Overview of International Arbitration

Arbitration is a form of alternative dispute resolution. It provides a final and binding outcome. Arbitration is an expedient method of resolving disputes. Disputants agree to submit their disputes to an individual whose judgment they are prepared to trust. Each puts its case to this decision-maker, this private individual—in a word, this ‘arbitrator’. He or she listens to the parties, considers the facts and the arguments, and makes a decision. That decision is final and binding on the parties—and it is final and binding because the parties have agreed that it should be, rather than because of the coercive power of any state.^[1] The process of International Arbitration is a form of alternative dispute resolution to which the parties can be two states, one state actor and one non state actor or two non-state actors.

This article is an attempt to present the history of international arbitration along with a reason to go for such arbitration and the principles these arbitrations follow. In addition to that, Permanent Court of Arbitration role and its formation is also discussed.

History of International Arbitration

International Arbitration can be traced back to ancient Greece where disputes relating to independence and sovereignty had to be resolved. In the middle ages, the Pope or the king acted as an arbitrator. In 1648, the Treaty of Westphalia was signed after the negotiation of peace. It followed thirty years of war in Europe and helped the primary states come together.^[2]

The Jay Treaty of 1794 between the US and Great Britain was the starting point of Modern International Arbitration. It established three arbitral commissions to settle questions and claims arising out of the American Revolution- (1) disputes in relation to boundaries, (2) claims for compensation due to British nations, and (3) claims from the US against Great Britain for treatment of their property. The 19th century witnessed the conclusion of many arbitral proceedings which settled specific claims as well as claims arising from a single event. The Alabama Claims Arbitration under The Washington Treaty of 1871 is another significant arbitral proceeding that addressed the damages suffered by the US due to attacks on union ships by confederate navy ships which were built in the British shipyard during American Civil War when Britain failed to stay neutral. It was ruled in favor of the US. It sets an important precedent since it successfully settled a huge inter-state dispute through arbitration. The 1899 Hague Convention led to the creation of the Permanent Court of Arbitration.

In the 20th century, there were around 120 claims. There were multiple claims of the US and Mexico to settle claims with Germany after the Second World War. In 1921, the Permanent Court of International Justice was established which was attached to the League of Nations. It was functional until the International Court of Justice replaced it in 1946. In the next few years, arbitration became less popular.

The last decades of the 20th century witnessed an increase in mixed arbitrations. International Commercial Arbitration became increasingly popular. The companies which had gained large concessions in the extraction of natural resources in developing countries started to use arbitration for dispute resolution. This led to the creation of the International Centre for Settlement of Investment Disputes (ICSID) in 1960.

The significant international rules, treaties, and conventions on international arbitration are the Geneva Protocol of 1923, the Geneva Convention of 1927, the New York Convention of 1958, the International Centre for Settlement of Investment Disputes (ICSID) Convention of 1965, the UNCITRAL Arbitration Rules (the ‘UNCITRAL Rules’), adopted in 1976 and revised in 2010, the UNCITRAL Model Law (the ‘Model Law’), adopted in 1985 and revisions to the Model Law (the ‘Revised Model Law’), adopted in 2006.

This form of alternative dispute resolution has now been accepted by individuals, corporations, and states as an effective means of resolving disputes due to the reasons of flexibility, confidentiality and prompt resolution of disputes.^[3]

Principles of International Arbitration

International arbitration has become the principal method of dispute resolution between states, individuals and corporations in almost every aspect of international trade, commerce, and investment. Principles of international arbitration are as follows:

1. Binding Outcome

The outcome of arbitral proceedings is called an arbitration award. This outcome is binding on the parties. Article 34, paragraph 2 of UNCITRAL Arbitration Rules stipulates-

“all awards shall be made in writing and shall be final and binding on the parties. The parties shall carry out all awards without delay.”3

The parties must adhere to the tribunal’s judgment.

2. Principle of Party Autonomy

Arbitration is designed by the parties to the disputes. This means that the parties choose arbitrators, the procedural law, and the applicable law. This makes the dispute resolution very flexible as the parties get to have a bigger say in the proceeding than they would have in judicial proceedings. The arbitral tribunals are composed of three to five arbitrators out of which the parties get to select an equal number of arbitrators and the president is jointly appointed. The parties can freely choose the procedural law. There can be ad hoc arbitration as well as conventional institutional arbitration. The parties can choose a set of rules such as UNCITRAL for the dispute resolution process. These rules define the constitution of tribunals, the power of tribunal in relation to the conduct of procedure, evidence gathering, effect and form of awards, and so on. The parties get to choose the issues as well as laws.

3. Territorial Principle

In the choice of applicable laws, the parties may choose different conventions as in the inter-state dispute between the United Kingdom and Ireland (MOX Plant Arbitration), the parties chose the OSPAR convention.^[4] In Alabama Claims Arbitration, the parties chose soft law. In the case of investor-state arbitrations, international law, and domestic laws are used together. If the parties fail to identify the laws applicable, the same is done by the tribunal. Article 35, paragraph 1 of the UNCITRAL Arbitration Rules stipulates, “The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate.” Article 42, paragraph 1 of the ICSID convention stipulates, “The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.”^[5]

4. Separability

In the dispute between two parties, the party claiming non-performance of the obligation by the other party would want to claim damages whereas another party would argue on the ground of invalidity of agreement. In order for arbitration proceedings to resolve a dispute between parties, it is an essential arbitration clause should stay unaffected by the claim of invalidity. This implies that even if an underlying agreement is invalid this just by itself would not render invalid the arbitration clause and vice-versa and therefore arbitration clause and underlying agreements are two different agreements.

5. Competence

Competence: It essentially means that the arbitral tribunal has the power to decide its own competence.

Reasons for Arbitration

The reasons why the parties choose arbitration for the resolution of international disputes are as follows-

1. Confidentiality

The arbitral proceedings offer confidentiality and privacy which the judicial proceedings do not. This is one of the reasons why the parties choose arbitration as the means for dispute resolution. This helps the corporations and nations to protect trade secrets, classified information or anything else they do not intend to be disclosed. Article 28(3) of the UNCITRAL Rules stipulates,

“Hearings shall be held in camera unless the parties agree otherwise. The arbitral tribunal may require the retirement of any witness or witnesses, including expert witnesses, during the testimony of such other witnesses, except that a witness, including an expert witness, who is a party to the arbitration shall not, in principle, be asked to retire.”

The parties have the choice to include confidentiality in their agreement or to sign another confidentiality agreement. The principle of confidentiality has been reaffirmed by English courts in various cases.^[6] Even then, it must be noted that confidentiality is not absolute and disclosure may be permitted in some cases where there is the consent of the party, a court order, a necessity for protection of an arbitration party, or when the disclosure is required in public or judicial interest.^[7] In many countries like Sweden and Norway, the apex courts have rejected the idea of confidentiality in arbitral proceedings.

2. Flexibility

The principle of party autonomy means that the parties are free to make decisions on the choice of the arbitral tribunals, arbitrators, laws, and the issues. They are not forced to conform to a set of procedural rules. The procedure to be followed in order to arrive at a binding decision is flexible, adaptable to the circumstances of each particular case. The parties have a wide range of tribunals to choose from based on their previous judgments and the categories of cases dealt in the past. This saves the parties time and money and also offers them the prospect of a sensible and predictable award.

3. Neutrality

Since the parties belong to different countries, the choice of judicial proceeding might lead to the domestic court being biased towards the home country. There would also be technical problems of a difference in language and foreign laws. This would make the procedure more expensive. Additionally, the judicial proceedings can be time-consuming. In contrast, arbitration offers neutrality whereby the arbitrators chosen by the parties, deliver impartial arbitral awards based on the procedural and applicable laws chosen by the parties themselves.

4. Enforcement

Enforcement is the process to collect the amount owed or to carry out an obligation provided in the award. The end result of arbitral proceedings is binding in nature and not merely a recommendation. The award is final and there are no appeals allowed as in the case of judicial proceedings. Once the arbitral award is issued, it can be enforced through the domestic courts.

In its international enforceability, an award also differs from the judgment of a court of law, since the international treaties that govern the enforcement of an arbitral award have much greater acceptance internationally than do treaties for the reciprocal enforcement of judgments.^[8]

As per Article 53 of ICSID, the domestic courts cannot refuse the enforcement or recognition of an award^[9].

Permanent Court of Arbitration (hereinafter ‘PCA’)

The Permanent Court of Arbitration is situated at Hague in the Netherlands. It is an intergovernmental organization which was established in 1899. It owes its inception to the Hague Convention of 1899 which was negotiated at the Hague Peace Conference convened by Russian Tsar Nicholas II.^[10] It was aimed to strengthen the means to settle international disputes peacefully. It also resulted in the formation of a Convention for Pacific Settlement of International Disputes. The Second Hague Conference in 1907 brought small changes to the aforementioned convention and PCA.

PCA sounds rather misleading because it is neither a court nor permanent. PCA is an arbitration institution which provides the parties with facilities to arbitrate disputes and administers arbitrations.

The PCA consists of a three-part organizational structure^[11]–

1. Administrative Council

It is composed of the diplomatic representatives of contracting parties and is headed by the Dutch minister of foreign affairs. The council is responsible for shaping the policy of PCA and overseeing work of the International Bureau. In 1994, a financial assistance fund was established with its main objective to help developing countries.

2. Members of the Court

It is a group of potential arbitrators who are appointed by the contracting parties. They are appointed for six years and their appointments can be renewed.

3. International Bureau

International Bureau is the PCA secretariat which is headed by secretary general. It provides administrative support to tribunals and acts as registry. The International Bureau provides services such as financial administration, logistical and technical support for meetings and hearings, travel arrangements, and general secretarial and linguistic support. It also provides administrative support to tribunals or commissions conducting PCA dispute settlement proceedings outside the Netherlands.

PCA has its own set of procedural rules. It is mostly used for resolution of inter-state disputes between foreign investors and states. The Secretary General often acts as an appointing authority. When there are issues with respect to appointment of arbitrators (e.g. because one of the parties refuses to designate an arbitrator or when the designated arbitrators are unable to agree on designation of a third arbitrator), the Secretary General appoints the arbitrators.

Conclusion

Arbitration has gained a preferable and favorable momentum over the years due to its advantages, effectiveness. Major contracts around the world irrespective of nature of parties and scope of contract irresistibly contain arbitration clause so that delayed decision of judiciaries is averted and subject-domain expert arbitrator preside over the matter to amicably resolve the dispute and whose decisions are often accepted if acceded to arbitration requests based on arbitration clauses in contract.