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The Key Issues Surrounding International Commercial Arbitration

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About The Author

Helen Morse (Writer)

Helen is studying Law (European & International) LLB at the University of Sheffield, now entering her final year having spent an Erasmus year at the University of Vienna, Austria. Helen is interested in international and commercial law. Outside of law, Helene is a keen sports woman, playing at county level.

International Commercial Arbitration is a process of resolving disputes arising out of international commercial contracts, as an alternative to settling in court. Disputes are resolved by a neutral arbitration tribunal whose decision is final and binding. There can be no arbitration tribunal without an agreement from both parties to submit to arbitration, most commonly found in an arbitration clause inserted in the contract.

There are two types of arbitration tribunals; institutional arbitration and ad hoc arbitration. An institutional arbitration tribunal is one in which a specialised institution intervenes and takes on the role of administering the arbitration process. Major arbitration institutions include the International Chamber of Commerce (ICC) in Paris, the London Court of International Arbitration (LCIA) and the American Arbitration Association (AAA). Each institution has its own set of rules which provide a framework for the arbitration tribunal and its own form of administration to assist in the process. On the other hand, ad hoc arbitration is one which is not administered by an institution. The parties will therefore have to determine all aspects of the arbitration themselves, from the number of arbitrators to the general procedure for conducting the tribunal.

The use of arbitration as a formal dispute resolution mechanism is continuing to grow in prominence in the international commercial world, becoming the primary mechanism of choice in a number of industries, such as the construction, energy and shipping sectors. In the LCIA Registrar’s 2013 Report, a total of 290 arbitrations were referred to the LCIA, a rise of 10% from 2012 and surpassing the previous all-time high of 2009. Other arbitration centres have also reported similar findings, indicating that, after the global economic down-turn, arbitration has emerged as, and will continue to be, a significant dispute resolution forum. It is, therefore, important to outline the most significant issues that require consideration when choosing to submit to arbitration and throughout the arbitration process thereon.

Why Submit to Arbitration Instead of Going to Court?

The principle motivation for parties involved in international contracts submitting to arbitration is concerned with the issue of enforceability. Under ‘The Convention on the Recognition and Enforcement of Foreign Arbitral Awards’ (commonly known as ‘The New York Convention’), a convention party state must recognise and enforce foreign arbitration awards. There are currently 149 signatory states to ‘The New York Convention’ meaning arbitration decisions are practically globally enforceable. On the other hand, national court rulings are not enforceable in the same way. Except where specific bilateral enforcement agreements exist, courts are under no obligation to recognise or enforce decisions of foreign courts. Therefore parties with global business relations, wishing to be able to rely on a decision resulting out of a dispute, are likely to prefer to use arbitration instead of going through the courts. This is especially true in circumstances where the enforceability of their national court rulings in other jurisdictions is not guaranteed.  

Another unique aspect to arbitration awards is that they cannot be challenged on the basis of its merits in the way court rulings can be appealed. The final and binding nature of arbitration decisions means the dispute process is often less timely and less costly for the parties, two very important considerations for any economically conscious business. This is of course is a risk too for the parties because if they receive an unsatisfactory arbitration award, their grounds for appeal are very limited. On the other hand, the arbitration tribunal and award is completely confidential unlike the judicial process. This will be particularly attractive to parties wanting to maintain their reputation and avoid any potential ‘bad press’ that can be involved with disputes played out in the courts.

The final main reason why global commercial parties might want to opt to resolve their disputes through arbitration instead of going to court is because of the flexibility it entails. Party autonomy is a general principle of arbitration, meaning the arbitration provisions are free to be drafted as the parties wish, including the rules that govern the proceedings and the number of arbitrators. It is worth noting that, even where parties have agreed to submit to institutional arbitration, the institution’s specific rules will often give the parties a lot of freedom to choose certain aspects of their own tribunal. Having the choice of arbitrator in the parties’ hands is probably the most important attraction to arbitration for parties involved in international business. Firstly, parties can ensure their needs are understood and properly represented by appointing an arbitrator who not only speaks the same language, but also has a similar cultural and legal background as them. Secondly, parties can appoint individuals with expertise in the field their dispute concerns, which will be especially appealing to parties with technical or industry specific issues. However, it should be noted that due to this freedom, particularly where business relations are strained, the formation of the arbitration tribunal is susceptible to delays before even getting down to settling the dispute.

The Arbitration Agreement

As previously mentioned, there can be no arbitration tribunal without an agreement, which must contain the valid consent of both parties to submit to arbitration. Whilst arbitration awards cannot be challenged, arbitration agreements are subject to judicial review and a large proportion of post-arbitration disputes relate to whether there was jurisdiction to arbitrate. Therefore, it is very important for the parties to ensure their arbitration agreement complies with the mandatory legislation of the lex arbitri (the national law of the seat of arbitration) in order to avoid any disputes over the validity of any subsequent arbitration awards. Traditionally, most jurisdictions expect a valid agreement to be in writing, however, this is not universal. For example, under Article 1507 of the French Civil Procedure Code oral arbitration agreements will be recognised.

It is also important to note that an agreement within an arbitration clause has a separate legal existence to the whole contract. Therefore it is possible to apply a different national law to the arbitration proceedings to the one governing the main contract if the parties so wished. It also means that the arbitration agreement does not necessarily share the same fate as the rest of the contract. This allows for arbitration proceedings to continue in circumstances where the original contract may be deemed invalid or void. This doctrine of separability is encompassed in Article 16(1) of UNCITRAL’s Model Law (a legislative text that is recommended to states by the United Nations Commission on International Trade Law, which works to promote the harmonisation and unification of international trade law) and several states have incorporated the doctrine into their own national arbitration legislation (see Article 178(3) of the Swiss PIL and Beijing Jianlong Heavy Industry Group v Golden Ocean Group Limited & Ors confirming the principle in English law).

The Seat of Arbitration

This leads me to one of the most important issues to consider in international commercial arbitration: the location of the seat of arbitration. Firstly, despite the existence of ‘The New York Convention’, it will always be sensible to check the enforceability of foreign arbitration awards when choosing the seat. Secondly, as one can already see, there still exists a number of variations in national arbitration law which parties must be aware of, even if only subtle differences, before choosing their seat. Procedural practices can vary greatly in areas such as the use of witnesses and document production. As a general example, oral evidence has more influence in common law jurisdictions, whereas the civil law process often places more weight on documentary evidence. Another significant difference to be familiar with is the time limits of challenging an arbitration award. At one extreme, English law states an appeal must be made with 28 days of the date the party was notified of the award, whereas at the other extreme Chinese arbitration law establishes a time-limit of six months. It is essential parties are made aware of variations such as these when deciding upon the seat of arbitration and consider the legal culture they are used to.

There are two important features to note when drafting an arbitration agreement and choosing the seat of arbitration. First of all, the physical location of the seat of arbitration is not necessarily the same as the jurisdictional seat of arbitration. In the English case of Braes of Doune Wind Farm (Scotland) Ltd v Alfred McAlpine Business Services Ltd [2008] the arbitration clause expressly stated that the seat of arbitration was Glasgow, Scotland, however, the parties selected the English Arbitration Act 1996 to govern proceedings. The parties disputed the applicable law and thus the validity of their subsequent arbitration award. The court held that, on a proper construction of the contract as a whole, the juridical seat of the arbitration was England. What is important to note from the case, however, is that a choice of seat will usually dictate the corresponding procedural law to govern the tribunal, but this is not an automatic assumption. Therefore, it is advisable that parties are not only aware of this point, but that they make very clear in their arbitration agreement any distinction between the physical location of proceedings and the jurisdictional seat of arbitration which will govern the applicable procedural law. This will go a long way in avoiding future dispute over the validity of the arbitration award.

Secondly, in the context of arbitration agreements within arbitration clauses, whilst parties will almost certainly agree on a choice of law for the contract, they rarely specify the law to govern arbitration proceedings. Due to the separability doctrine already discussed, the two are not necessarily the same. There has been much domestic case law and legal writings on how a court should infer the location of the arbitration seat where it is disputed and not expressly stated. For example, in the Dutch case of Owerri v Dielle [1993] (see ‘Comparative International Commercial Arbitration’ by Julian D. M. Lew, Loukas Mistelis & Stefan Kroll, page 121), it was stated that parties would in general prefer, 'to submit the validity of the arbitration clause to the same law to which they submitted the main agreement of which the arbitration clause forms a part of'. However, in the English case of Sulamérica Cia Nacional de Seguros SA v Enesa Engenharia SA [2012], the court held that the seat must be ‘determined by a three-stage test inquiry into the express choice, the implied choice and then closest and most real connection’ between the two parties. This is still an area of legal contention and large variations exist from jurisdiction from jurisdiction. The important point to be taken from this is that it would be in the parties’ favour to expressly state the choice of law for the arbitration proceedings and not rely on the assumption it is the same as the main contract.

Type of Arbitration

There are several factors for parties to think about when deciding whether to submit to institutional or ad hoc arbitration. It will depend greatly on the relationship between the parties and the nature of the dispute. Parties may prefer to go to an institution for ease, as they will not have to deal with the administration or regulatory framework of the tribunal. However, institutions can be more expensive and slow. Therefore, parties may favour arbitration on an ad hoc basis, particularly where relations are more amicable and agreement should be easier.

Conclusion

International Commercial Arbitration has become a popular forum for settling disputes for a number of reasons, the most important being the enforceability of arbitration awards and the flexibility of the arbitration process. The main areas to consider when submitting to arbitration is whether it is appropriate to go to arbitration in the first place; the validity of the arbitration agreement; the applicable law to the seat of arbitration; and whether to use an institution or not. All of these factors can have a large impact on the costs, efficiency and likelihood of a satisfactory outcome.

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Tagged: Commercial Law, International Law, Legal Careers

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