In this article, Suraj G Badrayan pursuing M.A, in Business Law from NUJS, Kolkata discusses Ten factors to consider before deciding seat of Arbitration.
Introduction
Over the years, arbitration has grown to be one of the most preferred dispute resolution mechanisms between parties, particularly in the areas of international business. Arbitration is a form of alternate dispute resolution for the settlement of disputes where an independent third party makes a decision that is binding[1]. There is considerable time spent in negotiating, selecting and drafting arbitration clauses to enable an effective arbitral process and adjudication in the event of any dispute. Arbitration is generally a voluntary and consensual process, it is very important to take into account all the key factors that generally affect an arbitral process. In this regard, one of the key factors that underlie in any arbitral agreement is selecting the seat of arbitration.
The “seat” or place of arbitration has been defined as the geographical location to which the arbitration is ultimately tried and which in the absence of the agreement otherwise prescribes the procedural law of the arbitration[2]. Hence, it means that the seat of arbitration is the jurisdiction where the parties intend the law of arbitration to apply in their arbitration agreement or the applicable procedural law of the arbitration.
Since arbitration is a voluntary process, the parties to an arbitration are free to agree on the seat at anytime. Usually, it is agreed in the arbitration agreement. If not, it might be agreed later. The freedom to choose the seat of arbitration is one of the bedrock principles on which arbitration is based on. The jurisdiction of the seat is not necessarily the same as the governing law of the contract. For example, the governing law of the contract can be the law of India but the seat of arbitration can be in Singapore, i.e the procedural law of the arbitration will be governed by the Singapore law while substantive law of contract to be analysed by the Arbitral Tribunal is governed by Indian laws.
As highlighted since arbitration agreement is voluntary and based on consensus between the parties, deciding the seat of arbitration is very important in the context of effective arbitral dispute resolution. Hence, in the preceding sections, ten factors to be considered before deciding the seat of the arbitration are discussed.
Seat of Arbitration
One of the most important factors to be considered before deciding the seat of arbitration is the national arbitration law of the seat. Since, the seat of arbitration decides the procedural law of the arbitration which governs the process of arbitration. Although the UNCITRAL model law exists to assist States in reforming and modernizing their laws on arbitral procedure so as to take into account the particular features and needs of international commercial arbitration, the model law is not binding on the States. It just reflects worldwide consensus on key aspects of international arbitration which have been accepted by States of all regions and the different legal or economic systems of the world. Hence, there are variations in procedural laws between different States.
The procedural law of arbitration of a State is a body of rules which sets a standard external to the arbitration agreement, and the wishes of the parties, for the regulation and conduct of the arbitration. It comprises rules governing interim measures, rules for supportive measures by the court, and rules for courts to exert judicial review which will be explained separately[3].
Some of key issues to consider in procedural arbitration law that one should consider are:
- Need to be party to the New York Convention or Geneva Convention
- Desired level of judicial interference and control
- Appointment of Arbitrators and legal representatives
Some examples include, local lawyer requirements hence impairing ability to choose their own legal representatives and their own arbitrators.
- Challenge to appointment of arbitrators
- Power to grant interim orders:
For example, under French law an arbitrator has the power to impose penalties on parties that refuse to comply with his/her interim orders – no such power is found in most other arbitration legislation.
- Enforcement of Awards
- Power of judicial review
- Local laws may impose a particular choice of law, law of limitations on arbitrators.
- Process of adducing evidence and discovery
For example, if the key evidence is in one party’s hands and that party does not want such evidence to be available to the other side, it may choose an arbitral institution without full discovery. Another example includes if a party initiated discovery is desired, the arbitration can be held in United states or England, however is discovery is to be avoided it can be any civil law jurisdiction.
Enforcement of Foreign Arbitral Awards
The New York Convention requires that, the states that have ratified it to recognize and enforce international arbitration agreements and foreign arbitral awards issued in other contracting states, subject to certain limited exceptions. These provisions of the New York Convention, together with a large number of contracting states, have created an international legal regime that significantly favours the enforcement of international arbitration agreements and awards.
Once the arbitral tribunal has passed an order, the interim or final order has to be enforced in a Country where it is required to be enforced. While selecting the seat of arbitration, it is very important to determine whether any international arbitral award can be enforced in the jurisdiction of any particular state. While most of the countries which are signatories to New York Convention recognise the interim arbitral awards and final arbitration awards it is important to have reciprocal arrangement between the countries. Even in enforcing such awards, the court interpretation with regard to Public policy or other grounds on which the enforcing court can refuse enforcement, matters a lot. For example, the state where the forum of arbitration is, or the state which is supposed to enforce a foreign award, may not be a member of 1958 New York Convention.
Jurisdiction neutrality and impartiality
Another aspect to consider is the forum neutrality of the State designated as the seat of arbitration. Neutrality is in the sense denotes that none of the parties have any interest or stake in that particular jurisdiction. It also covers the aspect that no party has any place of business or residence in the country designated as seat of arbitration. Generally, all Courts historically favour the local party, and also the neutrality of arbitrators adjudicating in the case comes into question. Hence, the concept of forum neutrality not only refers to the ability of the parties to select a neutral arbitral seat, rather it refers as well to their ability to select neutral arbitrator. This avoids local party bias as foreign parties perceive such partiality and hence and impediment to fair and just resolution of the dispute. Both courts and arbitrators should not only be neutral, impartial and independent but deemed to be neutral as well.
Challenge to Arbitral award – Extent of Judicial Review
The Courts within the seat of arbitration have supervisory powers of judicial review and powers to review any challenge to the arbitral award. Although the national law of the seat and the signatory to the New York convention are discussed. It is much more important to understand on what grounds the arbitral award can be challenged and extent of judicial review of the seat based on statutory laws and analysing previous judicial verdicts on the same is important.
The important considerations as highlighted in major statutory laws are: violation of principle of natural justice by the arbitrator, evidence of corruption by the arbitrators, the agreement not valid under law of the land, and on grounds of public policy. The important aspect is the treatment of national courts under the garb of judicial review and analysing the trend. The Courts may have special public policy concerns, such as political or religious factors, and set aside the arbitral award at issue.
Convenience for the parties and Arbitrators
It is also important that issues such as availability of appropriate venues and a supportive arbitral infrastructure are also important to allow the arbitration to run smoothly. In this regard, another important factor to consider is the convenience for the parties and arbitrators during the process of arbitration. The seat of arbitration should be geographically convenient for most people who will be involved in the arbitration like parties, witnesses, arbitrators and lawyers. It is also important is that there are international flights and facilities such as appropriate hotels and rooms for conducting the arbitration hearings and also presence of good communication infrastructure. Another important aspect is the local language of the arbitral tribunal/arbitrators. It is important that both the parties and the arbitrators converse and fairly conduct proceedings in a common lingua franca. Other factors to consider include, the Location of records and evidence (both material and immovable), place of residence of the chairperson of the arbitral tribunal or the sole arbitrator, and place of previous court action.
Fixed by the Arbitral Tribunal
If the parties in the arbitration agreement do not make an express choice of the place of arbitration, the choice will have to be made for them, either by the express mention of the law of the State where the agreement was made, by the arbitral tribunal itself or by the arbitration institution. Hence, it is very important to unequivocally state the seat of arbitration leaving no scope for ambiguity. Generally, on express mention of the seat of arbitration, courts do not interfere, but in case of ambiguity, or for the sake of convenience the arbitral tribunal itself can decide of the seat of arbitration. The relevant UNCITRAL rules states that:
“Unless the parties have agreed upon the place where the arbitration is to be held, such place shall be determined by the arbitral tribunal, having regard to the circumstances of the arbitration[4]”
Cost of Arbitration
Another important aspect that is necessary to consider before deciding the seat of arbitration is the cost of arbitration. The cost of the arbitration can be divided into two main categories:
- The ‘arbitration costs’ which include the arbitrators fees and expenses and the administrative charges of any arbitral institution, as well as charges for any other assistance required by the arbitral tribunal; and
- The ‘party costs’, which include legal costs and other expenses incurred by a party for the arbitration, including the fees and expenses of outside counsel, party-appointed experts, witnesses, translators, etc.
From the above discussion, we see that, the main cost factor is usually the legal fees. A study conducted by the International Chamber of Commerce analysing the proportion between the two cost categories as discussed above in recent ICC final awards showed that the party costs accounted for more than 80 per cent of the total costs of the arbitration.[5]
The ‘party cost’ varies depending on the seat of arbitration and the local lawyers appointed to represent the interests of the parties. One should also consider, the arbitration costs and draw a balance between the cost of arbitration and the cost of dispute settled by judicial means. The party costs are decided by the national cost rules applicable at the place of arbitration is considered for legal fees and in line with market practice.
There are costs incurred due to witness testimony, expert witness and support systems costs. Another factor to be considered, is in case, the arbitrator is not the local arbitrator of the seat, then there are costs incurred for paying the arbitrator to travel from his place of residence to the seat.
Quality of Judiciary, Court System and Political Stability
In international commercial arbitration, quicker, reliable resolution of dispute is of great importance. Hence, the quality of judiciary, the court system and political stability becomes a very important factor in deciding the seat of arbitration. If it becomes necessary during arbitration proceedings to approach a court for assistance, it is necessary to analyse if that court be able to deal with the matter quickly, efficiently and predictably. The courts must be experienced in dealing with complex commercial matters in an independent and objective manner. Although States may have adopted the UNCITRAL model law, there is difference and one must distinguish between formal legislation and actual practice in real cases. That practice can be demonstrates only over time, and many States are in this transition period.
Another dimension to this point is the lack of Supportive infrastructure and experience of local courts in judicial assistance in cases where appointment of arbitrators and arbitral forum is difficult for the parties to finalize. Further political situation of a country also plays a role, for example choosing Hong Kong as a seat of arbitration in Asia is unadvisable because of concerns regarding neutrality and independence.
Choosing Arbitration organisation directly
It is favourable in many cases to select the seat of arbitration directly by naming it or indirectly delegating the choice to an arbitration organization. Each of these organizations has a different set of rules and provides a neutral forum and has set rules for governing the process of arbitration. The various such organisations include:
- The International Court of Arbitration of the International Chamber of Commerce (ICC): The ICC, which is based in Paris, was established in 1923. It is regarded the best known international commercial arbitration institution.
- The London Court of International Arbitration (LCIA): The LCIA, which is based in London, was established in 1892. It is Europe’s second leading international arbitration institution (after the ICC) and is very well known internationally. The LCIA has affiliated arbitral institutions in Dubai (DIFC-LCIA), India (LCIA India) and Mauritius (LCIA-MIAC).
- The International Centre for Dispute Resolution (“ICDR”): The ICDR is a part of the American Arbitration Association (AAA), which was established in 1926, and is the best known arbitral institution in the US. The AAA administers a large number of domestic disputes through its network of US offices. The ICDR administers international arbitrations (pursuant to its International Arbitration Rules).
The rules of the ICC, LCIA and ICDR are all suitable for use around the world and for arbitrations conducted in various languages and under various governing laws. In each case, it is for the arbitrators to resolve the dispute, with the institutions simply administering the arbitrations. In this capacity, the ICC, LCIA and ICDR each receive and distribute the parties’ initial submissions, assist with the appointment of the tribunal (with or without party-nominations) and resolve any challenges that a party may make against an arbitrator.
The choice of which arbitration institution to choose can also depend on its rules. For example, the ICC procedure is more actively administered, involving two additional steps:
- The preparation of Terms of Reference, a document which defines the scope of the arbitration by setting out the basic claims and defences, the relief sought and the issues to be addressed; and
- The scrutiny of draft awards, especially as regards issues which might affect their enforceability, by the ICC Court before the final awards can be issued to the parties[6].
The value of these supervisory functions must be weighed up against the likely additional time and cost to be devoted to them. In contrast, the procedures under the LCIA and ICDR Rules are lightly administered, with the role of the LCIA and the ICDR in each case being primarily concerned with the appointment of (and challenges to) the tribunal. There is no formal requirement for Terms of Reference or the scrutiny of draft awards.
Requirement of experienced Arbitrators regarding specialise matters in a dispute
Disputes regarding specialised matters such as intellectual property with complex technology, many complex commercial transactions etc. require experienced and sophisticated arbitrators to handle the dispute. Many matters involve laws of more than one country; they are complex and counterintuitive and vary from country to country. The facts relevant to the dispute often involve scientific, technical data, and extensive accounts and calculations.
The advantage in arbitration over judicial intervention is that in arbitration it is possible to obtain arbitrators with expertise in a given subject matter. For example, in Intellectual Property dispute, it is possible to obtain arbitrators that is experienced both in intellectual property and if a particular technology is involved with it as well. Hence, choosing a seat of arbitration where there is availability of such specialized arbitrator is important. Further, choosing the arbitral institution based on the subject matter of dispute can be considered.
For example arbitration in World Intellectual Property Organisation. JAMS in USA, for example, is well-known for having retired judges to handle sophisticated disputes (among other things), and AAA is known for having excellent construction arbitrators to handle multi-faceted disputes (among other things). Also, if it is an international dispute involving a treaty, one can choose international organization, like ICC, CPR, or AAA[7].
CASE LAWS
In this section we will discuss two cases that illustrate the importance of the seat of arbitration.
Gouvernement du Pakistan – Ministère des Affaires Religieuses v. Dallah Real Estate and Tourism Holding Company[8]
The Paris Court of Appeal, in this case, rejected an application by the Government of Pakistan to set aside ICC awards delivered in Paris, holding that the tribunal was correct in finding that it had jurisdiction over the Pakistani Government, despite not signing the arbitration agreement. The facts of the case is that: Dallah – a Saudi trading group had initially entered into a memorandum of understanding with the Pakistani Government in relation to the construction of housing for Pakistani Pilgrims visiting holy sites within Saudi Arabia. Following this, Dallah entered into a contract with the Awami Hajj Trust created by a Pakistani presidential Ordinance to move forward with the housing project. Said project never came to fruition and, following a change of government in Pakistan, the Trust ceased to exist as a legal entity. The contract contained an arbitration agreement, under which all disputes were to be referred to the ICC. On analysis, the Paris Court of Appeal took into account the surrounding context of the contract (including pre-contractual negotiations) and ruled the tribunal was correct. However, curiously in a similar case the UK Supreme Court ruled that the Tribunal does not have jurisdiction as it framed the issues notions of privity of contract and separate legal personality. Hence, this case illustrates how the selection of seat affects the outcome of the arbitration proceedings.
PT Garuda Indonesia v Birgen Air[9]
The Singapore Court of Appeal held that the seat of an arbitration does not change simply by virtue of the tribunal holding hearings or other meetings at a location other than the seat. The facts of the case are as follows: the parties’ arbitration agreement had expressly designated Indonesia as the seat of arbitration. It was subsequently decided as the result of political unrest in Indonesia the hearings should be conducted in Singapore as the situation was not right in Indonesia. The court held that Indonesia had remained the seat of arbitration throughout the arbitration, as a result, the Singapore courts did not have jurisdiction to entertain an application to have the award set aside. In the words of the court,
“There is a distinction between ‘place of arbitration’ and the place where the arbitral tribunal carries on hearing witnesses, experts or the parties, namely, the ‘venue of hearing’. The place of arbitration is a matter to be agreed by the parties. Where they have so agreed, the place of arbitration does not change even though the tribunal may meet to hear witnesses or do any other things in relation to the arbitration at a location other than the place of arbitration.”
CONCLUSION
The consensual nature of arbitration is extremely useful for parties who during agreement can mould the arbitration clause based on various requirements in consideration of various factors. As highlighted, the parties have the freedom to decide on law governing the arbitration agreement. But, the parties must be circumspect and care must be taken to select the seat of arbitration carefully. Each of the factors discussed above must be weighed carefully during negotiations before signing of the arbitration agreement. Then, the parties can truly utilize the convenience that arbitration as an alternate dispute resolution provides.
References
[1] http://www.ciarb.org/dispute-appointment-service/arbitration/what-is-arbitration, last accessed on 25th June 2017.
[2] Russell on Arbitration 2003, para 2-209
[3]https://singaporeinternationalarbitration.com/2012/06/26/the-laws-governing-an-arbitration/, last accessed on 27th June 2017.
[4] UNCITRAL Arbitration Rules, Art. 16(1)
[5] See the 2015 ICC Report on Decisions on Costs, para. 2
[6]https://www.lw.com/thoughtleadership/guide-to-international-arbitration-2014, last accessed on 26th June 2017.
[7]http://www.insidecounsel.com/2016/02/18/arbitration-101-choosing-the-right-forum-for-dispu, last accessed on 26th June 2017.
[8] Case No. 09/28533, dated 17th February 2011.
[9] [2002] 5 LRC 560.
