Guide To International Abribtration In Of Commercial Disputes

Arbitration - An International Commercial Disputes & Arbitration Guide

International arbitration is a non-judicial dispute resolution mechanism that provides a final and binding outcome. There are various definitions of arbitration depending on the context being used. The American Bar Association defines arbitration as private process where disputing parties agree that one or several individuals can make a decision about a dispute after receiving evidence and hearing arguments.[1] According to the American Arbitration Association, arbitration is the out of court resolution of a dispute between parties to a contract, which is decided by an impartial third-party known as the arbitrator.[2] One of the salient features of arbitration is that it is private in nature.

Introduction to Arbitration

International trade and globalisation have led to an increase in complex cross-border commercial relationship between businesses. Some of these relationships will in the course of trade break down therefore creating the need to find a suitable mean of resolving disputes that might arise. International arbitration will be the most preferred means of resolving such kind of disputes. International arbitration is commonly used to resolve disputes in industries construction, insurance, shipping, and trade in commodities.

In some countries, there is a distinction between international and domestic arbitration. These distinctions are using various criteria such as the nationality of the parties, nature of the dispute and the law and rules applicable in solving the dispute.

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Nature/ Characteristics of Arbitration

Arbitration is usually conducted by either one arbitrator or three arbitrators commonly referred to as the arbitration tribunal. The tribunal is usually appointed by the parties in the dispute and the tribunal is the equivalent of a judge in court. This allows the parties to have some control over the arbitration tribunal.

The arbitration process is a consensual one meaning that disputing parties submit to the arbitration tribunal voluntarily. The arbitrators only have jurisdiction when all the parties to the dispute have agreed to submit the dispute to the arbitration process. Parties in a contract will agree to submit themselves to arbitration in the event of a dispute by way of an arbitration agreement. The arbitration agreement could take the form of an arbitration clause in the main contract or as a standalone or separate agreement as will be discussed later in this article.

Advantages of Arbitration

Arbitration as a dispute resolution mechanism has several advantages over other means of solving disputes like court litigation. These advantages make it the most preferred option in settling disputes in the course of international trade. These advantages are highlighted below:

Advantages of Arbitration
  • Confidentiality
    Arbitration is a private process unlike litigation which takes place in open court. Arbitration proceedings usually take place in private and any evidence produced, or documents disclosed in the proceedings are kept private and confidential. The arbitrators or tribunal does not disclose its findings or award unlike in litigation where documents and the court’s decisions are published and are public.
  • Neutrality
    Another advantage of arbitration is that it is neutral in nature. In international arbitration, parties will choose a neutral forum instead of submitting to the laws of the other party’s country. This neutrality is achieved by choosing international rules of arbitration and a venue that are neutral to both parties. Arbitrators who make up the tribunal can be of different nationalities from the parties in the dispute to make the process fair and neutral.
  • Enforceability
    Enforcement of arbitral awards is another element of arbitration that makes it the best means of solving international trade disputes. The United Nations Convention on the Recognition of Foreign Arbitral Awards, New York, 1958 (also referred to as the New York Convention) provides the mechanism that requires contracting states to recognise and enforce arbitration awards. 163 countries including leading trading countries have ratified this convention therefore making it easy to enforce arbitration awards across borders.
  • Freedom of choice
    Parties in arbitration have the freedom to choose several aspects of the arbitration process. In arbitration, parties can choose their arbitrator or tribunal unlike in litigation where disputes are subjected to determination by state employed judges. This is important because some disputes are complex and require technical expertise to resolve. The parties can therefore appoint arbitrators who are experts in the filed relevant to their dispute. Alternative, the parties can delegate the decision to appoint a tribunal to neutral institution especially where technical expertise is required.Secondly in arbitration parties have the freedom to choose other aspects such as language of arbitration, location of arbitration proceedings and applicable law to be used in the process.
  • Efficiency
    The arbitration process is an efficient one offering procedural simplicity and flexibility unlike the commercial litigation process. Arbitration rules are relatively easy to understand, and the procedures focus more on the substantive issues in the dispute unlike litigation which has numerous procedural technicalities to be adhered to. In arbitration, parties in the dispute or the arbitration tribunal have a choice to choice to follow procedures similar to court procedures or create their own simple procedures. In some cases, parties will do away with the requirement for a formal hearing and empower the tribunal to make a decision based on document evidence presented to the tribunal. This reduces the time spent in the process and allows the tribunal to reach a determination as quickly as possible.
  • Cost
    The arbitration process can cheaper and faster than commercial litigation especially where the maters in dispute are not complex. However, the costs can sky rocket where the dispute involves several parties and is complex in nature. Parties must bear the costs of the arbitrators, venue, and their own legal fees. These costs can be relatively lower compared to the costs involved in commercial litigation in a commonwealth jurisdiction which tends to take longer to conclude.
  • Finality
    Another advantage of arbitration is finality in that the decision made by the tribunal is mostly final and binding on the parties. Most arbitration rules do not allow for the award to challenged except in very exception circumstances. Commercial litigation proceedings can be long drawn out affairs because of the option to appeal on points of law thus making arbitration a better and faster option to resolve a commercial dispute.

Whilst there are several advantages of international arbitration over other forms of dispute resolution particularly commercial litigation, parties must make informed decisions to arbitrate based on their objectives and interests.

Arbitration Agreement

As mentioned above, arbitration is a consensual and voluntary process. Parties in a dispute must agree to submit to arbitration any dispute that arises from their contract. This agreement could be stated in the agreement in the form of an arbitration clause. Alternatively, parties can draw a separate and standalone agreement to arbitrate once a dispute arises.

The arbitration agreement is important because it sets out the key aspects of the arbitration process. These aspects include the place (or seat) of arbitration, the number of arbitrators and the procedural rules that will govern the arbitration process. The arbitration agreement should be well drafted to avoid uncertainty or invalidity issues that might arise in the event of a dispute.

Seat of Arbitration

Seat of Arbitration

The seat of arbitration is also referred to as the legal place of arbitration. The seat of arbitration needs to be differentiated from the venue of the hearings or place where other procedural steps take place. The seat of arbitration determines law or legal framework under which the arbitration takes place. This is important because it determines how the local courts can be involved if required e.g. in enforcing an arbitral award. Parties need to be careful in choosing the seat of arbitration because by so doing they are choosing the procedural laws that apply to the arbitration process. For example, if the parties choose London as the seat of the arbitration, they elect to be subject to the Arbitration Act 1996 on procedural  matters. It should be noted that the national laws do not substitute the procedural rules chosen by the parties but provide a framework under which those rules operate any may fill gaps that are not addressed by the procedural rules. The procedural rules that parties can choose are discussed below.

Choice of Arbitration Rules

The arbitration process can either be administered by an institution or ad hoc (non-administered). The procedural rules to be used are determined by whether the parties choose institutional or ad hoc arbitration. Institutional arbitration incorporates the rules and procedures of the institution selected by  the parties in their arbitration agreement. The rules set out by a particular institution provide a procedural framework that will guide the proceedings from the beginning to the end when the tribunal makes an award. The entire process is administered by the institution chosen by the parties.

Ad hoc arbitration on the other hand is conducted without the involvement of an arbitration institution and parties here are free to craft the arbitration rules themselves. Parties are however at liberty to adopt rules specifically crafted for ad hoc arbitration such as the United Nations Commission on International Trade Law (UNCITRAL) Rules.

There are many arbitration institutions in the world which parties to use and some are highlighted below:

  • The London Court of International Arbitration (LCIA)
    The LCIA is one of the leading international institutions well known for commercial and international arbitration as is based in London. The court was initially launched in 1892 as the “The City of London Chamber of Arbitration”  then later re-named to the London Court of Arbitration in 1903. The LCIA has other affiliates spread across the world including DFIC-LCIA based in Dubai, LCIA-MIAC based in Mauritius and LCIA India. The London Court of International Arbitration administers arbitration proceedings under the LCIA Rules.
  • The International Court of Arbitration of the International Chamber of Commerce (ICC)
    This is the best-known international arbitration institution. It was established in 1923 and is based in Paris. The International Court of Arbitration has since its establishment been instrumental in resolving complex international commercial, trade and investment disputes. The court administers arbitration proceedings under the the ICC Rules.
  • The International Centre for Dispute Resolution (ICDR)
    The ICDR is the international division of the American Arbitration Association which was established in 1926 and is the leading arbitration institution in the US. The ICDR administers international arbitration under its International Arbitration Rules.

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There are other specialist international arbitration institutions such as:

  • The International Centre for the Settlement of Investment Disputes (ICSID)
    The ICSID was established in 1966 and is based in Washington, DC. The ICSID was established by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention). The ICSID is part of the World Bank as was established to specifically deal with resolution of international investment disputes. The ICSID administers arbitration proceedings under its ICSID Convention Arbitration Rules.
  • The World Intellectual Property Organisation (WIPO) Arbitration and Mediation Centre
    The WIPO Arbitration and Mediation Center is based in Geneva, Switzerland. It was established in 1994 to offer dispute resolution in international commercial disputes in the technology, entertainment, and intellectual property sectors. It administers arbitration proceedings under its WIPO Arbitration, Expedited Arbitration, Mediation and Expert Determination Rules (the WIPO Rules).

There are many other international arbitration institutions and rules that parties are free to choose from. Parties are therefore encouraged to choose the rules and institutions that are most appropriate in their circumstances.

Typical Steps in International Arbitration

Procedures used in international arbitration vary depending on the rules chosen by the parties. Generally, the procedural rules cover aspects like commencement of arbitration, appointment of the tribunal, the hearings, or proceedings, rendering of the awards and enforcement.

Typically, an international arbitration will follow the following steps:

  1. Request for arbitration by the Claimant or aggrieved party. This will usually include a summary of the claim.
  2. Response by the respondent which may include a counterclaim (if any).
  3. Reply to counterclaim (if any) by the claimant.
  4. Appointment of the tribunal.
  5. A procedural hearing setting out the steps to be followed and the timetable for the arbitration.
  6. Filing of the claimant’s full statement of the case.
  7. Filing of the full statement of defence and counterclaim (if any) by the respondent.
  8. Filing of the claimant’s reply and defence to the counterclaim (if any).
  9. Disclosure of documents to be relied upon by the parties.
  10. Exchange of witness statements.
  11. Exchange of expert reports (if any).
  12. Meeting of parties (or their representative) to narrow down and agree on issues to be determined by the tribunal.
  13. Exchange of pre-hearing submissions.
  14. Oral hearings then take place.
  15. Exchange of post hearing submissions.
  16. Delivery of the award by the tribunal.

Some of these steps can be done away with if the parties agree. For example, parties may agree to do away with oral hearings and request the tribunal to make an award based on the documents filed and exchanged among the parties.

Awards and Enforcement

An award in arbitration is the final decision made by the arbitration tribunal after considering all the facts and the law. An award is equivalent to a judgment issued by the court in litigation. The award by a tribunal is usually on a substantive issue and not on procedural issues.

Awards by the tribunal can be interim, partial, or final. An interim award is issued temporarily and does not finally decide on a issue. In most cases it is used to maintain status quo or preserve a assets or property before a final decision is made. A partial award is a decision on one or more issues but not all issues that the tribunal has to make a decision on. A final award is one the conclusively decides on all issues and brings the arbitration process to an end.

An award can also be arrived at by consent of the parties. This is known as a consent award where parties in the dispute agree to settle their dispute. This consent award may be enforced like another award if it is not complied with by either party.

Awards can be challenged but in limited and exceptional circumstance because they are final and binding. An award can be challenged in cases of irregularities in appointment of the tribunal. An irregularity in the arbitration proceedings that causes an injustice to one of the parties can also be a ground for challenging and setting aside an award.

Enforcement of awards is easy as parties tend to comply with the award voluntarily in most cases. However, there are incidents where a party fails to comply with an arbitral award. In such cases, the other party may apply to a court of law for the recognition of the award. When a party applies to a court of law for recognition of the award, it does so to seek the court’s confirmation that the award is valid and binding. The court’s enforcement processes will the be used to enforce that award. Enforcement process vary depending on the nature of the dispute and they include seizure of assets or orders to pay the other party.

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International arbitration is probably the best method of solving international commercial disputes as opposed to commercial litigation. Other forms of dispute resolution such as mediation may also be used to find solutions but may not be perfect for commercial disputes because the decisions that emanate from such processes are not final and binding in nature.

In considering international arbitration, parties are recommended to take into consideration the various aspects of the process like costs, seat of arbitration and choice of rules to be used as these considerations may determine the success of the process.

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About the Author

Flora Tan is an editor and journalist at Trade Finance Global

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