What is arbitration?
Arbitration is a contract-based form of binding dispute resolution. In other words, a party’s right to refer a dispute to arbitration depends on the existence of an agreement (the “arbitration agreement”) between them and the other parties to the dispute that the dispute may be referred to arbitration.
Commercial contracts will commonly include provision for how disputes relating to that contract are to be resolved. If the parties choose arbitration, the arbitration agreement will generally be part of the document recording the terms of the commercial transaction. Parties can also enter into an arbitration agreement after a dispute has arisen.
In entering into an arbitration agreement, the parties agree to refer their dispute to a neutral tribunal to decide their rights and obligations. Although sometimes described as a form of alternative dispute resolution, arbitration is not the same as mediation or conciliation. A mediator or conciliator can only recommend outcomes and the parties can choose whether or not to accept those recommendations. By contrast, an arbitration tribunal has the power to make decisions that bind the parties.
One of the attractions of arbitration is that it is typically easier to enforce an award in another country than it is to enforce a court judgment. That said, enforcement regimes vary and it is crucial to take into account the prospects of enforcement in deciding whether, and if so how, to arbitrate a dispute before spending too much time and money. This is especially the case if cash in the bank is one of the important factors in arbitrating.
The arbitration agreement
The arbitration agreement will determine key elements of the process. For example:
- Will the tribunal comprise one person or three?
- How will the arbitrators be selected?
- Where will the arbitration take place and (possibly different) where will the legal ‘seat’ or place of the arbitration be?
- Will the arbitration be conducted in accordance with the rules of a particular arbitration institution or will it be ‘ad hoc’?
All these factors can have a significant effect on the time and cost of the arbitration. So, if you are considering entering into an arbitration agreement, you should ensure that you take expert legal advice first.
(Examples of major international arbitration institutions include: the London Court of International Arbitration (LCIA), the International Chamber of Commerce (ICC), the Singapore International Arbitration Centre, the Hong Kong International Arbitration Centre, and the Stockholm Chamber of Commerce. There are many others, who have varying degrees of experience in administering international disputes.)
How is an arbitration started?
As arbitration is a contract-based dispute resolution mechanism, there may be steps set out in the contract which have to be followed before you can start arbitration. These can include holding meetings between senior people in the two organisations to attempt to resolve the dispute or mediation.
A claimant will typically start arbitration by sending a document known as a “request for arbitration” or a “notice to arbitrate” to its opponent.
If your arbitration is to be conducted in accordance with the rules of a particular arbitration institution, that institution’s rules will typically prescribe what should be in your notice to arbitrate. Usually, the notice includes at least a description of the issue in dispute. Also, if the arbitration agreement stipulates that a disputing party should nominate an arbitrator, the notice should include the identity of the individual the claimant wishes to select.
The other party (or parties) will then have the opportunity to respond briefly within a set period of time and, where appropriate, also select an arbitrator.
What happens next?
- The tribunal must be formally constituted – if there are to be three arbitrators in a two party dispute, each party will typically select one arbitrator. The nominees or the arbitral institution will select a third arbitrator to act as chair. Where there is to be one arbitrator and/or more than two parties, the agreement or the arbitral institution’s rules will usually set out the appropriate approach to selecting the tribunal.
- The issues for determination must be identified – these can be issues of fact, law or quantum. It is not unusual for one party to contest the tribunal’s jurisdiction to decide part or all of a particular issue.
- The process and timetable must be decided – these will be worked out between the parties and the tribunal. Both should be designed to fit the requirements of the particular dispute.
Conduct of the arbitration
The arbitration will then proceed in accordance with the procedure that has been adopted.
It is likely to include each party producing written submissions. Typically, these will be supported by written witness statements and reports of technical experts, where appropriate.
It often includes the parties providing documents to the other parties and the tribunal. These will include documents they rely upon and documents the other parties have requested them to produce. This is often a point of contention between the parties. It is important to take legal advice early on the probable extent of your obligations to ensure that you can (a) comply with them and (b) manage the process as efficiently as possible.
The arbitration hearing
Arbitrations usually involve one or more hearings before the tribunal, where the parties’ lawyers put forward arguments and question the other party’s witnesses and experts.
Hearings can last from half a day to many weeks or even months depending on the issues at stake.
After the hearing, the tribunal will produce its award. This will set out the decisions it has reached on the issues between the parties. Unless the award is challenged, it determines the rights and obligations of the parties.
Challenging/appealing the award
The grounds on which an award can be challenged or appealed vary depending on factors such as the terms of the arbitration agreement, the arbitral ‘seat’ and the institutional rules. A tribunal’s findings of fact can rarely be challenged. However, if the tribunal has not conducted itself properly, has answered questions it should not have answered or, in some cases, made an error of law, a party can go to court to ask for the award to be set aside or sent back to the tribunal to make its decision properly.
One of the main attractions of arbitration is that awards can typically be enforced in most countries worldwide without a rehearing of the issues and after following a relatively short process. The realities of enforcement vary depending on such factors as:
- The jurisdiction in which enforcement is likely to be sought
- The status of the party against whom enforcement is sought eg certain assets may be immune from execution if the award is against a State
- Whether it is possible to take steps to ensure the other side does not get rid of its assets to frustrate enforcement.
If cash in the bank is important, the prospects of enforcement should be considered at the outset of any dispute.