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International arbitration

June 13, 2022

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This article has been written by Neha Dahiya, a law student at Dr. B.R. Ambedkar National Law University, Sonipat. This article explains the meaning, essential requirements, stages of proceedings, and advantages of international arbitration. It also covers the international conventions and forums regulating international arbitration.

It has been published by Rachit Garg.

Table of Contents

Introduction

Globalisation has brought the world closer. It has facilitated cross-country contracts where people from different corners of the world can come together and carry out different forms of commercial and non-commercial activities. In such cases, disputes arising between the parties are common phenomena. International arbitration provides a simple, inexpensive, and efficient method of dispute resolution between parties belonging to different nationalities. Basically, it involves the appointment of a neutral person called the arbitrator to decide on the dispute between the parties as per the procedure agreed upon by the parties, outside the ambit of the domestic courts. International arbitration provides a more neutral platform than the domestic courts that follow the law of a particular state. Arbitration tribunals, on the other hand, are private institutions that are not bound by any particular country’s laws and can efficiently deal with disputes arising from transnational transactions.

What is arbitration

The most accepted meaning of arbitration is that it is a process in which the parties involved consensually agree to present the dispute to a non-governmental decision-maker. The decision-maker then carries out neutral adjudicative proceedings, giving all the parties the opportunity to be heard and giving a binding decision in the end. Thus, there is no role for the courts established by law in arbitration cases.

From the definition, we can conclude that ‘arbitration’ has the following essential elements:

Consensual process to resolve disputes

International arbitration ensures full party autonomy, i.e. the parties involved can decide mutually among themselves whether or not the matter can be referred to arbitration. It must be a consensual decision of the parties to refer the dispute to arbitration. Signifying the importance of mutual consent, Article 8 of the UNCITRAL Model Law lays down that it shall be applied only in cases where there is “an agreement by the parties to submit all or certain disputes to arbitration.”

Non-governmental decision maker

Another important element of arbitration is that the decision-maker would be non-governmental and neutral. Usually, the parties themselves choose a private ‘arbitrator’ or an arbitral institution to decide on the dispute. However, it does not extend to forum selection agreements, i.e. parties do not decide on submitting their disputes to a specified national court.

Final and binding decision

Another significant characteristic of arbitration is that the decision given by the neutral and non-governmental arbitrator will be final and binding on the parties. It is subject to only limited grounds for a challenge in the national courts. The decision of the arbitration is not recommendatory that parties can accept or reject. It is more than just a process of negotiation. Thus, the arbitrator’s decision can be coercively enforced against the unwilling party.

Use of adjudicatory procedures

The ultimate and most important feature of arbitration is the use of impartial adjudicatory procedures providing each party with a reasonable opportunity to present their case. There is no provision for a unilateral decision in arbitration. An arbitration is characterised by the fact that the arbitrator first listens to both the parties and then decides on the merits of the case. However, the parties may decide to include ‘asymmetrical arbitration clauses’ which stipulate that only one party has the right to refer a dispute to arbitration, while the other must litigate. It is also known as the ‘unilateral option arbitration clause’.

Forum selection clauses and national courts

Another usual practice in international arbitration agreements is to include forum selection clauses or the choice of national courts. These clauses can provide for-

Jurisdiction or prorogation agreements– They provide that the matter may be resolved in a specified court, without limiting the jurisdiction of other forums.
Exclusive or derogation agreements– They provide that the matter must be resolved in a specified court only.

However, these agreements cannot be called arbitration agreements as they subject the dispute to a specified national court, and not to a non-governmental arbitrator. Also, these agreements are subject to national laws.

Types of arbitration

Ad-hoc arbitration

In simple words, ad-hoc arbitration is a form of arbitration in which the parties and arbitrators determine the procedure themselves, independently from any arbitral institution. As a result, the ad-hoc proceedings are more flexible, faster, and cheaper in comparison with institutional arbitration proceedings. The parties need not pay the administrative fees as well. In such a case, the parties need only mention that the disputes may be referred to arbitration, but it is beneficial if the seat of arbitration is also mentioned. If the parties cannot decide mutually on important matters like the constitution of the tribunal or the appointment of arbitrators, they will be determined by the laws of the seat of arbitration. However, at any point in the arbitration proceedings, the parties may decide to engage an institutional arbitrator to administer the process.

In fact, there have been concerted efforts in India as well to promote institutional arbitration. A high-level committee was established to suggest changes to the existing Arbitration and Conciliation Act, 2019, headed by Justice B.N. Srikrishna. The committee stated its aim to be “strengthening institutional arbitration in India through measures such as the grading of arbitral institutions, the accreditation of arbitrators, the creation of a specialist arbitration bar and bench, and the provision of governmental and legislative support for institutional arbitration.” As a result, the Arbitration Council of India was established. Therefore, there has been a growing inclination towards institutional arbitration.

Institutional arbitration

In institutional arbitration, an institution steps up to take charge of the arbitration proceedings. Each institution is recognised for its different procedures and administration of arbitration. Some of the common arbitration institutions are the London Court of International Arbitration (LCIA), the International Chamber of Commerce (ICC), the Dubai International Arbitration Centre (DIAC), etc. Usually, the choice of institution is specified in the arbitration clause. The arbitrators in such a case are appointed by the institution itself. For instance, as per Section 12 of the Indian Arbitration and Conciliation Act, 1996, when an arbitrator is approached, he must submit in writing all the circumstances, if any, that might give rise to justifiable doubts as to his independence and impartiality.

There are several advantages of employing institutional arbitration, like there are already established rules and procedures to be followed that make the process efficient and systematic, and administrative assistance is also provided by the institution. Additionally, qualified and experienced arbitrators are appointed by the institution. However, it can prove to be costly with administrative fees and other institutional costs incurred, and institutional bureaucracy might lead to delays and additional costs.

Commercial arbitration

Section 2(1)(f) of the Arbitration and Conciliation Act defines international commercial arbitration as “disputes arising out of the legal relationship where one of the parties is a citizen, resident, or habitually residing out of India.”

Commercial international arbitration refers to arbitration between traders across countries. When citizens or companies from different countries enter into commercial contracts, any dispute arising between them can be referred to as commercial international arbitration. It helps the parties to avoid going to the domestic courts of either party’s country. The contract may include a binding or non-binding arbitration clause to refer any specific dispute to arbitration.

Investor-state arbitration

Investor-state arbitration takes shape from international investment treaties that contain a clause for arbitration. In case an investor’s investment in a foreign jurisdiction has been harmed, the investor can initiate arbitration to claim compensatory damages from that state. However, the clause for arbitration is not mentioned in the investor’s contract, but in the investment treaties.

Before the era of investment, treaties started, in case any dispute arose between the investors and the government of the foreign state where investment was made, the only recourse for the investors was the courts of that country under its domestic law. But this was not a preferable option. Once the investment treaties known as, Bilateral Investment Treaties (BITS) came into being, arbitration provided a neural platform for the investors. These treaties may also provide that the dispute may be referred to a particular institution only.

Some of the investor-state arbitration institutions include the International Centre for Settlement of Investment Disputes (ICSID), the International Chamber of Commerce (ICC), and the Stockholm Chamber of Commerce (SCC).

Inter-state arbitration

State-to-state or inter-state arbitration refers to disputes between two states or state-like entities. It is drawn largely from diplomacy and commerce under public and private international law. Most inter-state arbitration issues arise from border disputes like land or maritime boundary conflicts. Mostly, they are ad-hoc arbitrations conducted by the parties through specially negotiated procedural rules.

The most striking example of inter-state arbitration is the Alabama Case of 1871. This case was related to maritime grievances accumulated between the US and Great Britain during the American Civil War. Both parties had signed the Treaty of Washington that sought to establish four different arbitrations to deal with the issues involved. As a result, the tribunal unanimously held Britain liable for the losses incurred by the US, and Britain was made to pay the damages.

What is international arbitration

International arbitration is a dispute resolution mechanism, similar to domestic court litigation, except it is carried out by private adjudicators called ‘arbitrators,’ and it extends beyond a country’s borders. It is a consensual, neutral, binding, and enforceable means of dispute resolution that is more efficient and faster than regular court proceedings. It facilitates the coming together of parties from different legal, linguistic, and cultural backgrounds and resolving their disputes.

Availing international arbitration can be optional, but it could also be made compulsory by inserting a ‘mandatory arbitration clause.’ Usually, parties enter into ‘arbitration agreements’ beforehand. Article II(1) of the New York Convention defines such an agreement as “an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.”

Thus, international arbitration, “provides businesses engaged in international transactions with a neutral form of dispute resolution.”

Essential requirements of an international arbitration clause

International arbitration clause to be in writing

It is mandatory for the arbitration agreement to be in writing if it is to be enforced, in most jurisdictions. This is also prescribed in Article 7 of the UNCITRAL Model Law.

International arbitration to be mandatory

The intention of the parties regarding taking the dispute for arbitration must be clear from the agreement clause. It may provide for mandatory arbitration in case of any dispute or contain permissive language, i.e. that any dispute may be referred to arbitration. In some cases, there may be a clause for unilateral choice of arbitration, i.e. either party may unilaterally choose between arbitration or court proceedings in case a dispute arises. However, these clauses are not enforceable in all jurisdictions.

In recent years, mandatory arbitration clauses have become a problem. Corporations usually insert mandatory arbitration clauses in agreements with consumers and employees. The problem that arises here is that these clauses take away the jurisdiction of domestic courts in case any dispute arises. Thus, the employees and consumers have no recourse left to the country’s judicial system; rather, they have to go for arbitration, which practically puts them in a disadvantaged position. That is why the relevance of such clauses has been disputed across the world recently.

Choice of the arbitral seat

The choice of arbitral seat is related to the country whose courts shall have the supervisory jurisdiction over the arbitration proceedings. These courts of the arbitral seat have the authority to pass rulings on preliminary injunctions and any challenges related to the arbitral award. However, the arbitral seat is not the same as the venue of the arbitration, i.e., it need not correspond with the place where the hearings physically take place. Because of these reasons, it is important to choose a seat in a place that has modern and arbitration-friendly laws and where the courts are cognizant of international arbitration principles to ease the entire process.

A pertinent case to mention here is that of the BALCO judgment. In Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc.(2012), it was held that part I of the Arbitration and Conciliation Act, 1986 would not apply to the foreign seated international commercial arbitrations. Section 2(2) of the Act outlines the territorial limitations of the Act, i.e., it applies only to arbitration seated in India. Thus, different countries have different laws regarding the arbitrations carried out on their soil or outside. The choice of the arbitral seat has serious consequences, including the applicability of domestic laws and the enforceability of the award.

4. Scope of the clause

It is important to clarify the scope of the arbitration clause so as to definitely outline the disputes arising out of, or in connection with the agreement that can be made the subject of arbitration, regardless of the types of claims asserted, like contract breach, business tort claim, etc. The parties may choose to keep certain claims like infringement of intellectual property rights, etc. out of the arbitration clause. In such cases, the claims left out may be preferred to any court of competent jurisdiction. Also, the matters that can be referred to arbitration may also differ according to the arbitral seat. Some jurisdictions prescribe that certain matters should be mandatorily resolved by courts of competent jurisdiction, and not referred to arbitration.

5. Applicable laws

The arbitration clause must also specify the substantive law to be applicable to the rights and obligations arising under the contract if they are not dealt with under any other relevant provision within the contract. The applicable law need not have any relation to the arbitral seat.

6. Arbitral rules

In case the parties wish to get their dispute resolved by a specific international arbitral institution, like the International Chamber of Commerce, the arbitration clause must specify that particular arbitral institution and the institutional rules as well.

7. Language of the proceedings

The international arbitration clause must also specify the working language of the arbitral proceedings.

8. Optional clauses

The following details, though optional, may be included in the international arbitration clause:

The number of arbitrators, or their specific qualifications;
The method of constituting a tribunal;
Rules regarding the confidentiality of the proceedings;
Allocation of the costs of arbitration;
Mandatory pre-arbitration negotiations or mediation;
Waiver of the right to challenge the arbitral award, adhering to the limits permitted under the law of the arbitral seat;
Powers of the tribunal to call for specific performance of the contract; or
Other specifics related to the dispute or arbitration.

Stages of international arbitration proceedings

International arbitration, especially commercial arbitration, consists of the following stages:

Request for arbitration

The proceedings begin with an initial pleading known as the Request for Arbitration or Notice of Arbitration. The pleading is a document (typically very short consisting of 15 to 25 pages) that contains the procedural information like the parties’ names, their contact details, address, and counsel. Besides this, it also includes a brief summary of the facts of the case and its background, along with the relief sought by the parties.

Answer to the request for arbitration

In response to the request for arbitration by the claimant, the respondent files an answer to this request, as per the institutional or procedural rules of the arbitration. The answer again is a brief and a procedural document. Here, the respondent presents his case and puts forward counter-claims. The respondent’s appointed arbitrator is also nominated in the answer itself.

Constitution of the arbitration tribunal

After the submission of the initial pleadings, the arbitration tribunal is to be constituted. If the tribunal consists of three members, then the two members nominated by the parties are examined for independence and impartiality. The arbitral institution then confirms their appointment and the third member, or any other member, is designated as the president of the tribunal by the institutional procedural rules or the rules mutually decided by the parties. Any challenges or issues arising from the appointment shall be disposed of, and finally, the tribunal shall be constituted formally. Article 11 of the UNCITRAL Model Law talks about the appointment of arbitrators. It gives liberty to the parties to decide among themselves the procedure of appointing the arbitrators.

The hearing

After the tribunal has been established formally, the next stage is that of the procedural hearing. It is the first opportunity for the parties to interact directly with the tribunal constituted. If it is not physically possible for all the pirates and arbitrators to be present in one place, then it might happen via telephone or video-conferencing. It is at this first hearing itself that the timetable is set for the remaining proceedings.

Detailed pleadings and production of documents

After the first hearing, the detailed hearing takes place. There is an exchange of further detailed written pleadings, witness statements, legal arguments, and authorities. Basically, it is the stage where either party presents its case with full strength and all the supporting evidence. There may be a second round of pleadings if requested by the parties and granted by the tribunal.

After the first exchange of pleadings comes to an end, it is followed by the presentation of documents. Documents are usually presented only when requested and it is proved that the presentation of documents is relevant and material to the dispute.

Article 23 of the UNCITRAL Model law deals with the statements of claim and defence. The parties are free to present all the documents to support their claims. The Article also permits the parties to amend their claims unless the arbitral tribunal considers it inappropriate to allow such an amendment owing to the delay in making it.

Witness statements and expert reports

If the tribunal feels that it is necessary, keeping in mind the nature of the dispute and the circumstances of the case, it can allow the presentation of expert witness evidence, after consulting all the parties involved. It can also happen that the pleadings and document presentation may be allowed after the expert evidence is submitted to focus on the factual issues at the core of the dispute.

Appointment of experts by the arbitral tribunal is covered under Article 26 of the UNCITRAL Model Law. It also adds that if the parties so request, the expert can be called into the proceedings after giving the evidence for questions and examination.

The formal hearing

After the detailed pleadings and all the evidence is presented, the tribunal then proceeds toward a more formal hearing of the matter. Usually, they are shorter in duration and do not last for more than ten working days. The formal hearing begins with both sides presenting their opening oral arguments, followed by a direct examination of the witness statements and cross-examinations.

The post-hearing brief

After the conclusion of the formal hearing, the parties may be asked to submit post-hearing briefs in place of oral closing arguments. In the post-hearing briefs, the parties reiterate their claims and defenses along with all the supporting evidence.

The award

After the proceedings come to an end, the tribunal shall issue a written award. The award is signed, dated, and distributed to the parties.

Article 31 of the UNCITRAL Model Law states that the award should be in writing and must include the reasons upon which it is based.

Appeal

The international arbitration awards have only limited grounds for challenge. However, the award can be set aside in the domestic courts of the arbitral seat. The challenge shall be governed by the domestic laws of the country that is the seat of arbitration. Usually, the law is consistent with the provisions of the New York Convention, if that country is a signatory to it.

Most countries have a restricted approach to appealing against arbitral awards. That is why many countries do not permit a de novo review of the evidence. Usually, the awards can be set aside on issues like grave procedural deficiencies, irregularities in the tribunal constitution, lack of jurisdiction, not following due process, or when the award goes against public policy.

Article 34 of the UNCITRAL Model Law lists the various grounds for setting aside the arbitral award. It includes grounds like procedural deficiencies, issues with jurisdiction or the appointment of arbitrators, etc.

Recognising and enforcing the arbitral award

Either party can bring a suit for judicial recognition and enforcement of the arbitral award in any country if the other party refuses to comply with the award. Recognition and enforcement are mostly governed by international arbitration conventions like the New York Convention, in countries that are signatories to it.

As per Article 35 of the UNCITRAL Model Law, the arbitral award shall be recognised as binding and enforceable, irrespective of the country in which it was made, except on certain grounds mentioned in Article 36.

Advantages of international arbitration

There are the following advantages of opting for international arbitration:

It provides a neutral platform for the parties to come together and present their arguments in front of the arbitrators outside of the formal court setting.
The arbitral awards are more easily enforceable than the court-awarded judgments.
The procedures are easy and flexible.
Arbitrators appointed usually have expertise in the matter they are going to arbitrate.
Privacy and confidentiality of the parties are ensured.
The outcome is binding on all the parties, and appeal is allowed only in limited cases.
It is often less expensive than civil litigation.
Parties get enough opportunities to directly participate in the proceedings.

Conventions governing international arbitration

There are several international conventions governing international arbitration. These conventions apply to the arbitrations carried out in countries that are signatory to them. Some of these conventions are:

The New York Convention

The two most initial modern conventions on international arbitration were the Geneva Protocol on Arbitration Clauses in Commercial Matters, 1923, and the Geneva Convention for the Execution of Foreign Arbitral Awards, 1927. The Protocol formally recognised international commercial arbitration agreements and required the signatory nations to refer such party agreements to arbitration. The Convention required the contracting parties to recognise the arbitration awards made in other contracting nations. However, breaking out of the Second World War diluted the efforts of these conventions.

They were succeeded in 1958 by the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the ‘New York Convention.’ It provided a universal framework for the recognition and enforcement of international arbitration awards. It was negotiated at the United Nations Conference on Commercial Arbitration held in 1958, spanning three weeks, and attended by 45 parties.

The main objective of the Convention was to establish uniform rules regarding:

National courts to recognise and enforce foreign arbitral awards;
National courts to recognise the international arbitration agreements; and
National courts refer the parties involved to arbitration when they have entered into an arbitration agreement.

Main features of the New York Convention

It limits the recognition and enforcement of arbitration awards on grounds of procedural irregularities, jurisdiction issues, compliance concerns by the parties, and public policy.
The burden of proving the invalidity of the arbitral award lies on the party resisting its enforcement.
The previous ‘double exequatur’ condition which required that the arbitral award must be first confirmed in the arbitral seat before it is enforced in a foreign jurisdiction has also been abolished.
Substantial autonomy has been given by the parties to mutually decide the procedures and law applied to the arbitration agreement.
Additionally, it does not affect the validity of any bilateral or multilateral arrangements entered into by different nations regarding the enforcement and recognition of foreign arbitral awards.

The Inter – American Convention

Inter-American Convention was ratified in 1975 by the United States and most of the South and Central American Nations. Formally known as the Inter-American Convention on International Commercial Arbitration, it seeks to establish uniform rules regarding the recognition and enforcement of arbitral awards, similar to the New York Convention. It is also called the ‘Panama Convention.’

Some of its features that are absent from the New York Convention are the following:

If the parties have not consented to any institutional arbitration rules, then the rules of the Inter-American Commercial Arbitration Commission shall apply.
The Convention prescribes the rules for the constitution of the arbitration tribunal and also gives the freedom to choose arbitrators regardless of their nationality.
It does not prohibit the national courts from taking up cases against the violation of the international arbitration agreement.

The European Convention

The 1961 European Convention on International Commercial Arbitration came into force in 1964. Currently, it has 31 states, mostly European and some non-EU states as well. It deals with the arbitration process in three phases – arbitration agreement, procedure, and the arbitral award. The Convention grants full autonomy to the parties and arbitrators to specify the procedure of arbitration.

It prescribes the following grounds for setting aside the arbitral award:

Incapacity of the contracting parties;
The invalidity of the arbitration agreement;
Violating the due process, like not adhering to the right to be heard and right to notice;
Arbitrators exceeding the limits of their authority; and
Irregularity in the composition of the arbitration tribunal or the procedure followed.

In a way, it complements the New York Convention. However, it has had limited impact due to less number of contracting parties, out of which the maximum are already parties to the New York Convention. Nevertheless, it has a wider scope than NYC regarding the appointment of arbitrators, the law applicable, objections to jurisdiction, and the competence of domestic courts.

Forums for international arbitration

ICC’s International Court of Arbitration

The International Chamber of Commerce’s International Court of Arbitration was established in 1923 in Paris. It has prescribed a set of guidelines for international arbitration called the ICC Rules of Arbitration that are revised periodically. It is neither a court nor an arbitrator. Rather, it is an administrative body that acts as a supervisor by appointing arbitrators. It is also responsible for the approval and scrutiny of arbitral awards. It consists of a president, vice-presidents, and members, who are appointed for a term of three years by the ICC World Council. When the parties decide to approach the ICA, they give it certain decision-making powers.

These decision-making powers include:

The ICA has the power to appoint or replace the arbitrators and also decide on the challenges levelled against them.
The ICA also has the power to monitor the arbitral process in order to check that it is carried out timely and efficiently as per the procedure prescribed.
It examines and approves the arbitration award granted by the tribunal in order to ensure its quality and enforceability.
It can make decisions on the arbitration costs as well, like adjusting the fees and costs in advance.
It is also responsible to oversee the emergency proceedings before the actual arbitration begins.

Permanent Court of Arbitration

The Permanent Court of Arbitration was established by the 1899 and 1907 Hague Conventions for the Pacific Settlements of the International Disputes. It is involved in settling disputes between states and state-like entities by the means of arbitration. Basically, it is not an international organisation per se, but an inter-governmental organisation that assists in the arbitration process between states or state-like entities.

Primarily. It has three organs, which are as follows:

Administrative Council– It comprises the representatives of the member states which are signatories to the Hague Convention and acts as the governing body of the PCA.
The members of PCA– Serve as potential arbitrators. Each member state can appoint up to 4 individuals.
The International Bureau- It functions as a registry or secretariat, providing administrative support to the arbitration proceedings.

Conclusion

Arbitration is an efficient means of dispute resolution that provides the parties involved a chance to resolve their disputes by direct participation and through a neutral arbitrator. It also provides several other benefits over regular civil litigation. For these reasons, in recent years, arbitration has evolved as one of the most preferred modes of dispute resolution. Due to its growing popularity, there have been several international conventions signed to standardise the arbitration process and make it uniform across the world. There are several forms of arbitration that are practiced across the globe. The international conventions seek to lay down some basic guidelines to govern these proceedings. Yet, we do not have any universal law that is applicable to the arbitration proceedings as the conventions are subject to the countries that sign them. Therefore, arbitration is still in its developing phase and needs more time to come up as an official and universal means of dispute resolution. On the bright side, most national laws pertaining to international arbitration are modeled on the UNICITRAL Model Law, and other countries are also trying to do the same.

References

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