Doctrine of Competence of International Commercial Arbitration

Over the past few years, several changes and improvements have been made in the resolution of international commercial disputes. One of the most notable changes is the introduction of laws aimed at preventing standard court-based litigations and exploring alternative methods for settling cases.

The United Nations Commission on International Trade Law (UNCITRAL) has played a vital role in the use of alternative dispute resolution. Established in 1966, UNCITRAL achieved two landmark rules: the implementation of the UNCITRAL Arbitration Rules (1976) – also known as the Arbitration Rules – and the UNCITRAL Conciliation Rules (1980) – also known as the Conciliation Rules.

The contribution of various international experts from different legal, economic, and social backgrounds enabled UNCITRAL to come up with a more competent resolution for international commercial disputes. Both Rules emphasize the need to settle disputes between parties through private and legal methods instead of public ones. This is an important aspect that distinguishes the Rules from another significant dispute resolution passed by UNCITRAL: the UNCITRAL Model Law on International Commercial Arbitration (‘Model Law’).

Alternative dispute resolution comes in various forms, including arbitration, assisted negotiation, counseling, conciliation, evaluation, expert appraisal, mediation and mini-trials. These methods are utilized to resolve issues of both national and international commercial relevance.

Despite the broad concepts and multitude of models for national and international commercial dispute resolution, there are two key alternatives: arbitration and conciliation. Arbitration involves a third party imposing a binding decision on the parties, while in conciliation, the third party can only make non-binding recommendations.

Due to recent trends in globalization and cross-border investments, business relationships have become more complex than ever before. When disputes arise between businesses, resolving them often requires international commercial arbitration.

Over the last few decades, arbitration as a means of resolving disputes has gained recognition from international business communities. They have come to realize the value of settling disputes before they reach court. Not only is it less time-consuming, but it is also more efficient and cost-effective.

International arbitration has several features:

• Enforceability – Awards from arbitrations are more easily enforceable than court judgments.
• Neutral form – There is no need to be under another party’s national court. International arbitration allows for a neutral forum for settling disputes.
• Procedural flexibility – Rules of arbitration are often less complex compared to standard court proceedings, making it suitable for parties coming from different jurisdictions.
• Arbitrators with experience – Arbitrators are selected based on their familiarity with the applicable business practices and national laws.
• Party autonomy – Parties are allowed to choose governing laws, place of arbitration, and other aspects pertaining to arbitration that assure them fair treatment of their case.
• Cost – It is difficult to determine if arbitration costs less than a standard court trial, but it does not require court fees at all and the parties can agree on a process that is suitable for the dispute.
• Pre-emptive remedies – The arbitral tribunal can provide preliminary relief such as freezing assets; however, imposing criminal sanctions is not allowed in arbitration.
• Joinder of parties and related disputes – It is necessary to acquire all parties’ consent before being joined in an existing similar arbitration.

The UNCITRAL Arbitration Rules (1976) and the UNCITRAL Conciliation Rules (1980) are used for resolving contractual trade law disputes. However, domestic laws in different countries can hinder the private parties’ options during arbitration or conciliation under these rules. To address this issue, the Model Law provides a guide that countries can use to create a favorable legal environment for international commercial arbitration.

The Model Law was passed by UNCITRAL on 21 June 1985. Its purpose is to assist countries in improving their domestic laws regarding the arbitral procedure, specifically in relation to international commercial arbitration. The Model Law covers all phases of the arbitral process, from the arbitration agreement and the constitution and jurisdiction of the arbitral tribunal, to court involvement and implementation of the arbitral award. It incorporates essential aspects of international arbitration practice that are recognized worldwide and is accepted by countries from various regions with different legal or economic systems.

During international commercial arbitrations, there may be cases where one party, often referred to as the respondent, declines to participate. If the applicant fails to present their statement within an agreed-upon timeframe without sufficient reason, the Arbitration Rules state that the arbitration will be terminated.

In all other cases, the tribunal can continue with the arbitration and make its decision without the involvement of either party.

One salient feature of international commercial arbitration is its ability to object to jurisdiction. The jurisdiction of arbitral tribunals is limited by the consent of the parties and may be further restricted by national or domestic laws that require certain issues to be examined or tried in local courts.

There are several examples that illustrate jurisdictional difficulties in arbitration. These include determining the legality of the arbitration clause or agreement, ensuring that the arbitral tribunal is properly represented, verifying if the matters to be considered for arbitration fall within the scope of the arbitration clause or agreement, and determining if those matters are considered ‘arbitrable’.

The doctrine of Competence-Competence is an important concept in arbitration. It refers to the inherent power of arbitral tribunals to determine their own jurisdiction. This doctrine, also known as Competence/Competence, is clearly outlined in the Arbitration Rules.

The power of the doctrine of competence/competence is limited by the jurisdiction of the concerned national court, which is vested with supreme authority to determine jurisdictional questions.

If a party opposes the jurisdiction of the arbitral tribunal, it is necessary to declare their formal objection immediately. The Arbitration Rules state that such objections should be raised no later than in the statement of defense or, with respect to a counter-claim, in the reply to the counter-claim. This rule suggests that the right to object may no longer be available after this particular phase in the trial procedures, but its implications on whether or not this right has been waived will rely on relevant national law. In cases where a party fully knows that the Arbitration Rules have not been strictly observed and still fails to immediately oppose non-compliance, they are considered to have relinquished their right to oppose.

International commercial arbitration often involves more than one system of law. Different laws may regulate various aspects of the arbitration process, including:

• The trial procedures of the arbitral tribunal, also known as the lex arbitri, are crucial in ensuring a fair and just resolution.
• The acknowledgment and implementation of the award is an important step in finalizing the arbitration process.
• The matters in dispute, referred to as the ‘applicable law’, must be carefully considered and analyzed by all parties involved.

In German, the concept is referred to as Kompetenz-Kompetenz”. In French, it is called “compétence de la compétence”. Kompetenz-Kompetenz means that an arbitral tribunal can decide whether it has jurisdiction over an issue that needs to be settled and whether an arbitration agreement is valid. According to the principle of Kompetenz-Kompetenz, the validity or expiration of an agreement that includes an arbitration clause does not necessarily mean that the arbitration agreement is invalid or has expired.

The doctrine of competence-competence is an important aspect of arbitration law. It holds that an arbitral tribunal may determine questions regarding its own jurisdiction. If arbitrators could not determine such questions, a recalcitrant respondent could easily frustrate the parties’ agreement to have their dispute decided by arbitration or create considerable delay by contesting the existence or validity of the arbitration agreement in court. Furthermore, this situation would seriously undermine arbitration as an effective means of private dispute resolution and deprive it of its attraction.

The doctrine of competence-competence is largely based on Article 16 of the UNCITRAL Model Law. According to Article 16(3) of the Model Law:

If the arbitral tribunal rules that it has jurisdiction as a preliminary question, any party may request the court specified in Article 6 to decide on the matter within thirty days of receiving notice of that ruling. The decision made by the court shall be subject to no appeal. While such a request is pending, the arbitral tribunal may continue with the proceedings and make an award.

The competence-competence concept, in layman’s terms, simply means that arbitrators have the ability to look into their own jurisdiction without waiting for a court to do so. They are not required to stop arbitral proceedings to refer a jurisdictional issue to judges. This was explained by Rau, supra n. 36, at n.175 (quoting William W. Park’s article titled The Arbitrability Dicta in First Options v. Kaplan: What Sort of Kompetenz-Kompetenz- Has Crossed the Atlantic?” published in Arbitration Intl, vol. 12 (1996), pp. 137, 149).

The competence-competence approach is used to avoid the additional costs and burdens often involved in standard court proceedings and their parties. As stated in id. at n.226, the marginal cost of having an arbitrator determine the scope of the arbitration clause is low, while allocating the determination to a court, another decision maker, requires an additional transaction and an extra cost.” This quote from Steven Walt’s article “Decision by Division: The Contractarian Structure of Commercial Arbitration,” published in Rutgers Law Review, vol. 51 (1999), pp. 369, 410 emphasizes how this approach can save time and money for all parties involved.

Additionally, as mentioned in id. at n.39 “In how many cases might the issue simply disappear during the course of arbitration? In some cases argued before the panel might well lead to a new perspective on the case for the parties promoting early settlement.” This shows that sometimes issues may be resolved during arbitration leading to early settlements or interim arbitral rulings on jurisdiction or final awards on merits themselves which obviate further proceedings.

In his article, Spanish Perspectives on the Doctrines of Kompetenz-Kompetenz and Separability: A Comparative Analysis of Spain’s 1988 Arbitration Act,” Christian Herrera Petrus notes that there is a distinction in European arbitration law between a minimalist approach to competence-competence and more restrictive forms. Under the minimalist approach, arbitrators may rule on their own jurisdiction, but parties may also apply to court for a ruling. Under more restrictive forms of competence-competence, arbitrators must rule first on their jurisdiction, and court review of jurisdiction issues may only be obtained thereafter (American Rev. of Int’l Arbitration, vol. 11 (2000), pp. 397, 402).

The UNCITRAL Model Law provides a provision for arbitral tribunals to make an initial determination on a plea of lack of jurisdiction. If such a ruling is made, any party may request that an appropriate court review the matter within 30 days of receiving notice. This is stated in Article 16(3) of the UNCITRAL Model Law on International Commercial Arbitration. While the request for judicial review is pending, the arbitral tribunal may continue with the proceedings and make an award.

The likelihood of corrupt or biased arbitrators asserting jurisdiction to resolve disputes involving parties over whom they clearly have no authority is enough to prove the point. Many other undesirable things” are possible. At least some possibility of court review to prevent such things from occurring is important. According to Park, in the citation supra n. 32, at n.9, “An agreement giving arbitrators sole competence to rule on their own jurisdiction would make sense principally (perhaps only) when contained in a subsequent contract that provided for arbitration of a dispute about jurisdiction that had arisen under a pre-existing arbitration agreement.”

In his article Beyond Trilogies: A New Bill of Rights and Law Practice Through the Contract of Arbitration,” Thomas E. Carbonneau discusses the First Options case and its implications. According to Carbonneau, First Options represents an adoption of the Kompetenz-Kompetenz doctrine on a contractual basis.

In his article, Park (supra n. 88) argues that judges are involved in determining the boundaries of arbitrator jurisdiction because the arbitral process exists under the shadow of public coercion. The state lends its power to enforce arbitration agreements, which means that court proceedings can be stayed, arbitral awards can be given res judicata effect, and a losing party’s assets may be seized. Therefore, to maintain the integrity of the judicial system that enforces arbitration agreements, courts must independently examine arbitrator jurisdiction regardless of an arbitrator’s own ruling on their jurisdiction (Park, supra n. 88 at 199).

References:

1. Lowry, Houston. (2003). Recent Developments in International Commercial Arbitration in 2003. Available online from: http://www.brownwelsh.com/HPLowry_archive/2003_ILW_recent_arbitration_developments.htm. Accessed on 7th January 2007.
2. Griffith, Gavan and Mitchell, Andrew. Contractual Dispute Resolution in International Trade: The UNCITRAL Arbitration Rules (1976) and the UNCITRAL Conciliation Rules (1980). Melbourne Journal of International Law. Available online from: http://www.austlii.edu.au/au/journals/MelbJIL/2002/8.html. Accessed on 7th January 2007.
3. Bennett, Steven. (2003). The Developing American Approach to Arbitrability. Dispute Resolution Journal. Available online from: http://www.findarticles.com/p/articles/mi_qa3923/is_200302/ai_n9201149/pg_18. Accessed on 7th January 2007.
4. Ong, Colin. International Arbitration. Available online from: http://www.iclg.co.uk/index.php?area=4;country_results=1;kh_publications_id=35;chapters_id=773. Accessed on 7th January 2007.
5. Aluko, Oyebode. The National Committee on the Reform and Harmonisation of Arbitration and ADR Laws in Nigeria. Available online from: http://www.alukooyebode.com/ADR/Discussion%20paper.htm