What is Arbitration?

Arbitration is “a legal technique for the resolution of disputes outside the courts, wherein the parties to a dispute refer it to one or more persons (the “arbitrators”, “arbiters” or “arbitral tribunal”), by whose decision (the “award”) they agree to be bound.” [1] In other words, arbitration is a form of dispute settlement, where parties can avoid resolving their dispute in the public litigation. It is used mainly in solving disputes arising out of commercial matters. Arbitration should not be confused with mediation. In the arbitration, the arbitrator obliged to determine the dispute by reference to certain rules, rather than to seek compromise which is mediator’s task.

There are two types of arbitration: ad hoc arbitration and arbitration organized in permanent institutions. Ad hoc arbitration is conducted independently from any influence of institutions and according to the rules chosen by the parties. In this type of process, the arbitrators are appointed by case-by-case basis, usually by parties. One option is that the parties select an appointing authority who will appoint arbitrators for the proceeding. The composition of the tribunal can vary from one to several arbitrator depending on procedural rules.

In the arbitration process organized by permanent institutions, the process is more bound to the rules of the said institution. The institution provides arbitral services and normally appoints the arbitrators. One example of this kind of institution is the International Chamber of Commerce.

The arbitration process has some advantages and disadvantages, when compared to public litigation. First of all, it is confidential process, which can be important in disputes involving commercial secrets. On the other hand, because of the confidentiality, the disputes settled in the arbitration do not gain such publicity that disputes resolved in the public litigation. The arbitration process usually also gives the parties the freedom to select their arbitrators. Thirdly, it is usually quicker and more flexible than public litigation. However, one disadvantage is that arbitration is normally more expensive than public litigation because of high salary of the arbitrators.

Relevant Conventions and Documents

One of the most relevant convention in the field of international commercial arbitration is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958). It requires courts of contracting states to give effect to private agreements to arbitrate and to recognize and enforce arbitration awards made in other contracting states and it applies to arbitrations which are not considered as domestic awards in the state where recognition and enforcement is sought.

On European point of view, the next relevant legal document is the European Convention on International Commercial Arbitration (1961), which applies to arbitration agreements concluded for settling disputes arising from international trade between physical or legal persons residing in different Contracting States.

The UNCITRAL Model Law on International Commercial Arbitration reflects the worldwide consensus on key aspects of arbitral process accepted by different states and it is designed to assist States in reforming and modernizing their laws on arbitral procedure.

The UNCITRAL Arbitration Rules provides a set of procedural rules upon which parties may agree for the conduct of arbitral proceedings arising out of their commercial relationship. These rules are widely used both in ad hoc arbitration and in permanent arbitration institutions.

In addition with these conventions and documents, arbitration process is regulated by other regional conventions, such as Inter-American Convention on International Commercial Arbitration, and Conventions covering certain subject matters, such as the EU Tax Arbitration Convention, as well as national arbitration laws.

DEFINITIONS

Arbitration Agreement

The UNCITRAL Model Law defines an arbitration agreement as “an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.” This means that parties agrees to settle their disputes in arbitration process instead of public litigation. Basically, parties can choose which kind of disputes fall under the arbitration. It can mean that all disputes arising out of their legal relationship are to be settled in the arbitration process, or on the other hand, parties can choose that only certain kinds of them falls under it. Also, as the wording of the definition states, the arbitration agreement can be drafted before or after the dispute has arisen.

The arbitration agreement also defines the scope of the arbitral tribunal’s jurisdiction. The arbitral tribunal does not have jurisdiction over the matters which are not covered by the arbitration agreement made by the parties. In other words, if the parties have agreed to settle certain kinds of disputes in the arbitration, the tribunal has no jurisdiction over other matters.

There are two types of arbitration agreements: “separate” arbitration agreements and arbitration clauses. Separate arbitration agreements are those which constitute a whole new agreement, where parties agrees to settle their dispute in arbitration. Arbitration clause means a provision, included in the contract between parties, which contains an obligation to settle disputes in arbitration.

National arbitration laws can set out different requirements for the form of the arbitration agreement. The main rule is that the arbitration agreement must be in writing. However, the requirement is pretty loose, because the requirement can be fulfilled by the exchange of letter or telegrams, or in otherwise documented way.

Seat of Arbitration

Basically, the concept of the seat of arbitration determines the procedural rules of the arbitration proceedings. It refers to the geographical and legal jurisdiction to which the arbitration process is tied. In other words, it is the place where the arbitration is held. For example, the arbitration agreement can state that the proceedings are to be held “in London under the rules of the ICC”. Parties are free to identify the seat of arbitration. If they fail to do so, the seat is implied from an express choice of law governing the procedure. For example, if the arbitration agreement states that the dispute is settled in accordance with Indian law, the seat is considered to be in India.

THE LAW GOVERNING THE ARBITRATION AGREEMENT

The Governing Law

The law governing the arbitration agreement can be truly different, if the parties chooses to conclude a separate arbitration agreement instead of arbitration clause included in the substantive contract.

In the case of separate arbitration agreements, parties are free to choose the law governing the arbitration agreement. This can lead to situation where the proper law of the arbitration agreement can be different from the law governing the dispute, because the arbitration agreement and the contract from which the dispute arises are separate entities and are governed by different laws.

But on the other hand, in the case of arbitration clauses, finding the governing law can be a bit more difficult. Firstly, the proper law of the arbitration agreement will normally be the law applicable to the substantive contract as a whole. So if the contract contains an express choice of law made by parties, the chosen law also governs the arbitration clause. Secondly, in the case where the parties have failed to express their choice of law, the law governing the contract (and arbitration agreement) is normally implied from the seat of arbitration. And thirdly, if parties have failed to express their choice of law and they have not designated the seat of arbitration, the proper law of the arbitration clause is the law of the country with which it is most closely connected.

Refusal of the Recognition of the Arbitration Agreement

The national court can refuse the recognition of the arbitration agreement, if under the law of the country the dispute is not capable of settlement by arbitration. Usually this type of issues are related to status and family law matters, and of course criminal law matters, in which the parties have restricted ability to enter into agreement over the matters. In some countries, also consumers are protected by setting additional requirements for the arbitration agreements.

Validity of the Arbitration Agreement

The validity of the arbitration agreement is considered under the choice of law governing the arbitration agreement. But if there is no choice of law made by the parties, the validity of the arbitration agreement is considered on the basis of the law of the country in which the award is to be made. In some cases it can be hard to say in which country the award is to be made. In these cases, where there is no choice of law and the country in which the award will be made cannot yet be determined, the validity is considered in accordance with the law of the country in which the court is considering the validity.

THE LAW GOVERNING THE ARBITRATION PROCEEDINGS

The issue of choosing the law governing the arbitration proceedings depends on the fact whether the arbitration agreement refers a matter to the permanent arbitration institution or to the ad hoc arbitration.

Basically, if the matter is referred to permanent arbitral institution, proceedings are held in accordance with the rules of said institution. For example, if the dispute is referred to ICC International Court of Arbitration, the proceeding is governed by their rules.

In ad hoc tribunals, the law governing the arbitration proceedings is determined from the seat of arbitration, meaning that the governing law in this case is the law of the seat of arbitration. If the parties have not designated the seat of arbitration, the proceedings are governed by the express choice of law of the merits of the dispute.

THE LAW GOVERNING THE MERITS OF THE DISPUTE

Arbitration tribunals are required to apply the choice of law rules of the seat of arbitration. Many countries have foreign arbitration laws that include a statutory provision setting out special choice of law principles to be applied by arbitration tribunals. This provision was introduced, for example, into English law by the Arbitration Act 1996. Previous to this English arbitrators were bound to apply the choice of law rules which were binding on the English courts only.

The choice of law rules of the Arbitration Act 1996 deal with three types of situations: situations in which the parties make a choice of law, situations in which the parties choose ´other considerations` instead of making a traditional choice of law and situations in which the parties fail to make a choice of law.

Choice of law

This principal means that the arbitration tribunal will decide the dispute submitted to it according to the law which the parties have chosen as applicable governing the dispute. In other words, if the parties choose a specific law to govern their contract, the arbitration tribunal is obligated to comply with the decision (express choice of law clause).

Choice of other considerations

Instead of making an express choice of law the parties may agree that the contract is governed by principles common to the laws of both parties, or they also may agree when making a choice of law clause that the contract is governed by principles common to the laws of some other country as well as public international law. The Arbitration Act also allows the parties to make a choice of law clause stipulating that the contract will be governed by internationally accepted principles of law governing contractual relations (also referred to as lex mercatoria), an non-national corpus of rules, such as the UNIDROIT Principles of International Commercial Contracts, and finally, it is also permitted to choose a religious law to govern the contract, such as Jewish law or Sharia law. Under the Arbitration Act it is also possible, if the parties so wish, for the arbitration tribunal to apply to the dispute the principle of equity or fairness instead of strict rules of law.

Absence of choice

If the parties have not made a choice of law, it is up to the arbitration tribunal to decide the proper choice of law applicable to the particular dispute, and this law is determined on the basis of the conflict of rules the tribunal considers applicable. In these situations it is possible, for example, to apply the choice of law rules contained in the Rome Convention on the Law Applicable to Contractual Obligations.

In other words, where the parties have not made a choice of law, the arbitration tribunal will decide what the applicable law is. There is, however, a traditional choice of law methodology to be followed despite the considerable freedom the arbitration tribunals can exercise in choosing the applicable law. According to the traditional choice of law methodology the arbitration tribunal must first decide what choice of law rules are applicable, and then apply those rules to identify the law of a country as the applicable law. The European Convention on International Commercial Arbitration (entered into force in 1964) provides also that where the arbitrators choose the applicable law they shall take into account of the terms of the contract and trade usages while doing so (Article VII – Applicable Law).

Mandatory rules

The lex arbitri [2] is a set of mandatory rules of law applicable to the arbitration at the seat of the arbitration. [3] It also can be defined as the juridical seat of arbitration.

Lex arbitri also “determines the relationship between the arbitral tribunal and national courts.” [4] For instance, what extent court intervention during the arbitral proceedings is authorized.

“International commercial arbitration is presumed to be governed by the law of the place in which it is held.” [5] This is the ‘lex arbitri’ or the law of the ‘seat’ of arbitration. But, it includes the principal of party autonomy, which allows the parties to choose the applicable law. “The parties are free to choose rules, which govern their contract.” [6] According to Geneva Protocol, “the arbitral procedure, including the constitution of the arbitral tribunal, shall be governed by the will of the parties and by the law of the country in whose territory the arbitration takes place.” [7] This article demonstrates that there is a strong link between the law of the country where the arbitration takes place and the law governing that arbitration (lex arbitri).

The law of the arbitration agreement (lex arbitri), may be different from the proper law and the procedural law (curial law). “Proper law of the contract governs issues of interpretation, performance, non-performance and liability under the contract and is determined by using the conflict of law rules.” [8] Contracting parties usually insert a clause to determine the proper law to govern the contract. “The lex arbitri is generally different from the proper law of the contract.” [9]

On the other hand, the curial law is the law that governs the procedure of the arbitration. It can be said that, “it is the part of the lex arbitri,” [10] because, they are, in most cases, the same as the law of the seat of arbitration. And the parties generally do not separate them. “Curial law is determined by parties’ choice, if there is no choice, the curial law is the law of the place of arbitration.” [11]

It is sometimes possible for the curial law to be different from the law of the seat of arbitration. For instance, “parties can choose to hold arbitration in one country but make it subject to the procedural law of another country.” [12] Under the Union of India case, arbitration clause providing for the seat to be in London but the procedural law was the Indian Arbitration Act 1940. However, “if parties have not made an express agreement as to the law to govern the arbitral proceedings then it is usual the law of the seat of arbitration will apply to the procedure.” [13] According to the Union of India case, “English procedural law governed the proceedings, with the addition of the sections of Indian Statute that were not inconsistent with English procedure, because Indian procedural law cannot override the mandatory provisions of the English Arbitration Act 1996.” [14]

Furthermore, delocalised arbitration is “to detach an international commercial arbitration from control by the law of the place in which it is held.” [15] The idea is that international commercial arbitration “has no forum”. [16] It is not under control of the lex arbitri and the court of the place of enforcement of award. The party autonomy becomes more important and control should come from one place that is “the law of place of enforcement.” [17]

One example is given below is that parties have expressly chosen the German law as a proper law of the contract.

Agreement: ICC Arbitration in London, English/Swiss Arbitrator (ie individual with dual nationality) as Chairman.

It is an institutional arbitration. The best-known institutional arbitrations are the ICC, the LCIA and the ICDR (AAA). The main feature is that, “it provides the arbitrators to settle rules directly and do not need to make a specific references to a national law procedure.” [18]

When parties are drafting an arbitration agreement, they mostly specify the seat of arbitration. The choice of seat is not a physical choice, but it is a legal choice, which allocates the arbitration law applicable to the arbitration procedure. For instance, if parties choose the seat of the arbitration in Turkey, but they required to be decided the substantive issues in accordance with the law of England, nevertheless, the arbitration process will be subject to the national arbitration law of Turkey. Moreover, “if parties do not make an express choice of place of arbitration, the choice will be made, either by the arbitral tribunal itself or arbitral institution.” [19]

According to the ICC Rules 14 [20] , which provide that “in the absence of agreement the place of arbitration shall be fixed by the Court of Arbitration and a choice is most commonly based upon the most convenient for the arbitrator himself such as his home country.” [21] In the instant case, the arbitrator has a dual nationality (Swiss and English). So, there is a possibility for Swiss Law to govern the arbitration agreement but England does not recognise delocalisation. It is not possible to apply Swiss Law in the UK.

It is clear under the Arbitration agreement that the arbitration takes place in London under the ICC arbitration. However, it does not necessarily mean that “the lex arbitri is the place of the arbitration” [22] but, “in the absence of the choice of lex abitri, it will be the seat of the arbitration that has the closest connection.” [23] So, the law of the arbitration agreement (lex arbitri) will be the national arbitration law of England. The reasons for that may find under the section 2 of Arbitration Act 1996 provide that “the provisions of this part apply where the seat of the arbitration is in England and Wales or Northern Ireland.” The seat of arbitration means “the juridical seat of the arbitration” [24] , which is mostly lex arbitri of the arbitration.

SOURCES

Barraclough, Andrew and Jeff Waincymer. “Mandatory Rules of Law in International Commercial Arbitration”. Melbourne Journal of International Law at http://www.austlii.edu.au/au/journals/MelbJIL/2005/9.html. (last visited 29 November 2010)

Clarkson, C.M.V., and Jonathan Hill. “Conflict of Laws 3rd ed. UK: Oxford UP, 2006.

Cornell University – Law Library, Research Guides, International Commercial Arbitration, available at http://library.lawschool.cornell.edu/WhatWeDo/ResearchGuides/Intl-Commercial-Arbitration.cfm (last visited November 29, 2010)

European Convention on International Commercial Arbitration at www.law.berkeley.edu/faculty/ddcaron/Documents/RPID%20Documents/rp04011.html.(last visited 29 November 2010)

HG.org – Worldwide Legal Directories, Definition of Arbitration, http://www.hg.org/arbitration-definition.html (last visited 29 November 2010)

Thorpe, Jessica. “A Question of Intent: Choice of Law and the International Arbitration Agreement”. Dispute Resolution Journal at http://findarticles.com. (last visited 29 November 2010)

United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention) at www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention.html. (last visited 29 November 2010)