and courts for actions they take relating to arbitration. “Party autonomy” refers to the idea that arbitration is characterised by the freedom of the parties to control almost every aspect of the arbitral process, so that they can design their own dispute resolution procedure that will meet their particular needs and preferences. It has arguably become the central doctrine in arbitration, routinely invoked to justify interpretations of how arbitration should operate, and is almost never criticised.

When trying to understand the place of party autonomy in arbitration, it is important to draw a distinction between what can be called “independent” and “supported” conceptions of party autonomy. The independent conception of party autonomy arises naturally from the basic fundamentals of arbitration, as discussed in the previous section. Arbitration is essentially a form of private justice, in which two parties agree to resolve their dispute through an adjudicatory dispute resolution mechanism they set up themselves. The independent conception of party autonomy in arbitration, then, is purely descriptive: it simply recognises that arbitration, by its private nature, delivers significant power to the parties to create their own dispute resolution process. Arbitration, as an idea, inherently includes this independent notion of party autonomy: it is the parties’ procedure, so they can shape it as they prefer.

Importantly, though, the independent conception of party autonomy relies upon a notion of arbitration as an entirely free-floating process, separate from government-run dispute resolution systems. The type of autonomy it involves is the same type of autonomy that you have when you are deciding where to eat your dinner if you are home alone. When your family is home they may perhaps expect you to eat with them at the dinner table, but if you are alone you can eat on the couch, in your bedroom, or anywhere else. The autonomy involved in the independent conception, hence, is the autonomy that comes from isolation. Because an arbitration is private, it can be run without the involvement of anyone but the disputing parties, and so can be run however they want to run it.

The problem with this picture of arbitration, though, is that while it describes a form of arbitration, it doesn’t describe a form of arbitration that many people find attractive. After all, the other side may not turn up at the time you agreed to arbitrate; the arbitrator may take a bribe; the loser may refuse to pay what the arbitrator decides they owe. The autonomy of this basic form of arbitration, that is, brings with it the autonomy of everyone involved in the process not to cooperate with it.

What parties actually want from arbitration is not this free-floating form of arbitration that the independent conception of party autonomy describes. Instead, as much as arbitration is constantly described as a private procedure, operating as an alternative to national court systems, what parties most want is arbitration connected to national laws and national courts. This way, when parties refuse to fulfil their agreement to arbitrate, they can be made to do so; when arbitrators act corruptly, they can be removed; when losing parties refuse to pay what they owe, the debt can be collected against their will.

The problem this creates is that governments are also free. There is no inherent obligation on any government to support a private arbitration. It is now standard that they do so, but that is because they have decided that the use of arbitration is desirable for the achievement of their own goals. This means, however, that governments are able to condition their support of arbitration. They have every legitimate right to say: “Yes, I will support your private dispute resolution procedure, but only if you run it in accordance with these rules”. This would not violate the independent conception of party autonomy, as disputing parties would still have the freedom to arbitrate in a way that violated the government’s rules, if they were willing to do so without government assistance. Yet it creates a potential problem for arbitration, as if governments impose too many regulations, arbitration begins to lose its value as an alternative to court litigation.

This is where the supported conception of party autonomy comes in. The supported conception is not purely descriptive, as is the independent conception. It is instead a normative view of the role of party autonomy in arbitration: it posits that party autonomy is so important in arbitration that it creates rules for how arbitration can be regulated; that States unquestionably have the legitimate power to lay down detailed rules on how arbitrations can operate, but that they are wrong to do so. According to the supported conception, party autonomy does not just describe arbitration, but constitutes its central core. Consequently, governments should legislate in ways that assist arbitration, as this supports the parties’ exercise of their autonomy. They should also exert control over arbitration to the extent necessary to ensure that each arbitration operates fairly, as this guarantees that the autonomy of one party is not overruled by the autonomy of another, more powerful party. But the supported conception of party autonomy also entails that a State should not insist that arbitrations operate in accordance with any particular rules, or obey particular social conceptions of how disputes can be resolved. To do so would impose on the parties the views of individuals and entities not themselves involved in the arbitral process. As a result, it would constitute a violation of the principle of party autonomy.

It is, beyond question, the supported conception of party autonomy that has come to dominate international arbitration, both in terms of how it is approached by practitioners, and in terms of how it is overwhelmingly viewed by governments. By creating a structural support for party autonomy, States do not limit the ability of parties to shape arbitration in accordance with their needs and preferences, but rather offer an infrastructure which ensures that party autonomy can operate effectively. Nonetheless, it is important to consider the consequences for arbitration of the centrality of party autonomy.

Firstly, one of the most important differences between arbitration and State court litigation is that the latter constitutes an expression of national sovereignty, while the former does not. In other words, the power of State courts to resolve disputes derives from the inherent authority of the State to govern actions subject to its jurisdiction. It constitutes a service provided by the government to individuals, and is made available to all. Consider, for example, one of the most basic forms of dispute, based on a contract between two parties: if a dispute arises, either of the parties can commence proc...