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This article is written by Parth Rishik from Law College, Dehradun

Introduction

Arbitration is one of the processes under Alternative Dispute Resolution which is very popular in domestic as well as international commercial disputes, even at resolving disputes among states. Arbitration has defined a process in which parties to a dispute opt-out to resolve the disputed subject matter outside the traditional litigation system, where the parties have the power to nominate a third party to act as an adjudicating authority called arbitrator, who upon hearing the submissions of the parties announces an award called arbitral award which is binding in nature.

The first appearance of Arbitration is traced back to 1794 when the United States of America and Great Britain engaged in a process similar to that of modern-day arbitration to resolve the dispute over Amity, Commerce, and Navigation whose result is famously called Jay’s treaty 1794. Since then Arbitration has taken a very firm root when it comes to commercial disputes either domestic or international, as it is more flexible compared to the traditional litigation system. Many international treaties with time came to further strengthen the roots of the arbitration and to promote it worldwide, to name a few:

  1. The Geneva Protocol on Arbitration Clause of 1923;
  2. The Geneva convention on the execution of Foreign awards 1927;
  3. The New York Convention of 1958 on the recognition and enforcement of Foreign Arbitral Awards.

With time, Institutional Arbitration took place to replace the system of ad hoc arbitration. This article will probe into the basic mechanism of the international arbitration and will provide a detailed study of the Permanent Court of Arbitration, The Hague.

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History of Arbitration

  • The Jay treaty of 1794

The modern-day arbitration is set upon the Jay treaty as it established the first systematic arbitral proceeding. The treaty was signed between Great Britain and the United States of America. The treaty is an outcome of the disputes relating to outstanding issues following the American war of independence. Under this treaty, three commissions were set up:

  1. The first commission aimed to settle the disputes relating to the boundaries.
  2. The second commission was set up for mixed disputes where claims for compensation were due to British national officials’ debt owed by the US officials, to be compensated by the US officials.
  3. The third commission also dealt with the mixed disputes as well, where claims from US Officials against Great Britain for treatment of their property subsequent to the independence of the United States.

The result of the treaty is the modern-day arbitration between two states, also for dispute between nationals of one state and another state.

  • The Alabama Claims Arbitration

This is also a very notable development in the field of International Arbitration. The subject matter for the dispute was damages suffered by the US government for the attacks on the Union ships by the Confederate navy Ships. Following this, a treaty was signed by the United Kingdom and the USA called the Washington Treaty in 1871 where it was decided that this along with other disputes will be addressed through an international arbitration tribunal set up in Geneva. The arbitral award was given in favour of the USA. The notable thing is that this arbitration set a precedent to successfully settle interstate claims through arbitration. For the first time, the council of arbitrators was composed of different people and not national officials of the parties to the dispute. Thus, it introduced the ideology of a third party having no interest in the dispute to be an arbitrator under arbitration which resulted in the independence of the arbitral tribunal. It was the very first arbitration that resembles the current practice of arbitration. Further, it was also observed for the first time that the power to choose the procedural law applicable was bestowed to the parties within the nexus of the dispute.

  • Arbitrational development by the end of the 19th Century and the Start of the 20th Century and the path to the 21st Century

By the end of the 19th century, it was not possible for individuals to approach any arbitral tribunal for the purpose of alternative dispute resolution, their cases of the dispute have to be brought in front of the commission or arbitral tribunal by the state of their nationality. This very fact is in contrast to today’s practice of arbitration. Following this, in the early 20th-century arbitration lost its popularity for interstate disputes. With the Permanent Court of International Justice being set up in 1921 and its successor the International Court of Justice established in 1945, there is a steep fall in the cases of arbitration. Seemingly, arbitration gained popularity again after the end of the cold war which can be evidently seen in the cases adjudicated by the Permanent Court of Arbitration.

With companies installing arbitration clauses under their contract in relation to manufacturing and production in different states, The International Centre for Settlement of Investment Disputes was established in the 1960s which only resulted in the increase of arbitration in the matters of dispute between foreign investors and states in the start of 21st century. Another evident growth in the Arbitrational field is seen under the mechanism of Iran-United States Claims Tribunal in 1981 which aimed to resolve the dispute between Iran and the US following the Iran Hostage Crisis through the means of International Arbitration.

Principles of International Arbitration

  1. Binding Arbitrational Award – International disputes adjudicated by the means of arbitration have enforcement in their nature as they are binding on parties who approach arbitration for resolve. Settlements that are binding in nature are called Legal Dispute Settlement and disputes which are addressed by any mechanism but do not have binding nature are called Diplomatic Dispute Settlement which are mediation, conciliation, etc. In other words, the outcome of arbitration, which is the arbitral award, is binding on the parties. The binding nature is the outcome of the fact that when the parties enter into an arbitral proceeding, they already accept the clause that the outcome of arbitration shall be binding on them. In other words, parties who chose to settle a dispute through arbitration accept in advance that they will be bound by the arbitral award. Further, it is also supported by Article 34 paragraph two of the UNCITRAL arbitration rules.
  2. Party Autonomy – This is one of the most essential principles of arbitration which means the party has the power to design the procedure of arbitration. This further means that it is the party that chooses the arbitrator, the procedural law which is the law that applies to how the procedure will be conducted, applicable law which means the law applicable to the settlement of the dispute. Further, it also empowers the parties to define the disputed subject matter over which the preceding of the arbitral tribunal shall commence, thus, the tribunal has the jurisdiction to preside over the matter submitted by the parties only.
  3. Difference between Institutional and Ad Hoc Arbitration – In Institutional Arbitration, unlike ad hoc arbitration the procedural rule which is applicable to the proceedings of the arbitration is prescribed by the institution facilitating arbitration, which is called institutional rules. But in many cases, it is not compulsory as parties can still choose which procedural law to follow. For instance, the Permanent Court of Arbitration allows the parties to use other procedural rules than the PCA’s procedural rules. While, in case of ad hoc arbitration, as already discussed before, under the principle of party autonomy, it is up to the party to chose which procedural rules shall apply to the proceedings of arbitration.
  4. Competence de la Competence – Once the tribunal has been established which is empowered by an arbitral clause, the sole judge of the competence and limitation of the tribunal is the tribunal itself. It is up to the tribunal to check that if the tribunal has the competence to hear over the disputed subject matter. This principle is called Competence de la Competence. This principle was first used in the Jay Treaty.

The power of the party to choose an applicable Law

Different types of arbitration call for different application of applicable law. The certain thing is that the power to choose the applicable law falls upon the parties to dispute. For starters, in case of interstate dispute, the parties generally choose the widest ambit of law which is the International Laws, in doing so the parties have the power to address the tribunal to proceed on specific conventions or conventions. For instance, in the case of Mox Plant Arbitration, which was between the United Kingdom and Ireland where the parties decided that only the Convention for the protection of the Marine Environment of the North-East Atlantic, the OSPAR Convention.

In cases of investor-state arbitration, the parties usually go for international law coupled with domestic law. The reason behind this is that it is essential to apply the domestic law of the state where the investment has been made which ensures smooth enforceability of the arbitral award, as it ensures that the award itself is in compliance with the domestic laws of the state.

In cases where the parties fail to identify the applicable law, then the power shifts to the arbitral tribunal to choose the applicable law. This transfer of power is mentioned in Article 35 of the UNCITRAL Arbitration Rules and Article 42 of the ICSID Convention.

Further, an arbitral is limited to not adjudicate a matter of equity which is called “ex aequo et Bono”, until unless the equity matter is specifically brought for adjudication by the parties by using their party autonomy power.

The Arbitration Agreement

The proceeding of arbitration is initiated by the invoking of the arbitral clause. An arbitral clause can be a stipulation to a parent contract or can be a different contract in itself. This clause empowers the parties, who have entered in a contractual relationship to address any disputes that arise from the breach of the parent contract to be addressed by the process of Arbitration. Many commercial agreements insert this arbitration clause to address any disputes if any arises in the future. The reason that business and commercial operations nowadays chose arbitration over traditional litigation, is the fact that the procedure of the arbitration is much flexible compared to traditional litigation.

In respect of different states approaching the mechanism of arbitration for the resolution of a dispute, is quite different than organizations approaching arbitration over a commercial dispute. Thus, the arbitration agreement also differs. To initiate arbitration by two disputing states, the states need to consent for the same.  There are generally two ways for consenting to arbitration:

  1. The first and the most common medium of consenting to the procedure of arbitration is through singing a specific treaty for the resolve of the dispute. In this, the party submits to resolve the existing dispute through arbitration which is empowered by the treaty they sign. This is called “compromise”, which means a special agreement specifically for the purpose of the arbitration.
  2. The second way is to insert an arbitration clause beforehand in a contractual relationship between two states that specifies certain subject matters and if a dispute arises under those subject matters, the states will address the same through arbitration at the request of any party within the nexus of the contractual agreement. This is called a “compromissory clause”.

In all conditions, whether arbitration between commercial figures or states, an arbitration clause will specify the procedure of the arbitration beforehand, thus this lessens the chance of ambiguity under the arbitration clause.

The Rise of Institutional Arbitration (Focused on the Permanent Court of Arbitration)

The aspects which will be addressed under this part of the article are strictly related to the Permanent Court of Arbitration (PCA) located at the Arbitrational Hub of the Hauge.

The Creation of PCA (Historical Development)

The Permanent Court of Arbitration is the most important institute that facilitates arbitration and that too in relation to the inter-state arbitration. It is located at the Hague, in the Peace Place established in 1913. PCA stands as an intergovernmental organization established in 1899 as a product and result of the First Hague Peace Conference. This conference was facilitated by the Russian Tsar Nicolas the second with the aim to provide a mechanism for the settlement of disputes among different states peacefully and to lessen the use of force that created tension between different states. The conference gave birth to various conventions, for instance, Convention for the Pacific Settlement of International Disputes (Hague Convention I).

The misleading fact about PCA is that it’s neither a court nor a tribunal or permanent in nature as it does not have permanent arbitrators. It is an institution that facilitates arbitration for parties to the dispute, especially interstate disputes. In other words, PCA administers arbitration. From a practical point of view, PCA acts as a registry for arbitration and facilitates various services essential for the same like communication, logistic and technical support, linguistic support etc.

Function and structure of PCA

The PCA is composed of various organs, the most essential one is the International Bureau which acts as PCA’s secretariat and it is headed by the Secretary-General. Its functions are to assist administrative support to the tribunals and act as a registry for the same.

Another essential branch of PCA is the Administrative Council, which is composed of the diplomatic representatives of the contracting parties (parties to the dispute) and is headed by the Dutch Minister of Foreign Affairs. It acts as a general assembly for PCA and is tasked with shaping policies of the PCA and to act as supervisor (oversee) the work of the international bureau. Notable establishment by the Administrative Council is the Financial Assistance Fund in the year of 1994 tasked with helping developing countries to meet with the financial cost of arbitration before PCA.

Parties approaching PCA for Arbitration have the freedom to chose arbitrators from the list of PCA or outside the list. PCA understands and recognizes environmental issues, and thus has a different list of arbitrators and environmental specialists for any dispute which affects the environment as well.

Types of Arbitration under PCA

Just like another arbitrational institute PCA also has its own set of procedural rules. These rules, however, are optional, meaning it is up to the parties approaching the PCA to choose the applicability of PCA’s procedural rule or apply other procedural rules, which makes PCA functioning more flexible and appealing to parties who have engaged in arbitration. PCA, nowadays, is popular when it comes to inter-state arbitration and investor-state arbitration. For the purpose of inter-state disputes, PCA administers a wide range of disputes that take place internationally, for instance, boundary disputes, the law of the sea, etc.  In most of the international arbitration cases under PCA, the Secretary-General acts as the appointing authority.

Concluding Thought

Arbitration has proven with time to be one of the most applicable disputes resolving mechanisms when it comes to international commercial disputes or disputes between two states. With time, it has grown into a machine that ensures enforceability of the foreign awards and provides flexibility that ensures the party’s autonomy.


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