This article is written by Gauri Atreja, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Prashant Baviskar(Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).
Table of Contents
Arbitration is one of the ADR processes that are particularly popular in both domestic and international economic disputes, as well as in resolving conflicts between nations. Arbitration is a process in which parties to a dispute opt out of the traditional litigation system to resolve the disputed subject matter, where the parties have the power to appoint a third party to act as an adjudicating authority known as an arbitrator, who, after hearing the parties’ submissions, announces a binding award known as an arbitral award.
The first instance of arbitration can be traced back to 1794, when the United States of America and the United Kingdom engaged in a process similar to modern-day arbitration to settle a disagreement over Amity, Commerce, and Navigation, the result of which is known as Jay’s Treaty 1794. Arbitration has gained a strong foothold in economic conflicts, both domestic and international since it is more flexible than the traditional litigation system. To name a few, many international accords have come to reinforce the roots of arbitration and promote it globally over time:
- The Geneva Protocol on Arbitration Clause of 1923.
- The Geneva convention on the execution of foreign awards 1927.
- The New York Convention of 1958 on the recognition and enforcement of Foreign Arbitral Awards.
With time, Institutional Arbitration began to replace the ad hoc arbitration system. This article will go into the fundamentals of international arbitration and provide a thorough examination of The Hague’s Permanent Court of Arbitration.
What is international arbitration?
After World War II, there was a need for an arbitration mechanism that could function between corporations in different countries as trade and business became more worldwide. In 1959, a pact known as the New York Arbitration Convention was signed. More than 65 countries have participated in arbitration rulings since the New York Convention was accepted by 154 UN members.
Other conventions have been formed since then. The New York Convention is included in the Federal Arbitration Act of the United States, which states that it “must be implemented in United States courts.”
What is the mechanism of international arbitration?
Consider a dispute between two corporations that are located in different nations. Which court has jurisdiction in this case? Which country’s laws must be adhered to? Having a neutral mechanism that everyone acknowledges makes resolving these inter-country issues considerably easier in these circumstances.
There are a number of arbitration organisations that work under the New York Convention or other treaties. A request for arbitration must be made with one of these associations in order to launch an arbitration. The International Chamber of Commerce (ICC) is one of the largest of these organisations; here’s how their system works.
File a request for arbitration
Let’s imagine you wish to pursue arbitration over a dispute with a customer in another country. You would file a request with the ICC and pay $5,000 in administrative and filing fees. You must describe the nature of the disagreement and the grounds for the claim in the request. You must also specify the resolution you desire, as well as any monetary damages, if applicable. There must have been a formal arbitration agreement between the two parties. The ICC sends your request to the opposite party, who has 30 days to respond.
Before the tribunal
If the other party objects to the arbitration agreement or fails to react, the ICC will make a decision on these points. The ICC will also require a fee advance.
It begins its work once several other preliminary procedures have been completed and the tribunal (one or more arbitrators) has been established. The majority of these meetings are held via teleconference. The process itself is adaptable, with the parties and the tribunal agreeing on terms. Witnesses and experts, as well as the parties involved, may be heard.
Following the tribunal’s ruling
A timeline for the final award is established and filed to the ICC International Court of Arbitration.
Forming a global arbitration agreement
Consider drafting an international arbitration agreement or including an international arbitration clause in your contracts if you do business with clients, vendors, or workers from other countries. According to the International Chamber of Commerce, all contract disputes “shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules by one or more arbitrators appointed in accordance with the said Rules.
What are the benefits of the international arbitration agreement?
The main advantage of international arbitration is that it is enforceable, whereas litigation (court cases) between companies in different countries may not be. It is also set up with both partners’ cooperation, and the results are usually kept private. Other advantages are comparable to those of arbitration in the United States: it is a faster and less expensive alternative to litigation. The only way to bring someone to arbitration in another country without international arbitration would be to use that country’s laws. This isn’t always a viable choice. Assume you intended to use arbitration to resolve a dispute with a customer in Germany. That includes finding a German-speaking arbitrator who can work in Germany. Because German laws and arbitration procedures may favour the customer, you would be at a disadvantage.
Jay treaty of 1794
The Jay Treaty, which created the first organised arbitral proceeding, is the foundation of modern-day arbitration. The Treaty of Versailles was signed by the United Kingdom and the United States of America. The pact is the result of disagreements over unresolved concerns following the American Revolutionary War. Three commissions were established as a result of this treaty:
1. The first commission was established to resolve boundary disputes.
2. The second commission was established for mixed issues including claims for compensation arising from debts owed by US officials to British national officials, which were to be compensated by the US officials.
3. The third commission also dealt with mixed issues, which involved claims by US officials against the United Kingdom for the treatment of their property after the US gained independence.
The treaty established modern-day arbitration between two governments, as well as for disputes between citizens of one state and citizens of another.
Alabama Claims Arbitration
In the sphere of international arbitration, this is also a significant development. Damages experienced by the US government as a result of Confederate navy ships attacking Union ships were the topic of the argument. Following this, the United Kingdom and the United States signed the Washington Treaty in 1871, deciding that this and other conflicts would be resolved through an international arbitration tribunal based in Geneva. The arbitral ruling favoured the United States. The significance of this arbitration is that it established a precedent for effectively resolving interstate issues through arbitration.
For the first time, the council of arbitrators was made up of individuals who were not national officials of the disputing parties. As a result, it established the idea of a third party with no stake in the dispute serving as an arbitrator in arbitration, resulting in the arbitral tribunal’s independence. It was the very first arbitration that resembled today’s arbitration process. Furthermore, it was noted for the first time that the parties within the nexus of the dispute were given the opportunity to choose the appropriate procedural law.
Arbitrational progress by the end of the nineteenth century and the beginning of the twentieth century, as well as the road to the twenty-first century
Individuals could not contact any arbitral tribunal for the purpose of alternative conflict resolution at the end of the nineteenth century; their cases of disagreement had to be presented before the commission or arbitral tribunal by the state of their nationality. This is in stark contrast to today’s arbitration process. As a result, arbitration for interstate conflicts fell out of favour in the early twentieth century. The Permanent Court of International Justice was created in 1921, and its successor, the International Court of Justice, was established in 1945, resulting in a sharp drop in arbitration cases.
Arbitration appears to have regained popularity following the end of the Cold War, as seen by the cases heard by the Permanent Court of Arbitration.
The International Centre for Settlement of Investment Disputes was established in the 1960s as a result of companies including arbitration clauses in their contracts in relation to manufacturing and production in different states, resulting in an increase in arbitration in matters of dispute between foreign investors and states at the turn of the twenty-first century. Another notable development in the field of arbitration is the mechanism of the Iran-United States Claims Tribunal, which was established in 1981 with the goal of resolving the dispute between Iran and the United States following the Iran Hostage Crisis through international arbitration.
International arbitration principles
Binding Arbitration Award
International issues resolved through arbitration have enforcement in their nature since they are binding on the parties that seek resolution through arbitration. Legal Dispute Settlement refers to agreements that are legally binding, whereas Diplomatic Dispute Settlement, which includes mediation, conciliation, and other methods, refers to agreements that are not legally binding. In other words, the arbitral award, which is the result of the arbitration, is binding on the parties.
The fact that the parties accept the stipulation that the outcome of arbitration would be binding on them when they enter into an arbitral procedure results in the binding character. In other words, parties that choose to resolve a dispute through arbitration agree to be bound by the arbitral ruling in advance. Furthermore, it is upheld by UNCITRAL arbitration rules Article 34 paragraph two.
One of the most important aspects of arbitration is that the party has the authority to create the arbitration procedure. This also means that the arbitrator is chosen by the party, as is the procedural law, which governs how the procedure is carried out, and the applicable law, which governs the resolution of the dispute. Furthermore, it permits the parties to designate the disputed subject matter over which the arbitral tribunal’s proceedings will begin, allowing the tribunal to preside over only the matters provided by the parties.
Institutional vs. Ad Hoc Arbitration
What’s the difference? In Institutional Arbitration, unlike ad hoc arbitration, the procedural rules that apply to the arbitration proceedings are specified by the institution that facilitates arbitration and are referred to as institutional norms. However, it is not always required because parties might pick which procedural law to follow. The Permanent Court of Arbitration, for example, allows the parties to utilise procedural rules other than the PCA’s. In the situation of ad hoc arbitration, as previously noted, the principle of party autonomy allows the party to choose which procedural rules will apply to the arbitration procedures.
Competence de la Competence
Once a tribunal has been constituted and is enabled by an arbitral clause, the tribunal itself is the sole judge of the tribunal’s competence and limitations. It is up to the tribunal to determine whether it has jurisdiction over the disputed subject matter. Competence de la Competence is the name given to this principle. The Jay Treaty was the first time this principle was applied.
What is fast-track international arbitration?
Although it should in principle be swifter and less expensive than traditional court litigation, international arbitration has recently come under fire for its increasing cost and the increasing length of the proceedings, which has made it more similar to traditional court litigation. To reduce the cost of international arbitration, it is possible to use lawyers at international arbitration boutiques, who typically charge less than large international corporate firms. Third-party funding, where an investor agrees to pay the legal fees with respect to a case in return for a stake in the amount ultimately awarded, can also serve to reduce a victim’s out-of-pocket costs to pay for international arbitration.
To ensure speed in the resolution of disputes it is possible for the parties to agree to resolve arbitrations via what is known as “fast-track” or “expedited” arbitration, which is arbitration with procedural rules designed to ensure that disputes come to an end swiftly. It is also useful to choose a skilled arbitrator and appropriate legal counsel, with significant legal experience in international arbitration law and procedure.
When it comes to international commercial issues or conflicts between two governments, arbitration has shown to be one of the most effective dispute resolution procedures over time. It has evolved into a machine that secures the enforceability of foreign awards while still providing flexibility to maintain the party’s autonomy.
International arbitration is sometimes called a hybrid form of international dispute resolution, since it blends elements of civil law procedure and common law procedure, while allowing the parties a significant opportunity to design the arbitral procedure under which their dispute will be resolved. International arbitration can be used to resolve any dispute that is considered to be “arbitrable,” a term whose scope varies from State-to-State, but which includes the majority of commercial disputes.
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