Arbitration is effective a step up in Alternative Dispute Resolution (ADR) from the previous topic, Mediation.
If we were to define Arbitration, it would be as follows:
Arbitration is a technique for the resolution of disputes outside the court systems whereby the parties refer a dispute to be determined by one or more persons (the “arbitrators”, “arbiters” or “arbitral tribunal”). The parties agree to be bound by the arbitration decision (the “award”) whereby a third party reviews the evidence in the case and imposes a decision that is legally binding on both sides and enforceable in the courts.
Much like Mediation, Arbitration can be voluntary or mandatory, although for it to be mandatory this has to be by statute or where in relation to a contract, where the contract has been freely entered into by the parties. In effect the parties are agreeing in advance of the contracted works to refer all existing or future disputes to arbitration, without necessarily knowing, specifically, what disputes will ever occur, if any.
An ambiguous consequence of Arbitration is where the parties agree to “non-binding” Arbitration.
Non-binding Arbitration is similar to Mediation in that a decision cannot be imposed on the parties. The key distinction is that where a mediator will try to help the parties find a middle ground on which to compromise in a binding Arbitration, in a non-binding Arbitration. The arbitrator remains removed from the settlement process and only gives a determination of liability and, if appropriate, an indication of the quantum of damages payable. Therefore by our definition non-binding Arbitration is technically not Arbitration.
What are advantages and disadvantages of Arbitration?
• In litigation the parties do not choose the judge, whereas Arbitration allows the parties to choose their own tribunal. This is especially useful when the subject matter of the dispute is technical as the arbitrators with an appropriate degree of expertise can be chosen. For example a quantity surveyor in the case of a construction dispute
• Arbitration can be cheaper and more flexible for a business dispute and will usually be significantly quicker than litigation, which can take months or years to resolve
• Arbitral proceedings and the arbitral award are usually confidential and therefore remain secret
• The language of an Arbitration may be chosen whereas in litigation the official language of the country of the relevant court will apply, which can have cost implications of their own
• As a result of the New York Convention of 1958, Arbitration awards are normally easier to enforce in other nations than court verdicts. This will be reviwed in greater detail next time
• The duration of a dispute can be limited as most legal systems offer extremely limited opportunities to appeal an arbitral award
• Arbitration can be subject to pressures from large law practices representing the stronger and wealthier party
• Arbitration agreements can be contained in ancillary agreements, or in small print in other agreements, and particularly consumers and employees may not know in advance that they have agreed to mandatory binding pre-dispute arbitration by purchasing a product or taking up an employment offer
• Where the arbitration is mandatory and binding, the parties have waived their rights to the courts to have a judge or jury decide the case
• In some arbitration agreements, the parties are required to pay for the arbitrators. This adds a layer of legal cost which can be prohibitive, particularly in small consumer disputes
• Some arbitration agreements and systems do not allow the recovery of legal fees, making it extremely difficult for consumers or employees to obtain legal representation, although most arbitration codes and agreements provide for the same relief that could be granted in court
• The very limited avenues for appeal mean erroneous decision cannot be easily overturned
• Whilst Arbitration is usually a relatively quick process, when there are multiple arbitrators on the panel, aligning their schedules for hearing dates in long cases can lead to delays
• In some legal systems, arbitral awards have fewer enforcement options than judgments
• Applicable law, as stated in the contract, is not necessarily binding on the arbitrators, although they cannot rule in contravention of the law
• Discovery may be more limited in arbitration or non-existent
• Court judgments are directly enforceable, whilst Arbitration awards themselves are not directly enforceable and requires a party to enforce an Arbitration award via judicial remedies or an action to “confirm” the award
• Whilst grounds for contesting an award in court are severely limited, efforts to confirm the award can be fiercely contested resulting in significant legal fees that can negate the initial economic incentive to arbitrate the dispute to begin with
There are generally two types of Arbitration agreements, these being:
• Agreement that if a dispute arises, this will be resolved by Arbitration. These will generally be in formalised contracts with a clause that contains the agreement in relation to Arbitration
• Agreement after a dispute has arisen in the absence of a formalised Arbitration clause, agreeing that the dispute should be resolved by Arbitration. This is also known as a Submission Agreement
An Arbitration clause in a contract is the more prevalent type of Arbitration agreement and can hold legal significance. By way of an example, in some British Commonwealth countries, but not including England and Wales, it is possible to provide that each party should bear their own costs in a conventional Arbitration clause, but not in a Submission Agreement.
The law, in keeping with the informality of Arbitration is keen to uphold the validity of Arbitration clauses even where they lack the formal language associated with legal contracts. There have been instances where courts have upheld clauses which specify resolution of disputes outside of the specific requirements of the legal system.
An agreement to refer a dispute to Arbitration usually has a special status in the view of the legal system. By way of an example, a common defence in a disputed contract is to plead that the contract is void and by consequence any claim based upon the contract fails. This would have the implication that, if successfully claimed, that every clause within the contract would be void.
In most countries, the courts have accepted:
I. A contract can only be declared void by a court or other tribunal; and
II. If the contract (valid or otherwise) contains an Arbitration clause, then the proper forum to determine whether the contract is void or not, is the arbitration tribunal.
It could be argued either position is potentially unfair particularly if a person is made to sign the contract under duress and the contract contains an Arbitration clause which favours the other party, then the dispute may still referred to that Arbitration tribunal
In the alternative, a court may be persuaded that the Arbitration agreement is void having been signed under duress.
However the courts will be reluctant to interfere with the general rule which for commercial expediency allows any other solution, as this would be self-defeating. In effect a party would first have to go to court to decide whether they had to participate in Arbitration.
Arbitration is regulated in different legal jurisdictions through a variety of laws. The main body of law applicable to Arbitration is normally contained either in the national Private International Law Act (this applies to Switzerland for example or in a separate law on Arbitration (this applies in English law). There may also be a number of national procedural laws that may contain Arbitration provisions.
Next time we will look at the New York Convention of 1958.