Arbitration essay

Arbitration

Introduction

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            Arbitration as a means of alternative dispute resolution is characterized by four distinct  legal elements.  First the decision to arbitrate disputes arises out of a contractual arrangement whereby parties agree to submit any and all disputes to arbitration, foregoing formal litigation.[1]   Secondly, the arbitration process is judicial in nature in that it permits both parties to be heard and the arbitrator resolves the dispute by issuing a decision which is similar to that of a judgment in that it binds the parties. In other words, the concept of natural justice is incorporated into the arbitration process.[2]  Thirdly, the arbitration process is structured so that it is a hybrid of both contractual and judicial concepts. Finally, although the arbitration process is adversarial in nature it is a private function and in this regard exists outside of its initial contract and outside of the judiciary.

            Each of these legal elements are best understood by reference to the various types of arbitration.  This paper will explore some of the main types of arbitration with a view to identifying and explaining the legal nature of arbitration.  Optional and mandatory arbitration for instance, demonstrates how agreements to arbitrate bind disputants by virtue of contract to submit to arbitration.  This paper will compare and contrast optional and mandatory arbitration, ad hoc and institutional arbitration as well as international and domestic arbitration.  By comparing and contrasting these specific types of arbitration this paper will demonstrate the legal basis of arbitration in terms of its contractual, judicial and independent nature.

Optional Arbitration vs Mandatory/Compulsory Arbitration

            Mandatory arbitration is the term used to refer to the inclusion of an arbitration clause in a contract with essentially a “take it or leave it” proviso.[3] Omri Ben-Shahar explains that it is common for consumer and employment contracts to contain a clause in which arbitration is a “mandatory forum to resolve disputes” arising under the contract.[4]  This is quite different from traditional or optional arbitration where the parties are free to agree to or refuse to agree to submit disputes between them to arbitration.  The underlying concept is that the option to resort to formal litigation should never to forcibly removed.

In fact, some commentators have regarded mandatory arbitration as a means by which “large areas of US life and commerce have silently been insulated from the lawsuit culture.”[5] Certainly, in a litigious society such as the US, mandatory arbitration can be a legitimate source of risk management for companies who face the risk of multiple lawsuits at a great inconvenience in time and expense.  However, the mere fact that a party is face with a “take it or leave it” option, defeats the contractual nature of the arbitration process.  After all the arbitrator’s authority comes from the contract which gives rise to arbitration in the first place.[6]  If the contract is flawed by the imposition of a “take it or leave it” influence, the judicial value of mandatory arbitration is flawed.

The irony in all of this is that arbitration itself is a reflection of the concept of freedom of contract.  This is certainly manifested by optional arbitration in which the perception is that parties are free to agree on the legitimate terms of their contract.  If they agree to arbitration they will be bound to submit to it.  Mandatory arbitration derives its authority and legitimacy from this concept of freedom of contract.  However, if a party is forced into a position where he cannot enter into the contract if he does not agree to submit to arbitration freedom of contract is lost.  Employment contracts, credit card bills, nursing home contracts, cell phone contracts and car dealerships typically contain mandatory arbitration clauses.[7]

The contractual legitimacy of arbitration is based solely on the idea that it is entirely optional.  Arbitration has validity and is only deemed to be effective when both parties voluntarily agree to it.[8]  Recognizing the unconscionability of mandatory arbitration clauses, several US states have introduced bills and legislation calculated to constrain corporate attempts at forcing consumers to waive access to the courts.  These measures insist that arbitration clauses be brought to consumer’s attention and in some cases the party including the arbitration clause must do so separate and apart from the main contract and each party must be permitted to be heard on the inclusion of the clause in the contract.[9]

Arbitration is therefore viewed as an optional tool.  By virtue of optional arbitration the parties are free to agree to third party intervention outside of the judicial process.  The option to litigate is an important right and it should only be relinquished voluntarily.  Optional arbitration recognizes this concept and abides by it whereas, mandatory arbitration usurps the right to litigate, forcibly substituting arbitration.  The difficulty with this aspect of mandatory arbitration is that the parties who are reservedly giving up the right to litigation is binding themselves a contract which will bind them further to a decision that for all intents and purposes have the force of law.

The binding nature of the arbitral award reaches across international borders.  Treaties such as UNCITRAL Model Law on International Commercial Arbitration not only favours arbitration but also insists on international harmony of arbitration standards.[10]  However, these kinds of international treaties and conventions presuppose that the agreement to arbitrate is optional.  The concepts of adherence and enforcement across international borders takes the position that the disputants who have essentially agreed to arbitration did so freely and voluntarily and there are no mechanisms in place for challenging the involuntary of the agreement to arbitrate.

Ad hoc arbitration vs institutional arbitration

            Ad hoc arbitration arises when parties who have previously agreed to arbitration look outside “established administrative bodies” to arbitrate over their dispute.[11]  This method of arbitration is typically chosen as a means of reducing time and saving costs.[12]  Administrative bodies generally publish fees for administrative as well as arbitration rules.[13]  It also stands to reason that with a sole arbitrator or an ad hoc panel has fewer administrative duties and protocol than an institutional arbitration process, thereby reducing time and costs.[14]  The decision to submit to ad hoc arbitration is up to the disputants and falls in line with the contractual legal element of arbitration.   Just as the parties bind themselves to arbitration as a means of alternative dispute resolution they are likewise free to bind themselves to ad hoc arbitration.

            Similarly, disputants may bind themselves to institutional arbitration.  Institutional arbitration are bodies such as the Court of Arbitration of the International Chamber of Commerce, the American Arbitration Association or the London Court of International Arbitration.[15]  These institutional arbitration bodies provide their own arbitrators together with their own procedural rules.[16]  Once the disputants elect institutional arbitration and agree on a particular institutional body they are not only bound by the resulting decision, they are bound by the fees.

            Two of the most important distinctions between ad hoc arbitration and institutional arbitration is that ad hoc arbitration is typically cheaper and comes to a conclusion much faster than institutional arbitration.  The difference is in the administrative fees and procedures.  For example the place for arbitration and the parties who render assistance to the arbitration panel will incur fees for the disputants.  Ad hoc arbitrators will usually perform their own administrative functions and will usually cost substantially less than institutional arbitration.[17] Institutional arbitration is laboured by bureaucracy and this can lead to delays.  For instance, the International Chamber of Commerce requires that all arbitral decisions go through the court in Paris, purely as a matter of formality.[18]

            While ad hoc arbitration is flexible with respect to procedural rules, this can work to its disadvantage.[19]Institutional arbitration is mired in uniform procedural rules that follow each case providing the consistency that characterises formal litigation.  More importantly, experience provides institutions with the wherewithal to anticipate issues that will arise in the course of arbitration. [20] In ad hoc arbitrations the parties are in full control of the procedural rules that will govern their arbitration and likely do not have the experience that institutional arbitrators have.[21]

So while time and cost may be beneficial to the disputant adhering to ad hoc arbitration a very important legal element is compromised.  That legal element is the judicial nature of the arbitration.  Although meant to be informal, too much informality can leave disputants feeling unsatisfied with the process in the end.  They can wind up with the impression that their cases were determined on the basis of some chaotic judicial process.  It is therefore more advantageous for disputants to subscribe to institutional arbitration so that in the end, whether they win or lose they come away with the feeling that they had fair trial in an organized forum.  More importantly,  disputants will walk away in the knowledge that the process treats all parties before them in the same manner.

International vs National Arbitration

            Arbitration is usually divided into two distinct categories; international and national arbitration.[22]  In Australia for example, arbitration involving disputes of a purely domestic nature will be governed by Australian Commercial Arbitration Act 1974.[23] On the other hand, arbitration involving international elements are governed by the UNCITRAL Model Law on International Commercial Arbitration which was incorporated into Schedule 2 of the Australian International Arbitration Act 1974.[24]  Be that as it may, the contractual legal nature of the concept of arbitration is adhered to the Australian International Arbitration Act which essentially allows the parties to choose not to subscribe to the UNCITRAL Model Law.  If the parties agree that the Model Law will not govern their arbitration then the Commercial Arbitration Act 1974 will apply.[25]  Canada has an arbitration legal framework that closely mirrors Australia’s.[26]

            International for the purpose of encapsulating international arbitration is defined by Article 1(3) and (4) of the UNCITRAL Model Law on International Commercial Arbitration.  By virtue of Article 1(3) and (4) international arbitration arises when the parties who have agreed to arbitration have businesses in “different states or” if the place where the parties have agreed to arbitrate is outside “the state in which the parties have their place of business,” or the performance of the main contract is outside a state where the parties’ business is located,  or if the parties agree that the contract has international elements.[27] Moreover, if a party has no “place of business” his “habitual residence” will determine his national status and if he has several places business, the place of business with the “closest relationship to the arbitration agreement” will determine his national status.[28]

            International arbitration provides a mechanism by which arbitral awards can be enforced across boarders.  For example, if the parties to arbitration and the arbitration agreement invokes the international elements or the countries where the parties are resident are parties to the an international arbitration treaty, any resulting arbitral award can be enforced.  The North Atlantic Free Trade Agreement, UNCITRAL’s Model Law and the New York Convention are among international treaties that make provision for the enforcement of international arbitral awards in any of the contracting states.[29]

The agreement to arbitrate by virtue of international arbitration is very much under the control of the parties to arbitration.  This entitlement goes directly to the element of self-power under the mandate of arbitration and its contractual legal nature.  It enables the parties to invoke a course of action that essentially takes the form of reciprocal enforcement of foreign judgments issued by a foreign court and submitted to another country for enforcement.

There is no indication however, that there is uniformity of laws among contracting states for the procedure for recognition and enforcement of foreign arbitral awards.  There is a lack of empirical evidence in this respect so it is impossible to state with any degree of certainty that a mere provision in treaties requiring cooperation among member states with respect to enforcement of foreign arbitral awards is effective.  In Italy for instance arbitral awards are required to be registered with the courts in order to have them capable of enforcement.[30]

Although international treaties promise uniformity, it appears that domestic courts can be required to enforce an arbitral award rendered by virtue of international arbitration making it no less effective than domestic arbitration.  Even so, arbitral awards are binding on the parties in much the same manner as the agreement to arbitrate is.  This is so, whether the arbitration is national or international.  In any case both foreign and domestic judgments require intervention by the courts for enforcements so that arbitral awards are no less effective than a formal judgment issued by a court.

Conclusion

Arbitration is founded on the authority of the parties who agree to submit to arbitration.  To this end the arbitrator’s authority comes from contract[31] and is no less binding on the parties than the judge’s authority which comes from statute.  The difference is that the parties may choose the arbitrator and the rules of procedure that will ultimately permit them to make their case.  In litigation they are bound by the procedure of the court and may not choose the judge who will preside over the dispute.  Essentially, these differences are found in the distinction between the contractual nature of arbitration and the statutory mandate of litigation.

Despite these differences the substantive nature of arbitration and litigation are both judicially grounded.  Arbitration like formal litigation permits the parties to present their respective cases and the presiding judge as well as the arbitrator is required to judge the case fairly and  impartially and render a decision.  In both cases, whether judicially or contractually bound the parties are likewise bound to follow the decisions rendered by both.  The only judicial differences between arbitration and litigation is that litigation is required to be heard in public except in very limited circumstances while arbitration is a closed matter not open to public scrutiny.   Even so, both follow the inherent principles of justice in that the process is required to be fair and impartial to both sides.

Bibliography

American Judicature Society. “Editorial: A Closer Look at Mandatory Arbitration for Consumers.” [2008]  91(5)  Judicature 219.

Arkin, Harry. “International Ad Hoc Arbitration: A Practival Alternative.” [1987] 15 International Business Law, 5.

Ben-Shahar, Omri. “How Bad are Mandatory Arbitration Terms?” [2008] 4(4) University of Michigan Law Reform, 777.

Bernini, Giorgio.  “Domestic and International Arbitration in Itlay after the Legislative Reform.” [1985] 5(3) Public Law Review, 543.

Blake, Cassell and Grayon, LLP. “Litigation and Dispute Resolution in Canada.”

Burtka, Allison, Torres. “Mandatory Arbitration Report Reveals Skewed System.” [2007] Trial, 74.

Dodge, William. “National Courts and International Arbitration: Exhaustion of Remedies and Res Judicata Under Chapter Eleven of NAFTA.”  [2000] 23357 Hastings International and Comparative Law Review, 358.

Khurana, S.I. (Ed) “Alternative Dispute Resolution Mechanisms in the Indian Context.” (2007) XL(3) Indian Council of Arbitration Journal 1.

Nicolau, Geroge. “Whatever Happened to Arbitral Finalty? Is it Their Fault or Ours?” [1987] Labor Law Journal, 259.

Pechota, Vratislav. “The Future of the Law Governing the International Arbitral Process: Unification and Beyond.” [1992] 3 The American Review: Essays in Honor of Hans Smit, 17.

Pryles, Michael. “Institutional International Arbitrations.” [1991] The Arbitrator, 127.

Pryles, Michael. “The Case For International Arbitration.” [2003] AMPLA Yearbook, 1.

State Report. “States Mover to Limit Mandatory Arbitration.” [2008] Trial, 10.

UNCITRAL Model Law on International Commercial Arbitration, Article 1(3) and (4) Cited in Pryles, Michael. “The Case For International Arbitration.” [2003] AMPLA Yearbook, 2-3.

[1] Khurana, S.I. (Ed) “Alternative Dispute Resolution Mechanisms in the Indian Context.” (2007) XL(3) Indian Council of Arbitration Journal, 3.
[2] Ibid, 8.
[3] American Judicature Society. “Editorial: A Closer Look at Mandatory Arbitration for Consumers.” [2008]  91(5)  Judicature, 220.
[4] Ben-Shahar, Omri. “How Bad are Mandatory Arbitration Terms?” [2008] 4(4) University of Michigan Law Reform, 777.
[5] Ibid, 778.
[6] Khurana, S.I. (Ed) “Alternative Dispute Resolution Mechanisms in the Indian Context.” (2007) XL(3) Indian Council of Arbitration Journal, 11.
[7] Burtka, Allison, Torres. “Mandatory Arbitration Report Reveals Skewed System.” [2007] Trial, 74.
[8] State Report. “States Mover to Limit Mandatory Arbitration.” [2008] Trial, 10.
[9] Ibid, 10-11.
[10] Pechota, Vratislav. “The Future of the Law Governing the International Arbitral Process: Unification and Beyond.” [1992] 3 The American Review: Essays in Honor of Hans Smit, 19-20.
[11] Arkin, Harry. “International Ad Hoc Arbitration: A Practival Alternative.” [1987] 15 International Business Law, 5.
[12] Ibid, 5.
[13] Ibid, 5.
[14] Ibid, 5.
[15] Arkin, Harry. “International Ad Hoc Arbitration: A Practival Alternative.” [1987] 15 International Business Law, 5.
[16] Ibid, 5.
[17] Ibid, 5.
[18] Ibid, 6.
[19] Ibid, 6.
[20] Pryles, Michael. “Institutional International Arbitrations.” [1991] The Arbitrator, 130.
[21] Pryles, Michael. “Institutional International Arbitrations.” [1991] The Arbitrator, 130.
[22] Pryles, Michael. “The Case For International Arbitration.” [2003] AMPLA Yearbook, 2.
[23] Ibid, 2.
[24] Ibid, 2.
[25] Pryles, Michael. “The Case For International Arbitration.” [2003] AMPLA Yearbook, 2.
[26] Blake, Cassell and Grayon, LLP. “Litigation and Dispute Resolution in Canada.” 7.
[27] UNCITRAL Model Law on International Commercial Arbitration, Article 1(3) and (4) Cited in Pryles, Michael. “The Case For International Arbitration.” [2003] AMPLA Yearbook, 2-3.
[28] Ibid, Articles 1(3) and (4).
[29] Dodge, William. “National Courts and International Arbitration: Exhaustion of Remedies and Res Judicata Under Chapter Eleven of NAFTA.”  [2000] 23357 Hastings International and Comparative Law Review, 358.
[30] Bernini, Giorgio.  “Domestic and International Arbitration in Itlay after the Legislative Reform.” [1985] 5(3) Public Law Review, 544.
[31]Nicolau, Geroge. “Whatever Happened to Arbitral Finalty? Is it Their Fault or Ours?” [1987] Labor Law Journal, 260.

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