This article is written by Rashi Singh currently pursuing LLB from Campus Law Centre, Faculty of Law, University of Delhi. The following article exhaustively covers the arbitration process, the legal framework around it, its working and how it differs from one country to another.
Alternative dispute resolution (ADR) is a term that is not unheard of in the present scenario. This alternative for dispute settlement has become a choice of parties. The reason for the growing importance of alternative dispute resolution is obviously valid as it saves parties from time-consuming and costly court litigation. Alternative dispute resolution allows parties to settle their disputes without resorting to the court systems. The most common types of ADR involve arbitration, mediation, conciliation, neutral evaluation, etc. In this article, we will talk about the most common form of alternative dispute resolution i.e. arbitration, its procedure, and governing laws in various countries.
What is Arbitration?
Arbitration is a private dispute resolution procedure in which parties opt to avoid court litigation. A party’s right to refer a dispute for arbitration depends on the “arbitration agreement”. Arbitration produces a binding decision defining the rights and obligations of the parties. Arbitration involves an independent third party. The third-party can be an individual arbitrator or a tribunal. The tribunal can have more than one arbitrator (most often one or three). Parties handover the right to resolve the dispute to the arbitrators. After the claimant’s “request for arbitration”, the arbitration will be conducted according to the procedure adopted by the parties. Tribunal will hear both the parties and will finally announce its award. The award will be binding unless it is challenged.
When should provision for arbitration be made
In the case of commercial contracts, parties generally include provisions defining the ways in which a dispute will be settled. Nowadays, an arbitration agreement has become one of the most common clauses in a commercial contract. By adding an arbitration agreement parties agree to refer their dispute to a neutral tribunal for a speedy resolution. Though, parties can enter into an arbitration agreement after a dispute has arisen but sometimes it becomes difficult to agree on the terms of the agreement because of the ongoing dispute. The Arbitration agreement contains the procedure to be followed to conduct the arbitration.
An arbitral tribunal (or arbitration tribunal) is a panel of one or more arbitrators who are constituted to sit and resolve a dispute by the process of arbitration. The tribunal consists of one or more arbitrators. It also consists of a chairman.
- Composition of the tribunal: The arbitral tribunal usually consists of a sole arbitrator or a panel of arbitrators. A chairman is appointed by the arbitrators to avoid a tie situation.
- Jurisdiction of the tribunal: The arbitral tribunal is independent to choose its jurisdiction without the interference of any court. The arbitral tribunal has the discretion to accept or reject a plea raising question on the jurisdiction of the tribunal. If the tribunal rejects the plea, proceedings will continue and an award will be given by the tribunal.
- Powers of the arbitral tribunal: The tribunal acts as a quasi-judicial authority. It has the power to administer an oath to the parties. It can take interim measures, appoint experts. It has the power to proceed ex-parte and finally to make awards.
Laws relevant in an Arbitration
An international commercial arbitration generally involves three questions of law:
- law governing the contract (substantive law),
- law governing the arbitration agreement,
- law governing the seat or procedure of the arbitration.
Law governing the contract
An arbitration agreement generally specifies the law which will govern the arbitration process. It is not necessary that the law governing the arbitration agreement is the same as the law of the contract (substantive law). The arbitration agreement is a contract on its own and is separable from substantive law. The doctrine of separability allows the arbitration agreement to be governed by a different law than the law of the contract. In case, if the governing law of the arbitration agreement is not specified in the arbitration agreement then the arbitral tribunal or the national courts will be approached with the issue. In India, in absence of governing law of the arbitration agreement, the law governing the seat of the arbitration is applied. It is always advisable to specify the governing law in the arbitration agreement to avoid any ambiguity.
The Choice of Arbitration Rules
When an arbitrator sits to resolve a dispute, he may look for a contractual clause specifying the choice of law. Parties generally specify the applicable law for the arbitration in the “arbitration agreement” to settle the dispute. Parties can choose to apply a national law or nonnational set of rules in the contract.
Parties choose a national law
Parties are free to choose the governing law in the arbitration clause of the contract. As every person derives their rights and duties from the national law of the country, the governing law of the arbitration derives its existence from the national law system. Arbitrators can also disregard the chosen law if it is not the closest connected law to the contract.
Parties choose a non-national set of rules
Non-national sets of rules can contain international law or customs, transnational law, etc. Again, the arbitrator decides the parties’ autonomy on choosing such a law to govern the contract.
Parties do not make a choice
Sometimes, parties find it difficult to choose a governing law especially when they belong to different countries. Such cases may generally arise in the case of international arbitration. In such a case, the arbitrator determines the law to be applicable. In international commercial arbitration, where the contracting parties do not specify the law relating to the merit, the “arbitration agreement” and the procedure of arbitration in the contract, the choice of law rule comes into play. The choice of law issues can raise questions such as
- the substantive law applicable to the merits of the case,
- substantive law applicable to the “arbitration agreement”,
- procedural law applicable to the arbitration proceeding, and
- the conflicts law rules applicable to determine all these laws.
There are some serious questions that the arbitrator faces while determining the governing law in international commercial arbitration:
- Application of the conflicts law system to determine the jurisdiction of the country which would have been there in absence of any arbitration clause in the first place. Then the arbitrator uses the conflict of laws rule to determine which country would have had jurisdiction. Hence the private international law system comes into play.
- Application of the governing law of the seat of arbitration. Parties are independent to choose the seat of arbitration and thus indirectly the applicable conflict of laws rules.
- Sometimes it is also suggested that arbitrator’s conflict of laws rules should be applied as the decision that one party’s rule will be applicable can leave the other party unsatisfied.
- The arbitrator can also try to apply the rule closest to the dispute.
- If the arbitrator chooses to apply any substantive conflicting laws instead of a conflict law system, it can lead to non-identical solutions to the dispute.
Hence, it becomes difficult to detach arbitration from national law systems.
The Place/Seat of Arbitration
The place or seat of arbitration is the “situs” of the arbitration procedure. The seat of arbitration determines the procedure law or curial law applicable to the arbitration and which court(s) will have supervisory jurisdiction over the concerning arbitration. Parties are generally free to choose the seat of arbitration, in rare cases their choice for the seat is restricted. In cases, where parties do not specify the seat, the arbitrator makes a choice regarding the seat of the arbitration. Also, the seat of arbitration is different from the venue of arbitration which is just the geographical location of the arbitration process. For international arbitrations, generally, a foreign seat of arbitration is chosen which is neutral to both the parties.
Typical Steps in an Arbitration
The process of arbitration differs from case to case. The main steps (not exhaustive) involved in an arbitration process are as follows:
- Initiating the Arbitration: The claimant starts the arbitration procedure by typically sending a document known as “request for arbitration” or “notice to arbitrate” to its opponent. The other party will take the stipulated time to respond to the notice.
- Appointment of Arbitrator: the appointment of the arbitrator takes place in one of the three ways:
- Directly by the disputing parties.
- By existing tribunal members i.e, each side appoints one arbitrator and then the arbitrators appoint a third arbitrator.
- By an external party i.e, the court, or an institution or individual nominated by the parties.
- Preliminary meeting: It is always better to have a meeting between the arbitrator and the disputing parties to discuss the process and timetable for the arbitration.
- Submissions of the claim by the parties: The claimant generally sets out the summary of the matter and the remedy sought in a statement. The purpose of such a statement is to identify the issue and the question. This step may also include a counterclaim by the respondent.
- Inspection: At this stage, parties investigate background information. Each party is then required to list all the documents they have under control. After selecting the documents, inspection is done and then the selected documents are finally produced before the arbitrator.
- Evidence interchange: Before the hearing starts, the written evidence is exchanged between the parties and given to the arbitrator.
- Hearing: arbitration usually involves one or more hearings before the court depending on the complexity of the issue. At this step, the arbitrator listens to the oral statements, questioning witnesses if any, and can ask for clarification on any matter. Parties are asked to put forth their case and both the parties are required to be present at the hearing. However, in some cases hearings are completely avoided, if the matter could be resolved through the documents only.
- The Award: The arbitrator takes into consideration all the information provided by the parties and then makes a decision. The award generally includes the summary of the procedure and the reasoning of the decision. The award is binding on the parties until challenged.
A comparison in different countries
In India, arbitration is governed by Arbitration and Conciliation Act, 1996. This Act was amended in 2015 to add several provisions. Part 1 (section 2 to 43) of the Act is entitled “Arbitration”. Part 2 (section 44 to 60) is entitled “enforcement of certain foreign awards” where New York convention awards and Geneva convention awards are dealt with. Part 3 (sections 61 to 81) deals with “conciliation” provisions.
Arbitration Act of 1996, regulates arbitration procedures in England and Wales, and Northern Ireland. In the UK, there were other various acts related to arbitration such as the act of 1889, 1950, 1975, 1979. Arbitration Act of 1979, limited the judicial review of the arbitration award.
The Federal Arbitration Act of 1925 regulates the arbitration process in the United States. Several arbitration organizations exist in the USA such as American Arbitration Association, JAMS, and National Arbitration Forum.
Singapore is the most sought-after seat of arbitration in Asia. International Arbitration Act (IAA) and Arbitration Act (concerned with domestic arbitration) are the main legislation in place for arbitration proceedings in Singapore. SIAC and ICC are the most commonly selected arbitration institutions in Singapore.
There are various conventions that govern international arbitration, mainly the New York Convention, 1958 which has almost every country as a signatory. Others include Geneva Convention, 1927, European Convention 1961, Washington Convention (ICSID) 1996, UNCITRAL Model Law on International Commercial Arbitration, 1958, etc.
Arbitration is a dispute redressal mechanism that is gaining popularity every day. Be it domestic arbitration or foreign arbitration both result in a flexible and effective dispute settlement among the parties. In absence of governing laws of the arbitration, the procedure becomes costly and time-consuming. To make this process easier and error-free parties should wisely choose the governing laws of the arbitration agreement, arbitrator, and seat of arbitration.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: