Arbitration


Arbitration is a formal method of dispute resolution involving a third party neutral who makes a binding decision. The neutral third party renders the decision in the form of an 'arbitration award'. An arbitration award is legally binding on both sides and enforceable in local courts, unless all parties stipulate that the arbitration process and decision are non-binding.
Arbitration is often used for the resolution of commercial disputes, particularly in the context of international commercial transactions. In certain countries, such as the United States, arbitration is also frequently employed in consumer and employment matters, where arbitration may be mandated by the terms of employment or commercial contracts and may include a waiver of the right to bring a class action claim. Mandatory consumer and employment arbitration should be distinguished from consensual arbitration, particularly commercial arbitration.
There are limited rights of review and appeal of arbitration awards. Arbitration is not the same as judicial proceedings, alternative dispute resolution, expert determination, or mediation.

Advantages and disadvantages

Parties often seek to resolve disputes through arbitration because of a number of perceived potential advantages over judicial proceedings. Companies often require arbitration with their customers, but prefer the advantages of courts in disputes with competitors. Prevalent advantages of arbitration over litigation involve:
  • Most importantly, the parties' ability to choose what substantive and procedural law governs the arbitration. This is often called the principle of 'party autonomy'.
  • In contrast to litigation, where one cannot "choose the judge", arbitration allows the parties to choose their own tribunal, since it is the parties who appoint the arbitrators. This is especially useful when the subject matter of the dispute is highly technical: arbitrators with an appropriate degree of expertise can be chosen.
  • Arbitration is supposed to be faster than litigation.
  • Arbitral proceedings and arbitral awards can be made confidential.
  • In arbitral proceedings the language of arbitration may be chosen, whereas in judicial proceedings the official language of the country of the competent court will be automatically applied.
  • Because of the provisions of the New York Convention 1958, arbitration awards are generally easier to enforce in other nations than court verdicts.
  • In most legal systems there are limited avenues for appeal of an arbitral award, which is sometimes an advantage because it limits the duration of the dispute and any associated liability.
Some of the disadvantages include:
  • Agreeing to arbitrate often implies a waiver of the right to bring the same dispute to a court. This has been said to exacerbate imbalances of power between corporations and individuals as courts play a role in levelling the field between sophisticated and unsophisticated parties.
  • Arbitration agreements are often difficult to identify in consumer and employee agreements.
  • There is sometimes a disconnection between the presumption of confidentiality and the realities of disclosure and publicity imposed by the arbitrators, and even the parties themselves.
  • If the arbitrator or the arbitration forum depends on the corporation for repeat business, there may be an inherent incentive to rule against the consumer or employee in favour of the corporation.
  • There are limited avenues for appeal, an erroneous decision will therefore be harder to overturn.
  • In some legal systems, arbitration awards have fewer enforcement options than judgments; although in the United States arbitration awards are enforced in the same manner as court judgments and have the same effect.
  • Arbitrators may struggle to enforce interlocutory measures against parties. Parties have an easier time taking steps to avoid enforcement of member or a small group of members in arbitration due to increasing legal fees, without explaining to the members the adverse consequences of an unfavorable ruling.
  • Discovery may be more limited in arbitration or entirely nonexistent.
  • Enforcing arbitral awards generally requires a court procedure, this may increase costs, particularly where a party attempts to challenge the award at this stage.

    Arbitrability

By their nature, the subject matter of some disputes is not capable of arbitration. In general, two groups of legal procedures cannot be subjected to arbitration:
  • Procedures which necessarily lead to a determination which the parties to the dispute may not enter into an agreement upon: Some court procedures lead to judgments which bind all members of the general public, or public authorities in their capacity as such, or third parties, or which are being conducted in the public interest. For example, until the 1980s, antitrust matters were not arbitrable in the United States. Matters relating to crimes, status and family law are generally not considered to be arbitrable, as the power of the parties to enter into an agreement upon these matters is at least restricted. However, most other disputes that involve private rights between two parties can be resolved using arbitration. In some disputes, parts of claims may be arbitrable and other parts not. For example, in a dispute over patent infringement, a determination of whether a patent has been infringed could be adjudicated upon by an arbitration tribunal, but the validity of a patent could not: As patents are subject to a system of public registration, an arbitral panel would have no power to order the relevant body to rectify any patent registration based upon its determination.
  • Some legal orders exclude or restrict the possibility of arbitration for reasons of the protection of weaker members of the public, e.g. consumers. Examples: German law excludes disputes over the rental of living space from any form of arbitration, while arbitration agreements with consumers are only considered valid if they are signed by either party, and if the signed document does not bear any other content than the arbitration agreement.

    Arbitration agreement

Arbitration agreements are generally divided into two types:
  • Agreements which provide that, if a dispute should arise, it will be resolved by arbitration. These will generally be normal contracts, but they contain an arbitration clause
  • Agreements which are signed after a dispute has arisen, agreeing that the dispute should be resolved by arbitration
The former is the far more prevalent type of arbitration agreement. Sometimes, legal significance attaches to the type of arbitration agreement. For example, in certain Commonwealth countries, it is possible to provide that each party should bear their own costs in a conventional arbitration clause, but not in a submission agreement.
Parties to a non-contractual dispute may enact a submission agreement where the circumstances for an advance agreement to submit to arbitration did not arise, for example in tort cases such as personal injury claims.
In keeping with the informality of the arbitration process, the law is generally keen to uphold the validity of arbitration clauses even when they lack the normal formal language associated with legal contracts. Clauses which have been upheld include:
  • "arbitration in London – English law to apply"
  • "suitable arbitration clause"
  • "arbitration, if any, by ICC Rules in London"
The courts have also upheld clauses which specify resolution of disputes other than in accordance with a specific legal system. These include provision indicating:
  • That the arbitrators "must not necessarily judge according to the strict law but as a general rule ought chiefly to consider the principles of practical business"
  • "internationally accepted principles of law governing contractual relations"
Agreements to refer disputes to arbitration are generally presumed to be separable from the rest of the contract. This means that an issue of validity pertaining to the contract as a whole will not automatically vitiate the validity of the agreement to arbitrate. For example, in disputes on a contract, a common defence is to plead the contract is void and thus any claim based upon it fails. It follows that if a party successfully claims that a contract is void, then each clause contained within the contract, including the arbitration clause, would be void. However, in most countries, the courts have accepted that:
  1. A contract can only be declared void by a court or other tribunal; and
  2. If the contract contains an arbitration clause, then the proper forum to determine whether the contract is void or not, is the arbitration tribunal.
This protects the tribunal's ability to arbitrate beyond termination of the contract. Arguably, it is necessary to ensure that disputes are arbitrated rather than litigated—without such a clause, a dispute arising out of a contract will necessarily be litigated.
Arguably, either position is potentially unfair; if a person is made to sign a contract under duress, and the contract contains an arbitration clause highly favourable to the other party, the dispute may still referred to that arbitration tribunal. Conversely a court may be persuaded that the arbitration agreement itself is void having been signed under duress. However, most courts will be reluctant to interfere with the general rule which does allow for commercial expediency; any other solution would be self-defeating.

Comparative law

Nations regulate arbitration through a variety of laws. The main body of law applicable to arbitration is normally contained either in the national private international law statute, as is the case in Switzerland's Private International Law Statute, or in a separate law on arbitration, as is the case in England and Wales, the Republic of Korea and Jordan. In addition to this, a number of national procedural laws may also contain provisions relating to arbitration.