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. Arbitration in the United States and in other countries often includes alternative dispute resolution (ADR), a category that more commonly refers to mediation (a form of settlement negotiation facilitated by a neutral third party). It is more helpful, however, simply to classify arbitration as a form of binding dispute resolution, equivalent to litigation in the courts, and entirely distinct from the various forms of non-binding dispute resolution, such as negotiation, mediation, or non-binding determinations by experts.

Arbitration is, today, most commonly used for the resolution of commercial disputes, particularly in the context of international commercial transactions and sometimes used to enforce credit obligations. It is also used in some countries to resolve other types of disputes, such as labour disputes, consumer disputes or family disputes, and for the resolution of certain disputes between states and between investors and states.

History

It is not known exactly when formal non-judicial arbitration of disputes first began but it can be said with some certainty that arbitration, as a way of resolving disputes predates formal courts. Records from ancient Egypt attest to its use especially with high priests and their interaction with the public. Arbitration was popular both in ancient Greece and in Rome.

Under English law, the first law on arbitration was the Arbitration Act 1697, but when it was passed arbitration was already common. The first recorded judicial decision relating to arbitration was in England in 1610. The noted Elizabethan English legal scholar Sir Edward Coke refers to an earlier decision dating from the reign of Edward IV (which ended in 1483). Early arbitrations at common law suffered from the fatal weakness that either party to the dispute could withdraw the arbitrator's mandate right up until the delivery of the award if things appeared to be going against them (this was rectified in the 1697 Act).

The Jay Treaty of 1794 between Britain and the United States sent unresolved issues regarding debts and boundaries to arbitration, which took 7 years and proved successful.

In the first part of the twentieth century, many countries (France and the United States being good examples) began to pass laws sanctioning and even promoting the use of private adjudication as an alternative to what was perceived to be inefficient court systems.

The growth of international trade however, brought greater sophistication to a process that had previously been largely ad hoc in relation to disputes between merchants resolved under the auspices of the lex mercatoria. As trade grew, so did the practice of arbitration, eventually leading to the creation of a variant now known as international arbitration, as a means for resolving disputes under international commercial contracts.

Today, arbitration also occurs online, in what is commonly referred to as Online Dispute Resolution, or ODR. Typically, ODR proceedings occur following the filing of a claim online, with the proceedings taking place over the internet, and judgment rendered on the basis of documentation presented. net-ARB.com is the world's leader in Internet Arbitration.

Nature of arbitration

Arbitration is a quasi-judicial form of dispute resolution by one or more decision makers called arbitrators, usually appointed by the parties. Most arbitrations involve a hearing similar to a trial in a court action, resulting in a binding decision. However, the arbitration process is often less formal. For instance, the rules of evidence applicable to trials in court typically do not apply or are relaxed.

All of the jurisdictions within Canada have now enacted legislation governing arbitrations. While there are differences between these statutes, they contain many identical and similar provisions. In general, these statutes oust the jurisdiction of the courts over disputes that the parties have agreed to submit to arbitration, require a stay of related court actions, and allow the court to intervene in an arbitration only in limited circumstances. The general, domestic arbitration acts do not govern certain types of arbitrations, most notably arbitrations in the labour field which are governed by separate, more specific statutes, and international commercial arbitrations

Arbitration is a proceeding in which a dispute is resolved by an impartial adjudicator whose decision the parties to the dispute have agreed will be final and binding. Arbitration is not the same as:

1. judicial proceedings, although in some jurisdictions, court proceedings are sometimes referred as arbitrations.

2. alternative dispute resolution (or ADR).

3. expert determination.

4. mediation.

Advantages and disadvantages of arbitration

Arbitration is viewed by some as a panacea. It certainly does have a number of advantages in many circumstances, which can lead overall to a more satisfactory dispute resolution process. However, there are also certain inherent and circumstance-dependent disadvantages that should be considered before agreeing to arbitration.

Perhaps the most significant advantage of arbitration is that the parties can agree upon a mutually acceptable decision maker. This can be particularly useful if the nature of the dispute calls for specialized or technical knowledge not likely held by a judge of the court.

In addition, this allows the parties to review the background and other characteristics of the arbitrator before the decision making power is ceded, which is an opportunity not normally afforded in court actions.

There are many other advantages that might be available, especially if the parties can reach agreement on procedural and other matters. The process is relatively unfettered in its flexibility and adaptability. Also, quite different than the open and public nature of court proceedings which is difficult to displace, the parties can agree that the nature of the dispute, the arbitration proceedings, and the award shall be kept private and confidential, which is often valuable in cases involving commercially sensitive information. In addition, to achieve earlier finality and to reduce cost, the parties can agree to eliminate appeal rights to a significant extent, which parties are more inclined to do for arbitration proceedings determined by a mutually agreeable decision maker.

Depending on one's perspective and strategy for a particular dispute, there are other aspects of arbitrations that may be advantageous or disadvantageous.

A significant benefit to potential corporate defendants is that it may be possible to exclude class action proceedings through a properly drafted arbitration submission clause.

For disputes involving an intransigent party not willing to participate in any process at all, there are certain aspects of arbitrations that can tend toward a more expeditious and less costly resolution. Typically, the arbitral tribunal is cloaked with the jurisdiction to set and control the process with these goals in mind. Depending on the approach of a particular arbitrator, intervention of this nature may begin at the earlier stages of the dispute.

Also, while certainly available in some cases, it is relatively uncommon for there to be examinations of witnesses before the hearing, in the form of examinations for discovery or depositions. In addition, a carefully crafted pre-dispute arbitration clause in a commercial agreement can substantially reduce the opportunities for delay tactics by an unwilling party in the face of a subsequent unwanted dispute. On the other hand, a recalcitrant party can sometimes find refuge in the absence of established rules of procedure for arbitrations, which can lead to cost and time similar to, or greater than, that experienced in court actions.

Arbitration does not work well when it is desired that a precedent be set by the resolution of the dispute because arbitrations are often conducted in private and on a confidential basis and also because there is no public registry for arbitration decisions. In certain instances, difficulties can be encountered in relation to the bounds of the jurisdiction of the arbitral tribunal, compared to the wide sweeping inherent jurisdiction of the courts.

Jurisdictional issues can arise as to whether the arbitral tribunal has the power to decide all substantive claims related to the dispute before it, whether the arbitral tribunal can grant certain types of relief such as punitive damages and security for costs, and whether it is practical to seek remedies such as emergency interim injunctive relief from an arbitral tribunal. Unintended difficulties also can arise in instances where there are multiple parties to a dispute and only some of the parties are bound by an arbitration clause.

Arbitrability

By their nature, the subject matter of some disputes are not capable of arbitration. In general, two groups of legal procedures cannot be subjected to arbitration:

1. Procedures which necessarily lead to a determination which the parties to the dispute may not enter into an agreement upon: Some court procedures lead to judgments which bind all members of the general public, or public authorities in their capacity as such, or third parties, or which are being conducted in the public interest. Examples: Until relatively recently (80s), antitrust matters were not arbitrable in the United States. Matters relating to crimes, status and family law are generally not considered to be arbitrable, as the power of the parties to enter into an agreement upon these matters is at least restricted. However, most other disputes that involve private rights between two parties can be resolved using arbitration. In some disputes, parts of claims may be arbitrable and other parts not. For example, in a dispute over patent infringement, a determination of whether a patent has been infringed could be adjudicated upon by an arbitration tribunal, but the validity of a patent could not: As patents are subject to a system of public registration, an arbitral panel would have no power to order the relevant body to rectify any patent registration based upon its determination.

2. Some legal orders exclude or restrict the possibility of arbitration for reasons of the protection of weaker members of the public, e.g. consumers. Examples: German law excludes disputes over the rental of living space from any form of arbitration, while arbitration agreements with consumers are only considered valid if they are signed by either party, and if the signed document does not bear any other content than the arbitration agreement.

Arbitration agreement

Arbitration is a consensual process; parties will only ever arbitrate where they agree to do so. Such agreements are generally divided into two types:

1. agreements which provide that, if a dispute should arise, it will be resolved by arbitration. These will generally be normal contracts, but they contain an arbitration clause.

2. agreements which are signed after a dispute has arisen, agreeing that the dispute should be resolved by arbitration (sometimes called a "submission agreement").

The former is the far more prevalent type of arbitration agreement. Sometimes, legal significance attaches to the type of arbitration agreement. For example, in certain Commonwealth countries, it is possible to provide that each party should bear their own costs in a conventional arbitration clause, but not in a submission agreement.

In keeping with the informality of the arbitration process, the law is generally keen to uphold the validity of arbitration clauses even when they lack the normal formal language associated with legal contracts. Clauses which have been upheld include:

1. "arbitration in London - English law to apply".

2. "suitable arbitration clause".

3. "arbitration, if any, by ICC Rules in London".

The courts have also upheld clauses which specify resolution of disputes other than in accordance with a specific legal system. These include provision indicating:

1. that the arbitrators "must not necessarily judge according to the strict law but as a general rule ought chiefly to consider the principles of practical business".

2. "internationally accepted principles of law governing contractual relations".

Agreements to refer disputes to arbitration generally have a special status in the eyes of the law. For example, in disputes on a contract, a common defence is to plead the contract is void and thus any claim based upon it fails. It follows that if a party successfully claims that a contract is void, then each clause contained within the contract, including the arbitration clause, would be void.

Applicable laws

Arbitration is subject to different laws. These may be summarized as follows:

· The law governing the arbitration agreement.

· The law governing the arbitral tribunal and its proceedings (lex arbitri - procedural law).

· The law governing the substance of the dispute .

· The law governing recognition and enforcement of the award.

Arbitral tribunal

The term, arbitral tribunal is used to denote the arbitrator or arbitrators sitting to determine the dispute. The composition of the arbitral tribunal can vary enormously, with either a sole arbitrator sitting, two or more arbitrators, with or without a chairman or umpire, and various other combinations.

In most jurisdictions, an arbitrator enjoys immunity from liability for anything done or omitted whilst acting as arbitrator unless the arbitrator acts in bad faith.

Arbitrations are usually divided into two types: ad hoc arbitrations and administered arbitrations.

In ad hoc arbitrations the arbitral tribunals are appointed by the parties or by an appointing authority chosen by the parties. After the tribunal has been formed, the appointing authority will normally have no other role and the arbitation will be managed by the tribunal.

In administered arbitration, the arbitration will be administered by a professional arbitration institution providing arbitration services, such as the LCIA in London or the ICC in Paris. Normally the arbitration institution also will be the appointing authority.

Arbitration institutions tend to have their own rules and procedures, and may be more formal. They also tend to be more expensive, and, for procedural reasons, slower.

Most television court shows are considered to be binding arbitration.

Arbitral awards

Although arbitration awards are characteristically an award of damages against a party, in many jurisdictions tribunals have a range of remedies that can form a part of the award. These may include:

1. payment of a sum of money (conventional damages).

2. the making of a "declaration" as to any matter to be determined in the proceedings.

3. in some jurisdictions, the tribunal may have the same power as a court to order a party to do or refrain from doing something ("injunctive relief").

4. to order specific performance of a contract.

5. to order the rectification, setting aside or cancellation of a deed or other document.

In other jurisdictions, however, unless the parties have expressly granted the arbitrators the right to decide such matters, the tribunal's powers may be limited to deciding whether a party is entitled to damages. It may not have the legal authority to order injunctive relief, issue a declaration, or rectify a contract, such powers being reserved to the exclusive jurisdiction of the courts.

Arbitration with sovereign governments

Certain international conventions exist in relation to the enforcement of awards against states.

· The Washington Convention 1965 relates to settlement of investment disputes between states and citizens of other countries. The Convention created the International Centre for Settlement of Investment Disputes (or ICSID). Compared to other arbitration institutions, relatively few awards have been rendered under ICSID.

The Algiers Declaration of 1981 established the Iran-US Claims Tribunal to adjudicate claims of American corporations and individuals in relation to expropriated property during the Islamic revolution in Iran in 1979. The tribunal has not been a notable success, and has even been held by an English court to be void under its own governing law.

Costs

In many legal systems - both common law and civil law - it is normal practice for the courts to award legal costs against a losing party, with the winner becoming entitled to recover an approximation of what it spent in pursuing its claim (or in defense of a claim). The U.S.A. is a notable exception to this generally applicable rule, as except for certain extreme cases, a prevailing party in a US legal proceeding does not become entitled to recoup its legal fees from the losing party.

Like the courts, arbitral tribunals generally have the same power to award costs in relation to the determination of the dispute. In international arbitration as well as domestic arbitrations conducted in countries where courts may award costs against a losing party, the arbitral tribunal will also determine the portion of the arbitrators' fees that the losing party is required to bear.

Nomenclature

As methods of dispute resolution, arbitration procedure can be varied to suit the needs of the parties. Certain specific "types" of arbitration procedure have developed, particularly in North America.

· Judicial Arbitration is, usually, not arbitration at all, but merely a court process which refers to itself as arbitration, such as small claims arbitration before the County Courts in the United Kingdom.

· High-Low Arbitration, or Bracketed Arbitration, is an arbitration wherein the parties to the dispute agree in advance the limits within which the arbitral tribunal must render its award. It is only generally useful where liability is not in dispute, and the only issue between the party is the amount of compensation. If the award is lower than the agreed minimum, then the defendant only need pay the lower limit; if the award is higher than the agreed maximum, the claimant will receive the upper limit. If the award falls within the agreed range, then the parties are bound by the actual award amount. Practice varies as to whether the figures may or may not be revealed to the tribunal, or whether the tribunal is even advised of the parties' agreement.

· Non-Binding Arbitration is a process which is conducted as if it were a conventional arbitration, except that the award issued by the tribunal is not binding on the parties, and they retain their rights to bring a claim before the courts or other arbitration tribunal; the award is in the form of an independent assessment of the merits of the case, designated to facilitate an out-of-court settlement.

· Pendulum Arbitration refers to a determination in industrial disputes where an arbitrator has to resolve a claim between a trade union and management by making a determination of which of the two sides has the more reasonable position. The arbitrator must choose only between the two options, and cannot split the difference or select an alternative position. It was initiated in Chile in 1979 and has proved to be a very effective mechanism.

· This form of arbitration is also known as Baseball Arbitration. It takes its name from a practice which arose in relation to salary arbitration in Major League Baseball.

· Night Baseball Arbitration is a variation of baseball arbitration where the figures are not revealed to the arbitration tribunal. The arbitrator will determinate the quantum of the claim in the usual way, and the parties agree to accept and be bound by the figure which is closest to the tribunal's award.

Appointment

The parties are generally free to determine their own procedure for appointing the arbitrator or arbitrators, including the procedure for the selection of an umpire or chairman. If the parties decline to specify the mode for selecting the arbitrators, then the relevant legal system will usually provide a default selection process. Characteristically, appointments will usually be made on the following basis:

· If the tribunal is to consist of a sole arbitrator, the parties shall jointly appoint the arbitrator not later than (for example) 28 days after service of a request in writing by either party to do so.

· If the tribunal is to consist of three arbitrators:

1. each party shall appoint one arbitrator not later than (for example) 14 days after service of a request in writing by either party to do so, and

2. the two so appointed shall forthwith appoint a third arbitrator as the chairman of the tribunal.

· If the tribunal is to consist of two arbitrators and an umpire-

1. each party shall appoint one arbitrator not later than (for example) 14 days after service of a request in writing by either party to do so, and

2. the two so appointed may appoint an umpire at any time after they themselves are appointed and shall do so before any substantive hearing or forthwith if they cannot agree on a matter relating to the arbitration.

Most arbitration clauses will provide a nominated person or body to select a sole arbitrator if the parties are unable to agree (for example, the President of the relevant jurisdiction's Bar Association, or a recognised professional arbitration organisation such as the LCIA, or a relevant professional organisation). In default of such a provision, where the parties are unable to agree, an application for an appointment is usually made to the court.

A well drafted arbitration clause will also normally make provision for where a party to the dispute seeks to cause delay by refusing to make or agree an appointment. Often this will allow the "non-defaulting" party to appoint a sole arbitrator and for the arbitration to proceed on that basis.

Arbitrator advocates

n some legal systems, it is common for each party to the dispute to appoint an arbitrator and for those two arbitrators to appoint a third arbitrator (who may or may not be called an umpire). However, the two arbitrators appointed by the parties to the dispute would essentially act as advocates for the party who appointed them, and the umpire would effectively act as a sole arbitrator. However, such systems can lead to difficulty, as other countries may be reluctant to enforce an arbitration award where two of the three "arbitrators" are clearly unable to demonstrate impartiality or independence.

Removal

In most legal systems the parties are free to specify in what circumstances the appointment of an arbitrator may be revoked. In default most legal systems provide either that the parties to the dispute must act jointly to remove an arbitrator, or the other members of the arbitral tribunal must act to remove the arbitrator, and/or the court must act to remove an arbitrator. Most legal systems reserve a power to the court to remove arbitrators who are unfit to act, or are not impartial.

Resignation

It is generally accepted that one cannot force a person to continue as an arbitrator against their will, and arbitrators may resign if they are unwilling to proceed with the arbitration. Where the arbitrator becomes aware of facts that might be seen to affect his or her impartiality, they are often under a duty to resign. The parties are generally free to agree with the arbitrator what should happen with respect to the arbitrator's fees, and any liability of the arbitrator (such as wasted costs), if the arbitrator should resign, with or without cause.

Death

The authority of an arbitrator is personal, and an appointment ceases upon death.

Unless the parties have otherwise provided, the death of a party does not usually revoke the appointment of any arbitrator appointed by the deceased, and any agreement relating to the appointment is enforceable in the usual way against the personal representatives of the deceased.

Fees and expenses

The parties may make provision for the arbitrator's fees (although in some jurisdictions, whether the parties are agreeing to submit an existing dispute to arbitration, they may not provide that each party bears its own costs). However, the position may be different between, on the one hand, as between the arbitrators and the parties, and on the other hand, as between the parties themselves.

Although the parties may provide differently in the appointment of the arbitrator, the usual rule is that the parties are jointly and severally liable for the arbitrator's fees. If the arbitrator is not paid, then they may sue either or both parties for unpaid fees.

In many jurisdictions, after making the award, the tribunal will order that the losing party pays the legal costs of the winning party, and this may include the arbitrator's fees.

However, this does not affect the joint and several liability referred to above; but it does mean that the winning party may maintain a separate action against the losing party for the unpaid costs, or to be reimbursed for arbitrator's fees that the winning party has been forced to pay, but which the losing party was ordered to pay.

Immunity from suit

It is generally accepted that an arbitrator is not liable for anything done or omitted to be done in the discharge of his or her duties as an arbitrator unless bad faith is shown. At common law this point was thought to have been left open, but in most jurisdictions it is accepted that arbitrators should enjoy immunity provided that they act in good faith in the same manner (and for much the same reasons) as judges, and some jurisdictions have clarified this by statute.

Jurisdiction

In most legal systems, the arbitral tribunal is able to rule upon its own jurisdiction (often referred to as the doctrine of "Kompetenz-Kompetenz" in international law). Briefly, this enables the arbitral tribunal to determine for itself whether:

1. an arbitration agreement is valid,

2. whether the tribunal has been properly constituted under applicable law, and

3. what matters are to be determined by the arbitration under the agreement.

4. The doctrine, although continental in origin, has been recognised at common law, and has now been widely codified into national law.

Hearing

An "arbitration hearing" can be either procedural or evidentiary. As in court systems, a "procedural hearing" focuses exclusively on how the proceedings are to be conducted. By contrast, an "evidentiary hearing" is the equivalent to what in the courts of many countries would be called a trial, with the presentation of evidence in the form of documents and witnesses. Although evidentiary hearings are generally available as a means to assist the arbitral tribunal in deciding contested factual issues, arbitration rules do not usually require them and leave the means of decided disputed factual issues to the discretion of the tribunal. Many decisions of arbitral tribunals are made without any hearing at all.

Where it may be appropriate to do so, arbitral tribunals can make decisions solely upon documentary evidence, which may or may not be accompanied by witness statements, which in the US are referred to as affidavits. Witness statements represent the testimony a witness would give if called to testify, and on which the witness is subject to questioning by the arbitral tribunal and, at times, cross examination by the other party.

Specific types of arbitration, for example, may rely exclusively on documents to decide disputes, such as in the growing field of online dispute resolution. In addition, some organizations, may specifically provide as part of their organizational bylaws or standard terms and conditions that disputes shall be arbitrated without an oral hearing and upon documentary evidence only, an example being certain trade associations, such as GAFTA.

Appeals

Provisions relating to appeals vary widely between different jurisdictions, but most legal systems recognise that the right to appeal (or, technically, the right to seek to set aside) an award in an arbitration should be limited.

Usually such challenges are made on one of two bases:

1. that the tribunal did not have substantive jurisdiction to determine the matter; or

2. there was a serious irregularity on the part of the tribunal. Examples of serious irregularities may include:

1. failure of the tribunal to act in accordance with the rules of natural justice, or allowing a fair hearing;

2. the tribunal exceeding its powers (other than by exceeding its jurisdiction);

3. failure of the tribunal to conduct proceedings in accordance with the procedure agreed by the parties;

4. failure of the tribunal to deal with all the issues put to it for resolution;

5. uncertainty or ambiguity as to the effect of the award;

6. the award being procured by fraud, or otherwise being procured in a way contrary to public policy;

7. failure to comply with the requirements for the form of the award (eg. in writing or in a specific language);

8. irregularities in the conduct of the proceedings.

In some jurisdictions it is also possible to appeal against an award on a point of law, however, such appeals normally require either the permission of the other parties, or the leave of the court.

Specialised Institutes of Arbitration

Specialised arbitration organizations have been formed in order to settle disputes in the matter of specialised issues, they work in only a very limited field but are highly specialised in the work they do. For this purpose they have made a special rules, procedures and regulations which they follow during the proceedings of arbitration. These institutions prove very useful in the cases where a very deep and specialised knowledge is needed in settlement, which in turn can be cost effective and time saving.

Such specialised institutions include:

1. Arbitration and Mediation Center, WIPO.

2. Center for Effective Dispute Resolution.

3. German Maritime Arbitration Association.

4. Maritime Arbitration Association of the United States.

5. Tokyo Maritime Arbitration Association.