INTERNATIONAL ARBITRATION

© Daniel Atkinson 1999

The New York Convention 1958

The advantage of international arbitration is most evident when the enforcement of the arbitrator’s award is examined. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the 'New York Convention') has been adopted by many countries and is free from the intervention of any State. It is a consensus document and therefore represents a common standard.

The New York Convention creates the structure for international arbitration and is said by commentators to be the most effective instance of international legislation in the history of commercial law.

Article 1 of the Convention means that subject to reciprocity and commerciality reservations, an award in any State (even if that State were not a party to the New York Convention) will be recognised and enforced by any other State which was a party to the Convention. It does however need to satisfy the basic conditions set down in the Convention.

Article 1(3) is the reciprocity reservation and allows a State to disclose that it will enforce only "Convention Awards". It is therefore usual to hold an international commercial arbitration in a State which has adopted the Convention. In the last 10 years many States have joined (such as Turkey and Saudi Arabia). Contracting States include Australia, India, Japan, Korea, Philippines, Thailand, USA, most western countries and some communist countries. Some countries accede to the Convention subject to reservations. For example, Kuwait acceded to the Convention in March 1978, subject to the reservation that it would only be applied to awards made in territories of other contracting states. The UAE has not acceded to the Convention, but it has signed a treaty between members of the Arab League. Bahrain has no formal treaty with respect to the enforcement of foreign awards. However, many States (including Bahrain) subscribe to the general policy that they will enforce an award made in any country which, in turn, enforces any award made in the respective state (reciprocity). The local legislation implementing the Convention also needs to be considered carefully since they may prevent an award being enforced.

Article 1(3) is the commerciality reservation which allows the Contracting State to determine for itself what relationships it considers as "commercial". This may arise in proceedings to stay actions in the local courts.

There are five grounds (Article V.1(a) to (e)) on which recognition and enforcement of an award may be refused at the request of a party, and two additional grounds (Article V.2(a) and (b)) which may be raised by the parties on its own motion.

Articles V.1

Incapacity, Invalidity under applicable law or law of country in which the law is made;

Denial of Fair Hearing. It is generally enough if the hearing was conducted with due regard to the agreement. The main requirements are that the proceedings should be in accordance with the principles of equality of treatment and proper opportunity for each party to present its case. In some States such as Germany and France, the standards for due process are less stringent for international arbitrations than for domestic arbitrations.

Lack of Jurisdiction or Excess of Authority; In many States the Arbitral Tribunal can decide its own jurisdiction, known as the principle of Kompetenz-Kompetenator has been given the authority under the Arbitration Act 1996.

Procedural Irregularities; This includes matters such as the composition of Tribunal or the arbitration procedure not being in accordance with the arbitration agreement, or was not in accordance with the law of the country where the arbitration took place.

Invalid Award; This relates to the Award not yet being binding or that it has been set aside or suspended by competent authority of the country in which or under the law which that award was made.

Articles V.2

Arbitability; The award will not be enforceable if it is not capable of settlement by arbitration under the law of the country where recognition and enforcement is sought. The concept involves public policy limitations upon arbitration as a method of settling disputes. In international cases there is a balance of competing policy considerations. There is a public interest in the promotion of the country as a venue for international arbitrations and for international trade. At least three different national systems of law may be involved in the decision as to whether or not a particular dispute is arbitrable namely under the law governing the arbitrators agreement, the law of the place of arbitration or the law of the country of enforcement.

Public Policy; The Award is not enforceable if recognition and reinforcement would be contrary to the public policy of the country in which enforcement is sought. The grounds for refusal are closely followed in the Model Law. In France international arbitration awards may be rejected in France on grounds of public policy only if there is shown to be violation of international public policy. This aspect is highly controversial. Thus it may not be possible to enforce in Saudi an award which contains a large sum for interest.

The arbitration agreement needs to comply with the requirements of the Convention to ensure any award gains international recognition and enforcement. The requirements of formality are set out in Article II. Article II.1 states that the arbitration agreement must be in writing. Article II.2 defines "agreement in writing" to include an arbitral clause in the contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams. In Zambia Steel an English Court held that tacit acceptance of a written quotation which contained an arbitration clause was sufficient to comply with the requirements for an agreement in writing. There may therefore be different national interpretations. The Model Law Article 7(2) has a wider more modern definition.

The Convention at Article II.1 recognise the validity of arbitration agreements which deal with future disputes as well as those which deal with existing disputes. Some States do not recognise the validity of an arbitration agreement to resolve future disputes. The reference to arbitration of an existing dispute normally takes the form of a Submission Agreement. In many Latin American countries a clause to submit future disputes to arbitration is not operative until a Submission Agreement is executed.

Article II.3 of the Convention requires the Court of Contracting State when seized of an action, to refer the parties to arbitration at the request of one of the parties, unless the said agreement is null and void, inoperative or incapable of being performed.

Types of Arbitration

International arbitration is the private determination of commercial disputes with international aspects and/or internationally diverse parties. It includes both ‘ad hoc’ and ‘administered’ arbitration. Ad hoc arbitration is conducted in a manner decided by the Arbitrator and where specified rules agreed by the parties, such as UNCITRAL Rules. Administered arbitration is administered by organisations such as the International Chamber of Commerce (ICC) in accordance with published rules and procedures.

Ad-hoc Arbitrations are more flexible since they allow the arbitration to be tailored to the dispute and there is no delay in going through particular organisation. Administered arbitrations have the disadvantage of the cost of administration , but some practitioners consider that there is little difference in overall cost.

The ICC Rules are perhaps the most commonly used procedure in international construction contracts. The place of arbitration is fixed by the Court unless agreed by the parties (Article 14). However, it is usual (unless the contract provides otherwise) for the arbitration to be held where the chairman of the tribunal resides (or where the single arbitrator resides if only one arbitrator is required). The ICC usually appoints a chairman from a country other than those from which the parties are nationals (unless otherwise agreed by the parties). In addition to being an appointing body ICC is also an administering body. It scrutinises the award in draft, as a means of quality control.

The United Nations formally came into existence from 24^th October 1945. The United Nations Commission (UNCITRAL) on International Trade Law was established in December 1966. UNCITRAL adopted Arbitration Rules in 1976. The General Assembly of the United Nations unanimously approved the Rules in December 1976. The aim of the UNCITRAL Rules was to establish a basic structure for ad-hoc arbitrations to ensure international acceptance of arbitration awards particularly under the New York Convention.

UNCITRAL Articles 6 and 7 refer to an appointing body, but failing which the Secretary - General of the Permanent Court of Arbitration at The Hague designates an appointing authority. UNCITRAL is not an administering authority. Article 6(3) lists procedure for a sole arbitrator and the general practice is for sole-arbitration to be of different nationality to parties.

Jurisdiction & Validity of Agreement

In International arbitration the arbitration agreement is usually independent of the contract in which it is incorporated. The principle of severability of the arbitration agreement from the contract means that even if the arbitrator should find that the contract is invalid, the arbitration clause (since it stands on its own) can be held to be valid thereby enabling the arbitration to proceed even when there is no valid contract. However, should the arbitration agreement (itself) be invalid (e.g. not being incorporated for some reason) then the arbitrator may not have jurisdiction.

The jurisdiction of the Arbitral Tribunal derives from the agreement of the parties and the legal status of its’ decisions is defined in the local legislation which in England is the Arbitration Act 1996. If the parties dispute that there is an arbitration agreement, then how can the Tribunal be competent to decide this point when it strikes at the very core of its jurisdiction? This issue provides fertile ground for one party to cause delay to the arbitration process. On the other hand the existence of an arbitration agreement is central to the legal validity of the Tribunal’s award. If the award is successfully challenged for want of jurisdiction then the arbitration process will have been a waste of effort.

Under the ICC Rules the issue of jurisdiction is dealt with in Articles 6.2 to 6.4. Article 21 of the UNCITRAL Rules deals with jurisdiction.

The independence of the arbitration agreement is accepted in a number of international treaties. National courts may recognise the arbitrator's powers to determine his own jurisdiction.

The Arbitration Act 1996 has addressed this problem by following the solution adopted in other legal systems and internationally, known as the doctrine of Kompetenz-Kompetenz. Section 30 provides that the Tribunal can rule on its own substantive jurisdiction which includes whether there is a valid arbitration agreement. The Tribunal cannot of course finally decide its own jurisdiction but this at least has given the Tribunal the power to avoid any delays in the arbitration process. The parties can exclude this power by agreement. Section 32 sets out the circumstances in which the court may determine the question of jurisdiction as a preliminary issue and requires the written agreement of the parties or alternatively the permission of the Tribunal. The situations in which the Court can intervene on issues of jurisdiction once arbitration has commenced, appear therefore to be restricted.

The difficulties with the doctrine still remain. The essential question is how will the Courts react when one party disputes that there is an arbitration agreement and issues a writ, but the other party considers that there is an arbitration agreement and seeks to stay the Court proceedings? The decision in Birse Construction Limited v St Davis Limited (Feb 1999)TCC is instructive. It was common ground that the Court essentially had two options.

The first option was for the Court to decline to decide the issue immediately. The Court could then grant the stay to arbitration and allow the Arbitral Tribunal to decide under Section 30 of the Arbitration Act 1996. Alternatively it could order the issue to be tried by the Court under RSC Order 73 rule 6(2) (now Practice Direction Part 49G Part 6(2)).

His Honour Judge Lloyd QC held that the Arbitration Act did not require a party who maintains that there is no arbitration agreement to have that question decided by an Arbitral Tribunal. He held that it was highly desirable that an issue such as the existence of an arbitration agreement should be determined by the Court before the arbitration commenced. He held that it cannot be in the interests of the parties to have to return to the Court on a challenge to an award on jurisdiction, to get a definitive answer to a question which could and should be decided by the Court before the Arbitral Tribunal embarks upon the meat of the reference. Accordingly he held that if the facts had not been clear he would have acceded to an application that the issue be tried by the Court. It was held that only where the Court considered it was virtually certain that there was an arbitration agreement or if there is only a dispute as to the scope of the arbitration agreement, would it be appropriate to leave the matter to be decided by the Arbitral Tribunal.

The second option available to the Court was to determine immediately whether there was an arbitration agreement and then decide on that basis whether or not to grant a stay to arbitration. His Honour Judge Lloyd QC held that if it is clear on the evidence that the agreement did or did not exist that the Court should decide, since the dominant factor must be the interests of the parties and the avoidance of unnecessary delay or expense. In so deciding he distinguished the decision in Ahmad Al Naimi v Islamic Press Agency (1998). In that case an action was stayed to arbitration for two contracts in which only the first contract appeared to have an arbitration agreement. It was recognised by his Honour Judge Lloyd QC that the decision was based on the exercise of the judges discretion and that there was an undoubted arbitration agreement and a close relationship between the two contracts. He considered it was therefore sensible to have allowed the arbitrator to decide whether the disputes about the second contract fell within the arbitration agreement of the first contract.

His Honour Judge Lloyd QC then examined the facts of the case before him and found that there was an arbitration agreement and accordingly granted the stay to arbitration.

The decision at its widest application is that the Court rather than the arbitrator should always decide the question whether there is an arbitration agreement. If followed by Arbitral Tribunals then it will cause considerable delays to arbitrations. It is suggested that this wide application is contrary to the intention of the Arbitration Act 1996 and the purpose of the doctrine of Kompetenz-Kompetenz which is to reduce the possibility of delays in arbitrations. So, Section 30(1)(a) allows the Tribunal to make an interim award on whether there is a valid arbitration agreement and the parties may challenge this ruling by appeal or review. Only if the parties agree under Section 31(5) should the Tribunal stay proceedings whilst application is made to the Court to determine the preliminary point of jurisdiction.

Applying the Law

Equity clauses, which enable the arbitrator to decide the matters according to equity and good conscience and where the arbitration may not be required to follow the strict rule of law, or expressly permit the arbitrator to act as amiable compositeur are not generally found in arbitration agreements for construction contracts.

The proposition that arbitrators might be allowed to depart from the strict rule of law was permitted to pass without judicial commence in Jager -v- Tolme and Runge (1916) 1 KB 953. However, both Scrutton L J and Atkin L J strongly condemned this approach in the Court of Appeal decision in Czarnikow -v- Roth Schmidt & Co (1922) 2 KB 478. Indeed, the principle that a contract has no validity except by reference to a system of law was confirmed by Lord Diplock in the House of Lords decision in Amin Rasheed Shipping Corporation -v- Kuwait Insurance Company (1983) 3 WLR 241 at 249. The Court of Appeal in Deutsche Schactbau -v- Ras al Khaimah National Oil Company (1987) 2 Lloyd’s Reports 246 enforced, as a foreign arbitration award, a decision founded on internationally accepted principles of law governing contractual relations.

In all other recent cases it has been held that a procedure which dispenses with the rule of law cannot be considered to be an arbitration. A number of commentators have argued in favour of recognising equity clauses or tribunal decisions made ex aequo et bono by the judiciary, if not by statute.

Arbitration Procedures

Much of arbitration law deals with how the process of arbitration is regulated. There are no recognised procedures followed in all International Arbitrations, but there has been a fusion of the common law and civil procedures. Common law proceedings have been influenced by the history of juries deciding civil litigation. Continental jurisdictions have generally not decided civil matters by juries. Civil Jurisdictions are not homogenous, but influenced by the use of documents, a written not oral tradition. The model in common law is a joint enterprise to establish the facts. In civil law the parties identify the facts to be used, then prove the facts, and the judge then applies the law.

There have been major changes in dispute resolution throughout the world in the last ten years and in particularly litigation. The effect has been an increased use of arbitration and ADR.

The procedural problems which arise are common to most arbitrations, and a short description is given below.

Preliminary Meeting

Many arbitrations have a preliminary meeting. It is an opportunity for the Tribunal to meet the representatives and establish the procedures to be followed. It is important that the decision makers are present, so that there are few recesses/adjournments to take instruction. An advance agenda is usual covering the following:

Outline of Claim

Outline of Counterclaim

Future Procedure

Preliminary Issues

Applicable Rules

Timetable

Documentary Evidence

Production of Documents (Discovery)

Witnesses

Expert Evidence

Terms of Reference

Communication

Written Submissions

Applications for Clarification of Issues (Further and Better Particulars)

Protective Measures

Party Defaults

Hearing

Production of Documents

In Civil proceedings a party can request an order from judge for specific discovery, with different sanctions in different legal systems. In each system inferences can be made if the document is not produced. General discovery is unusual in International Arbitration since it is difficult to enforce compliance. Generally there no longer is a duty for lawyers to find documents that are against one client’s case.

It is necessary in each arbitration to examine the applicable procedural rule.

Witnesses

In civil proceedings witnesses are questioned by the judge with the purpose of clarifying the facts not to discredit the witness. Since witness statements are given evidential weight by the judge, a party is not allowed to assist the witness in the preparation of his statement. In common law systems the witness will prepare a witness statement, but his evidence is given orally, unless the parties agree that the Witness Statements are evidence in chief. The witness is cross examined by the other party.

In International Arbitration it is unusual for witnesses to prepare affidavits or to notarise statements, they are normally simply signed and dated. Witnesses are normally prepared by the party. The tendency is for evidence not to be given under oath, but if required the Tribunal needs to check whether it has the power and authority to administer the oath in the particular jurisdiction. Examination of witnesses in International Arbitration is less punctuated by objections because the rules of evidence are not so pervasive. The standard system is for statements to be written beforehand and the witness to be questioned as clarification, by the Tribunal.

In some civil law jurisdiction the parties cannot be witnesses at the hearing and if this is contravened then the award may be set aside at the place of arbitration.

Experts

There is a movement towards Tribunal appointed Experts. This has the advantage that the Tribunal is not then expected decide between two experts on matters which the Tribunal has no knowledge. Parties can comment on Tribunal appointed experts report. If each side appoints its expert, then they will normally be cross-examined by each side and possibly examined by the Tribunal jointly.

Communications

It is usual for the party representatives to write to each other and copy to the Tribunal. The only communication directly to the Tribunal is if the Tribunal is requested to take action.

It is more and more common to make submissions on disk. This is useful for the arbitrator when preparing his Award.

Clarifications

It is rare in ICC Arbitrations for requests for additional particulars to be granted since it is seen as oppressive and abuse of process

Hearing

The Hearing is the climax in common law system and is usually an uninterrupted event. In International Arbitrations the Hearing is not usually so lengthy as in common law systems and more emphasis is place on the Tribunal reading up on the case before the Hearing.