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Introduction
Arbitration*1 is unique as a method of dispute closure. It does not use the Courts or the methods of the legal system. Unlike other alternatives to the Court, it is final in disposing of the dispute*2.
Recognised and enforceable at law, it is nevertheless not a process at law, but a private arrangement between the disputing parties and their chosen arbitrator, who may be a friend, a peer in their own field of business, a lawyer or an expert in the field of the dispute.
It may be helpful to begin this chapter with a definition from the Shorter Oxford English Dictionary:
It is the second meaning which concerns us here. The keyword in the
definition is "agree".
The parties to an arbitration agree to refer their differences to someone of their own choice, whom they appoint as their arbitrator. In most countries, there is legislation which enables the decision of an arbitrator to be enforced more or less in the same way as a judgement of the Court, but that should not be allowed to obscure the fact that arbitration takes place only by agreement and, ultimately, becomes enforceable because of the promises exchanged in the agreement to arbitrate.
The legislation for England, Wales and Northern Ireland, the Arbitration Act 1996, provides for arbitration agreements in writing*3. That is not to say that oral arbitration agreements are in any way invalid. It is merely that the legislation applies only to written agreements. The award of an arbitrator whose appointment was under a purely oral agreement would be enforceable, but only if the agreement and the circumstances of the award were fully proved as a contract*4; the legislation simplifies that task for what it treats as written agreements.
The concept of Arbitration is perfectly simple. Two (or more) parties who are unable to agree upon a decision appoint another of their own choice to make their decision for them and agree to be bound by it. That is a simple contractual agreement. There is no fixed procedure; arbitrations range from a simple "look-sniff" quality decision made, perhaps in a moment, by an arbitrator who is a trader in beans, to a very formal process between buyers and sellers of different nationalities, conducted in a neutral country by an arbitral tribunal which may be composed of professionals of different expertise, commerce, technology or law, and themselves of different nationality.
The only absolute requirements are that, for a reference to arbitration to bind the parties, first there must be no doubt that they all have agreed to it*5, then there must be no doubt about the authority conferred on the arbitrator by the parties and finally, the reference must be conducted openly and fairly.
It is this last requirement, that a reference to arbitration must be conducted openly and fairly, that is the moral and practical justification for arbitration. It is also one reason why arbitration is not universally popular; it tends to treat all parties equally, rather than defer to their negotiating power, as do other ADR processes, and if properly conducted, does not allow the same scope for forensic manoeuvring and the penalties of high costs, as sometimes can be found in proceedings in the Courts.
The parties to an arbitration agreement pledge themselves to a fair determination of their disputes and that often provides comfort in commercial dealing, as well as being an earnest of an intention to deal fairly with one another.
The requirement of fair and open arbitration is sometimes described as "Natural Justice". "Natural Justice" is sometimes thought of as if it were a legal term of art, but it is not. It might more correctly be called "Intuitive Justice" and is customarily summarised as requiring the arbitrator to hear both sides of the dispute and forbidding any one to act as a judge in his or her own cause.
In practice, there is a further qualification. For complete openness, not only must the arbitrator hear both sides, each party must also have an opportunity of seeing what the other has said and of dealing with it. That means that correspondence and documents, seen by the arbitrator, have to be seen by both parties, while any oral hearing is conducted openly with both parties present*6. It is suggested that Natural Justice is no more and no less than commonsense*7.
Although Arbitration is a contractual and not a legal process (in the sense that it is not a process of the Courts or of a subordinate tribunal of the State), like many contractual matters it is subject to a measure of legal regulation. In England and Wales (and in Northern Ireland), that regulation is now set out in the Arbitration Act 1996. In Scotland, where there has been rather less involvement of the Courts in arbitration*8, the relevant statutes are the Arbitration Act 1894 , the Administration of Justice (Scotland) Act 1972 and the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 - Section 66 and part of Schedule 7*9. The latter makes available in Scotland an internationally developed system of arbitration law, the UNCITRAL*10 Model Law.
Arbitration is the supreme method, perhaps the only effective method for determining international disputes, that is to say disputes between nationals of different countries. That is because, although foreign judgements to be effective outside the country in which they are made, have either to attract enforcement as a matter of policy and the comity of nations (difficult to argue in a private dispute) or to be enforceable under some reciprocal judgement treaty; not many nations have effective judgement treaties.
Foreign arbitration awards, however, are the subject of the 1958 New York Convention on the Enforcement of Foreign Arbitral Awards , which provides for arbitration agreements to prevail over actions in the Court and for arbitral awards to be enforced in over one hundred countries throughout the world, including the major trading nations.
The arbitrator or arbitrators have to be paid by the parties for performing their service; the Courts, at least at the present time, are not fully paid for. The commercial advantage of arbitration lies first in the use that can be made of an arbitrator or arbitrators of appropriate skill and understanding, to do away with a great deal of unnecessary time and expense, and second in the fact that there is no need for a party to engage specialist representatives to argue the issues before an arbitrator. (Although there may be references in which the skills of, for example, counsel are especially valuable. Even then, it is not necessary to adopt the full procedure one would use in a Court.)
There is a danger, however, that lack of care in the early stages of a reference to arbitration may result in the potential savings being lost. Arbitrators have the duty of controlling the costs of their procedures, but some cooperation from at least one of the parties may be necessary for the best results to be obtained.
The Practice of Arbitration
Arbitration may be provided for in one of two ways. By far the most common basis for arbitration is a clause, within a contract between two parties, which provides that differences between them will be referred to a sole arbitrator or to an arbitral tribunal of more than one person, generally three. If a decision is sought, there are obvious advantages in having an odd number in the tribunal. It is perfectly practical, however, for any two persons, or companies, or any other kind of group, in conflict, whether or not they are in a contractual relationship, to agree to have their differences determined by arbitration and, once the agreement is made, they will be bound by it. It needs to be an agreement in writing, but we have seen that writing is defined widely, at least in the English legislation.
Commonly, arbitration clauses and agreements provide for the parties to agree upon an arbitrator. If agreement cannot be achieved, then it is usual for an appointing body to be designated. In many UK construction contracts (and manufacturing contracts), that is likely to be one of the major technical institutions*11. In overseas contracts, an administering authority, such as the ICC Court of Arbitration in Paris, or the London Court of International Arbitration may be named. "Court" is perhaps an unfortunate misnomer. Some of these bodies may have some state connections and some not. The London Court of International Arbitration is in fact a private company, with contacts in a world-wide arbitral community.
The precise method whereby one party, usually the party who has made a claim that has not been met, invokes the arbitration provision of a contract, is likely to be set out in the contract itself (or in a set of arbitration rules, if rules have been adopted in the contract). Where there is no specific arrangement, the Claimant may write to the other party, the Respondent, simply stating what is claimed, giving notice that, as there has been no satisfactory answer, a dispute exists and requiring the Respondent to go to arbitration. The Claimant may suggest the name of one or more arbitrators, if a sole arbitrator is to be chosen. The Claimant may nominate his arbitrator if a three-arbitrator tribunal is required. Ideally, the Claimant should give consideration to inviting the Respondent to discuss a tribunal that will suit both of them. Three arbitrators of different skills may well be the best team to approach some complex problems. Unfortunately, however, relationships are sometimes allowed to sour, so that such cooperation becomes impracticable.
Even if there is no contract, as where there is a dispute about a tortious issue, or where a contract has no arbitration agreement, the Claimant still may suggest arbitration by giving notice of the dispute and offering to go to arbitration. If the offer is accepted, arbitration may proceed on the basis of a specific and new agreement. If it is not, then an action may have to be commenced in the Court, but there may be a possibility of suggesting arbitration or some other method of solution during the early stages.
Where there is an appointing authority named in the contract, then the notice may advise the Respondent of the intention of the Claimant to go to that appointing authority. An application for the appointment of an arbitrator usually is made without any specific suggestion on the part of the Claimant, but there is no reason, in principle, why a Claimant should not put forward the name of a putative arbitrator, although the choice of whether or not to appoint that person remains in the discretion of the appointer. In such an instance, the appointer, having ascertained that the nominee is prepared to act, would advise the Respondent of an intention to make the appointment, so that the Respondent would have an opportunity to object or suggest an alternative.
It is not uncommon for so-called questions of jurisdiction to arise at this stage. In this context, jurisdiction means no more than the entitlement of an arbitrator to act. There may be a question about the contract, or about the arbitration provision itself, that could lead to a conclusion, either that there was no arbitration agreement or that there are preconditions that have not been satisfied.
In England*12, the Arbitration Act 1996 provides for an arbitrator to deal with questions of his own jurisdiction, but an arbitrator's powers are somewhat more clear that those of an appointer. Consequently, most appointers do no more than satisfy themselves that there is some prima facie basis for making the appointment, leaving the arbitrator so appointed to make the necessary investigation into his own jurisdiction. That is a necessary course to take, as any other approach might stifle the process at birth, defeating the likely intentions, or what must be presumed to have been the original intentions, of the parties themselves.
To proceed, the arbitrator needs to be satisfied that, at least on the face of it, there is an arbitration agreement of some kind, there are differences between the parties and he has been appointed, either in accordance with the arrangements set out in the agreement or else, if there are no clear arrangements, in the manner set out in the Arbitration Act 1996*13.
Often nothing complicated is required; all that is needed is an agreement to invite the arbitrator to act and a letter by one or other party, on behalf of both, giving the invitation. That in itself serves the purpose both of an arbitration agreement and, if accepted, the arbitrator's appointment. The letter may say no more than "Dear Mr Jones, There are differences between ourselves and Messrs. Company Ltd. We have agreed that you should be asked to accept appointment as Arbitrator to determine those differences and would be grateful if you would indicate your terms for doing so."
Once the terms are agreed, the reference is under way. Once appointed, or perhaps as a condition of his acceptance, the arbitrator will decide upon a reasonably practical procedure for the reference. The parties are at liberty to make their own agreement about this, but even so, they would be well advised to consider what the arbitrator has to say. He or she is likely to be an expert in the subject matter of the dispute, as well as a specialist in the resolution of disputes. It is probable, therefore, that the arbitrator may be able to guide the parties along the most efficient practicable route to a fair result.
If the parties, or their professional advisers, try to compel the arbitrator to adopt some unsuitable course, they may run the risk of losing the services of that arbitrator*14. They certainly will run the risk of a penalty as to costs. *15
Once the Arbitrator has been appointed, it will be necessary first for him to know what the dispute is about and then to be given the information he needs to enable him to resolve it. That may be very simply done. It may require no more than a single letter from each party, setting out that party's case, following which the arbitrator can decide and write his award.
More commonly, each party may prepare a more or less formal statement setting out the facts that party asserts together with the relief sought and the reasons, which may be factual or legal, why the party considers that relief to be justified. Relief may be an award that either sums found due or damages be paid, that an extension of time be given (that often also involves a payment); it may also be in the form of a declaration or, in appropriate cases, an award of specific performance*16 (the handing over of disputed goods, for example). In some major cases, it may be appropriate for the parties to submit full statements of case, similar to those used in Court proceedings, but it should be emphasised that no special form is required and that the method of the Court often will not be well suited to the task of the Arbitrator.
Several systems of Rules provide for the exchange of statements in terms generally as follows: "Within 21 days, the Claimant shall send to the Arbitrator and to the other parties a statement of Points of Claim setting out in sufficient detail the facts and contentions of law on which he relies and the relief that he claims." That may be followed by a statement of Points of Defence and any Counterclaim and a further round of Defence to Counterclaim and reply.
The time allowed may vary, some international rules allow longer periods some rules shorter periods. It may depend upon the system of Rules it may depend upon the nature of the matters in issue. What is necessary is that a fair opportunity be given. Often the submitted statements of case will be accompanied by copies of the documents upon which a party relies (and particularly those that are mentioned in the statements). They may also be accompanied by witness statements of principal witnesses. Sometimes, the original application for arbitration may be in the form of a statement of case, with all its attachments.
There is now no right of discovery of documents in English arbitration*17 but the arbitrator has power*18 to ask for documents he needs or to which a party has drawn attention.
It should be noted that the arbitrator in an English reference has power to control the recoverable costs of a reference*19. He or she will take into account the most appropriate method of conducting the reference in making any decision about a limit to the recoverable costs.
Obviously, parties should be particularly careful to make sure that it is their own point of view, and not merely that of any professional team they may have employed, which the arbitrator has in mind when considering any possible limits. Otherwise, there would be a possibility that the professional teams for each side, both anxious to do as complete a job as possible, might agree among themselves upon amounts which would not be appropriate.
It is sometimes though that arbitration procedure should imitate that of the Courts. That is not right and there is no legal or logical justification for such a view. Indeed, there is a clear justification for the view that arbitration procedure should not mimic that of the Courts.
The distinguished author Mr Stewart Boyd QC*20, in one of the Bernstein Lectures of 1989, suggested that, if a member of the public was asked if an arbitrator was entitled to disregard strict rules of law if satisfied hat they would lead to a wholly unjust result, his answer would be that this was the whole purpose of going to arbitration.
Commenting on this proposition, Mr Fali Nariman, a distinguished senior lawyer and President of the World's leading arbitral association, the International Council on Commercial Arbitration (ICCA), observed*21 "The general feeling is that, in arbitration, devotion to law is less admired by the public that a willingness to strain it."
That must be right and, although it applies also to the arbitrator's substantive decisions, it applies with particular force to decisions about how to proceed.
Now, in a brief overview, would not be the time to discuss the entire range of options open to the arbitrators and the parties in a reference to arbitration, even if to define such a range were possible. It is not possible to set limits to the possibilities. Provided the procedure is fair and open, and compliant with the mandatory rules of the place where the arbitration is held*22, there are no limits to what may be done.
At one extreme, the procedure may not merely approximate to the proceedings of a court but may go beyond that, particularly where both parties are anxious to canvass aspects which ordinarily would be thought of peripheral relevance in the Court. Such references arise where the parties are peculiarly embittered and wish to thrash out, before a sympathetic third party, every detail of what has gone between them. It is not the most efficient way of resolving issues, but the parties may have decided that the expense of a complete catharsis is justified.
Arbitration can provide that solution if required to do so, in a way that the Court may not, but most arbitrators would wish to be quite satisfied that such a long-drawn out process is actually what the parties require. The duty of the arbitrator is to seek an efficient answer to the parties' problems. Unfortunately, these "theatrical" arbitrations are what sometimes attract attention and criticism, particularly as they are especially likely to go on to appeal in Court if the parties' bitterness is not fully expunged.
More conventionally, an arbitral hearing, following the exchange of statements, is likely to involve evidence from a small number of witnesses, much of which will be taken from the written material, together with some argument on behalf of the parties, following which the arbitrator will make his or her award.
The hearing will be set down for an agreed date, if possible and, because the arbitrator's task is to deal with the one reference (unlike that of the Court which may have a more or less full daily case list), that date will remain fixed and the reference heard as arranged, other than in wholly exceptional circumstances.
At the other extreme, an arbitration concerning the quality of some product or some construction may involve no more than a letter from each party to the arbitrator (copied, of course to the other party) and a brief visit to the site or a brief examination of a sample, followed by a decision.
Among the other notable choices are two alternatives provided in Civil Engineering practice*23, although not by any means limited to that field.
One is a procedure using experts for each side. They need not be independent experts; provided they adopt a professional approach, they may be appropriately expert members of the staff of one or both parties. In the procedure*24 each party provides the arbitrator with a file or dossier, including a signed report from an expert upon whom that party relies. The arbitrator may then have a look at the subject of the arbitration, perhaps a machine or a building, and arrange for a meeting at which he or she will discuss the reports with the two experts together. The arbitrator's decision, based on that discussion, may deal with the whole reference; if the expert procedure has been restricted to particular issues, then the issues will be decided so that the rest of the reference may continue in the light of the answers found in the expert procedure. It is a process well suited to deal with technical issues and matters of opinion.
Another method encouraged by the Institution of Civil Engineers is the so-called "Short Procedure"*25. There is nothing about this simple procedure which limits it to engineering, or indeed any field. It is eminently well suited to most commercial disputes and is perhaps the most archetypical form of commercial arbitration as understood by the commercial world. Again, the parties deliver a file or dossier to the arbitrator, saying what they seek, and why they consider themselves entitled to the decision they seek. Those dossiers are complete, they may be the only submissions the parties need to make. With them are included any documents or statements to which the parties wish to draw the arbitrator's attention. Within a month the arbitrator fixes a day on which the parties may attend to make oral submissions or to answer the arbitrator's questions. He or she tells the parties whom they should bring*26. Within a month after that, the arbitrator makes his award.
In fact, of course, the arbitrator and the parties may agree to adopt shorter (or longer) intervals as the case may require. There is no reason why an arbitrator should not read brief dossiers one day and hear and decide the issues the next (or that afternoon). Similar procedures are available, and have been customary for years, under many other systems. One noted maritime arbitrator is recalled as having made his enquiry on-board ship and issued his decision orally before the turn of the tide, to allow the ship to sail.
A variant on the Expert procedure, mentioned above, is for the arbitrator to order and attend a test or trial of machinery, in the presence of representatives, perhaps experts, for each side. If the arbitrator oversees the trial and himself endorses the readings taken, for example, then that may eliminate a great deal of oral testimony and argument. If the test or trial is a part of a major reference in which lawyers and others are involved, it may have the merit of enabling them to see the issues more clearly.
The ICE*27 Procedures, mentioned above, incorporate their own provisions for costs. Those provisions may not be appropriate in another context, where the principle behind the Procedure is to be adopted but there has been no prior agreement to the ICE Procedure.
An important distinction between a reference to arbitration and an action in court is that an arbitrator, particularly a technical expert arbitrator, has a duty to use his own skill and experience. That is why an expert has been selected. This aspect of arbitration has been much misunderstood and misinterpreted over the years.
Put simply, there are two commonsense restraints on the use of an arbitrator's knowledge and experience in a reference.
Nevertheless, his task is to enquire, where enquiry is necessary*28, at least within those constraints.
After the hearing or hearings, which may be as formal or informal as the parties and the arbitrator agree, the arbitrator will prepare the Award. This is a document which sets out the final decision of the arbitral tribunal, usually saying what payment is due, as a matter of Contract or as restitution, from one party to the other. It will also make directions as to who shall pay the costs of the arbitration; that usually means that the loser pays the common costs of the arbitrator and the venue, together with the winner's costs (or such proportion of them as can be shown to have been reasonable and reasonably incurred). In that way, the party who has been in the right is fully recompensed, although it is in the interests of all concerned to ensure that money is not spent unnecessarily.
Sometimes the decision on costs may be reserved for argument after the substantive decision is made. If the costs cannot be agreed (they are usually agreed between the parties' solicitors or other representatives) then the arbitrator may be asked to determine the correct amount. An award may provide for interest (in jurisdictions where that is permissible).
Generally speaking an Award is enforceable as if it were a judgement of the Court*29. There is a special facility for the enforcement of foreign awards in countries that have subscribed to the New York Convention of 1958 (See the text of the NYC on this site) for the English provision, see the footnote*30. Nevertheless, the successful party may well prefer not to enforce the Award directly but to negotiate further with the other party, to produce some more constructive or creative solution, with the award itself available in the last resort.
The award is final*31, and there are very limited grounds upon which it may be appealed*32 or challenged*33. In some jurisdictions it cannot be appealed at all and the grounds for refusing execution of a foreign award under the New York Convention of 1958 are severely restricted *34.
It can be seen that arbitration, while flexible and capable of being conducted in a manner suited to the parties and the subject matter of their dispute, is nevertheless sufficiently precise and final to enable the parties to achieve a final and binding award, which Courts will recognise, subject to reasonable safe guards.
Once an award is made, the parties then have an opportunity, either to enforce its terms or to use it as the basis of an appropriate but creative settlement.
This chapter has been an overview. The philosophy of commercial arbitration is in continual development and the reader is encourage to look to specialist works if further reading is required.
Companies and persons who agree to arbitration demonstrate a willingness to have their differences determined by a commonsense method, using experts or others who understand their problems and will find a just and fair solution. The presence of an arbitration provision in a contract affirms the parties intentions to deal ethically and fairly with one another.
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