Chapter 19

Arbitration

Chapter Contents

Introduction

Since the Second World War, arbitration has proved an extremely popular method of resolving disputes. Arbitration, arguably, could be said to be the first step toward privatisation of justice, in that it is an alternative to resolution through national (state) courts. As such, parties opting for arbitration have greater control over matters, such as the appointment of arbitrators, the language of the arbitration, and the place of arbitration. Equally, the principles to be applied to issues under consideration need not be tied to a national law, such as English law or French law. The issue could be decided on equitable principles (ex aequo et bono) or law merchant (lex mercatoria).1 The characteristics of arbitration, including those that contribute to its continued popularity, are highlighted within this chapter. While listing the characteristics, some of the issues that have generated some discussion are also considered.

Characteristics

First, in contrast to litigation, arbitration is the product of consent between the parties. The parties can make this agreement2 either before or after the dispute has arisen. Generally, arbitration agreements are expressed in writing. Section 5 of the Arbitration Act 1996, for instance, requires the arbitration agreement3 to be in writing,4 although there is no requirement that it be signed.5 The modern practice of electronic exchange of information, of course, raises the issue of whether an electronic document will suffice for the purposes of this section. Section 5(6) states that ‘references in this Part [Part I] to anything being written or in writing include its being recorded by any means’. Presumably, this will be construed to include electronic (paperless) documents.

The arbitration agreement need not be expressed in a specific manner that includes the word ‘arbitrate’ or its variants. Of course, clear expression of the intention of the parties’ agreement to submit a dispute to arbitration would help. The International Chamber of Commerce (ICC), which offers institutional arbitration and is a popular venue for international commercial arbitration, has devised rules for the conduct of arbitration and recommends the following clause should parties wish to submit to ICC arbitration:

All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.6

1 Lando, ‘Lex mercatoria in international commercial arbitration’ (1985) 34 ICLQ 747.

2The agreement may also bind third parties who claim through the contracting parties. See Astra SA Insurance and Reinsurance Co v Yasuda Fire and Marine Insurance Co [1999] CLC 950.

3Section 6(1) defines arbitration agreement as ‘an agreement to submit to arbitration present or future disputes (whether they are contractual or not)’.

4The Arbitration Act 1975 (the predecessor to the Arbitration Act 1996) in s 7(1) stated that an arbitration agreement means ‘an agreement in writing (including an agreement contained in an exchange of letters or telegrams) to submit to arbitration present or future differences capable of settlement by arbitration’. This section has generated some discussion. According to O’Connor LJ in Zambia Steel and Building Supplies Ltd v James Clark and Eaton Ltd [1986] 2 Lloyd’s Rep 225, p 232: ‘. . . for an agreement to be a written agreement to arbitrate it is unnecessary for the whole of the contract, including the arbitration agreement to be contained in

the same document. It is sufficient that the arbitration agreement is itself in writing; indeed it is sufficient if there is a document which recognises the existence of an arbitration agreement between the parties’. See also Abdullah M Fahem and Co v Mareb Yemen Insurance Co and Tomen (UK) Ltd [1997] 2 Lloyd’s Rep 738.

5An oral agreement to arbitrate is recognised at common law. This is preserved by s 81 (‘Saving for certain matters governed by common law’), which provides: ‘(1) Nothing in this Part shall be construed as excluding the operation of any rule of law

consistent with the provisions of this Part [Part I], in particular, any rules of law as to . . . (b) the effect of an oral arbitration agreement . . .’

6 Standard and Suggested Clauses, ICC Arbitration and ADR Rules, 2012. Available at www.iccwbo.org.

Similarly, the London Court of International Arbitration (LCIA) recommends the following clauses7:

For Future Disputes:

Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and fi nally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.

The number of arbitrators shall be [one/three].

The seat, or legal place, of arbitration shall be [City and/or Country].

that the dispute shall be referred to and fi nally resolved by arbitration under the LCIA Rules.

The Arbitration Act 1996 does not make any recommendations as to choice of words or clauses and leaves it to the parties to express their intention to submit their dispute to arbitration with a suitable choice of words. The issue of whether a contractual clause is an arbitration agreement is a matter of construction, as David Wilson Homes Ltd v Survey Services Ltd8 indicates. The Court of Appeal had to decide whether the clause under examination was an arbitration agreement within s 69 of the Arbitration Act 1996. The clause read:

. . . any dispute or difference arising hereunder between the Assured and the Insurers shall be referred to the Queen’s Counsel of the English Bar to be mutually agreed between the Insurers and the Assured or in the event of disagreement by the Chairman of the Bar Council.

The court concluded that the absence of the words ‘arbitration’ or ‘arbitrator’ did not make it a non-binding alternative dispute resolution (ADR) clause (per Simon Brown LJ, at para 22). The reference to Queen’s Counsel indicated that the inquiry was to be a judicial inquiry, since ‘that is what Queen’s Counsel are normally expected to do when matters are referred to them, and all the more so if the formality of the position is such that, if there is disagreement as to the identity of the Queen’s Counsel, he is to be appointed by the Chairman of the Bar’ (per Longmore LJ, at para 14).

The arbitration agreement also determines whether the particular dispute is within the purview of arbitration or not. The issue is one of construction, the parties’ intentions to be gathered from the expression. Clauses such as ‘all disputes arising out of the contract or in connection with it’ have been construed to include extra contractual claims.10 Without question, the drafting skills

7 Available at www.lcia-arbitration.com.

8 [2001] EWCA Civ 34.

9Section 6(1) reads: ‘. . . an “arbitration agreement” means an agreement to submit to arbitration present or future disputes (whether contractual or not)’.

10See Ashville Investments Ltd v Elmer Contractors [1988] 2 Lloyd’s Rep 73; Ethiopian Oilseeds and Pulses Export Corp v Rio del Mar Foods Inc [1990] 1 Lloyd’s Rep 86; El Nasharty v J Sainsbury plc [2004] 1 Lloyd’s Rep 309. See also Fiona Trust & Holding Co v Privalov [2008] 1 Lloyds Rep 254 (para 13).

of the lawyer are crucial to ensure that the intentions are adequately expressed and conveyed in the arbitration clause. As Jacobs observes:

The law reports are replete with cases, both in regard to international and domestic arbitration clauses, interpreting them and giving meaning to phrases chosen by the draft persons, drawn sometimes entirely at random from an old precedent or the database of a word processor, without any thought being given to its probable meaning, or whether or not what it provides is what one or more of the parties intends to be arbitrated.

The fault might lie with standard form contracts . . . where the balance of the document is attractive but the Arbitration Clause receives scant attention from the lawyers involved at the contract negotiation stage, and this fact comes back to haunt one or more of the parties with a substantial involvement in costs and delays in bringing the dispute to a speedy conclusion. In this manner, arbitrationwhichshouldbespeedyandrelativelycost-effective,maysometimesgetabadname.11

Separability, that is, the treatment of arbitration as a distinct agreement, is another feature.This feature is recognised by s 7 of the Arbitration Act 1996,12 which provides:

Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purposes be treated as distinct agreement.

That the arbitration clause, when included in a contract, is to be treated as a distinct agreement was confirmed by the House of Lords in Fiona Trust Holding Co v Privalov.13 The allegations of bribery in respect of the procurement of the eight charterparties did not affect the validity of the arbitration agreement (see para 7).

A second characteristic of arbitration is that the parties to the arbitration agreement have the freedom to choose the arbitrators, which means that the dispute is decided by people with specialised knowledge of a particular trade and commercial practice. This common framework of reference boosts the confidence and trust of businessmen in the proceedings and the resulting award, which is especially important in international commerce where parties come from different legal cultures. To have people of their own kind on the panel should disputes arise contributes to the willingness of businesses to engage in international trade.

Although the parties have the freedom to choose the arbitrators, the courts have the power, under s 24 of the Arbitration Act 1996, to remove an arbitrator on application by a party to the arbitration tribunal, among other things, for lack of qualifications as required by the arbitration agreement14 and justifiable doubts as to his impartiality.15

The parties are also free to formulate the procedures that are to be applied to the arbitration. In the absence of an agreement, s 33 of the Arbitration Act 199616 (if applicable) lays down the general

11‘The jurisidiction of the International Commercial Arbitration Tribunal’, a paper delivered to the London Court of International Arbitration Group, Sydney, 15 April 1997.

12See Harbour Assurance Co UK Ltd v Kansa General Insurance Co Ltd [1992] 1 Lloyd’s Rep 812; Kalmneft JSC v Glencore International AG [2002] 1 All ER 76; and LG Caltex Gas Co Ltd v China National Petroleum Corp [2001] BLR 235.

13[2008] 1 Lloyd’s Rep 254.

14See Arts 14 and 15 of the ICC Rules of Arbitration 2012 on challenge and replacement of arbitrators.

15 See AT & T Corp v Saudi Cable Co [2000] 1 Lloyd’s Rep 22; Rustal Trading Ltd v Gill and Dufus [2000] 1 Lloyd’s Rep 14.

16There is a similar rule in the ICC Rules of Arbitration, which in Art 15(2) provides: ‘In all cases, the Arbitration tribunal shall act fairly and impartially and ensure that each party has a reasonable opportunity to present its case.’

duty of the tribunal to act impartially, giving each party a reasonable opportunity for putting his case and dealing with that of his opponent,17 and to adopt suitable, but not slow or expensive, procedures for a fair means for the resolution of the matters falling to be determined. The parties are also free to agree on the procedure to be followed where the procedure to appoint an arbitration tribunal has failed. In the absence of an agreement, the courts have the power to make appointments or revoke appointments under s 1818 of the Arbitration Act 1996.

Third, parties are free to choose institutional arbitration, such as arbitration in the ICC or LCIA. These institutions have devised procedures designed with the mercantile community in mind, thus contributing to the parties’ confidence in the system.

Fourth, parties have control over where and when arbitration takes place.This could contribute to the lowering of costs, since parties may not have to incur expenses for travel, accommodation and the renting of premises.

Fifth, parties can keep the nature of their dispute private, since arbitrations are not conducted in public.19 Arbitrations are (arguably) deemed confidential,20 in that information disclosed in an arbitration cannot be disclosed to a third party. In other words, the confidentiality obligation is perceived to apply internally and externally. (It must be noted that privacy is lost should the parties decide to take their dispute to the courts.) The views on disclosure of the documents prepared for an arbitration to third parties vary. Some jurisdictions view confidentiality as distinct from privacy, and doubt the view that privacy embodies confidentiality. For instance, in an Australian decision, Esso Australia Resources Limited v Plowman,21 the High Court was of the opinion that a third party (not party to the arbitration) could discover information provided in an arbitration. Although the private nature of a hearing was an integral part of an arbitration, confidentiality was not, on the grounds that:

(a)witnesses were not subject to the confidentiality obligation;

(b)court proceedings relating to arbitration procedure would bring the information deemed confidential into the public sphere;

(c)disclosure of awards to third parties such as shareholders and insurers was commonplace.22

As for England, there seems to be no problem in maintaining the confidentiality of arbitral proceedings. In Hassneh Insurance Co of Israel Ltd v Mew,23 the court had no hesitation in saying that documents prepared for an arbitration hearing could not be disclosed to a third party on the grounds that such disclosure would be equivalent to opening the doors of the arbitration room to a third party. According to Colman J:

. . . if the parties to an English law contract refer their disputes to arbitration they are entitled to assume at the least that the hearing will be conducted in private. That assumption arises from a practice which has been universal in London for hundreds of years and, I believe, undisputed. It is a practice which represents an important advantage of arbitration over the Courts as a means of dispute resolution. The informality attaching to a hearing held in private and the

17See ‘Challenging arbitral awards’, below.

18See R Durtnell and Sons Ltd v The Secretary of State for Trade and Industry [2001] 1 Lloyd’s Rep 275.

19Challenge of an arbitral award under s 68 of the Arbitration Act 1996 can be heard in private or in public according to Rule 62.10 of the Civil Procedure Rules. It does not follow on the basis of a private hearing that the judgment would not be

public, unless it raised highly sensitive issues, for instance in the political or commercial realm. See Department of Economic Policy and Development of the City of Moscow v Banker’s Trust Co Industrial Bank [2004] 2 Lloyd’s Rep 179.

20See Smit, ‘Confidentiality in arbitration’ (1995) 11(3) Arbitration International 337.

21(1995) 128 ALR 291; (1995) 183 CLR 10.

22See also United States v Panhandle Eastern Corp 118 FRD 346 (D Del 1988); Samuels v Mitchell 155 FRD 195 (ND Cal 1994).

23[1993] 2 Lloyd’s Rep 243.

candour to which it may give rise is an essential ingredient of arbitration, so essential that if privacy were denied by an offi cious bystander, I have no doubt that, in the case of practically every arbitration agreement, both the parties would object.

If it be correct that there is at least an implied term in every agreement to arbitrate that the hearing shall be held in private, the requirement of privacy must in principle extend to documents which are created for the purpose of that hearing . . .. The disclosure to a third party of such documents would be almost equivalent to opening the door of the arbitration room to that third party [at pp 246–47].

Does it follow that this duty of confidentiality is absolute and no exceptions are allowed? Even at the cost of injustice? It may, for instance, be necessary in some circumstances to submit documents deemed confidential to a court to protect an arbitrating party against a third party. The courts have acknowledged that there are indeed exceptions to this rule. These, as listed in a more recent case, Ali Shipping Corp v Shipyard Trogir,24 are:

(a)disclosure by express or implied consent of the parties;

(b)order of disclosure by the court for the purposes of a later court action;

(c)disclosure where it is reasonably necessary for the protection of the legitimate interests of an arbitrating party; and

(d)disclosure for reasons of public interest25 (interests of justice).26

In Ali Shipping, where the issue was whether confidential documents from an arbitration between the plaintiffs and the yard could be disclosed in a second arbitration between the yard and the buyers, the court came to the conclusion that convenience and good sense were insufficient to satisfy the test of reasonable necessity.27

The finality of arbitration awards means that time and money are not wasted on appeals through various courts (in England, the Court of Appeal and House of Lords) as in litigation. Judicial review of arbitral awards is possible on points of law, but the courts are economical in giving leave to appeal.28

The cost and speed of arbitration are often cited as advantages. This may not always be the case. Arbitrators with specialist expertise and experience – for example, in the construction industry or computer industry – are expensive. A dispute involving complex issues is likely to prolong arbitration and inflate costs if the arbitrators’ fees are calculated on a daily basis. Despite popular belief, arbitrations are not necessarily speedy. Arbitrations involving intricate issues may last as long as court proceedings. Moreover, in an arbitration agreement, parties may need to resort to court proceedings where an issue of law needs clarification,29 or where the issue involves a third party who is not subject to the arbitration agreement. Also, poor drafting of the arbitration clause that requires clarification may increase the costs and slow down the arbitral process.

24 [1998] 1 Lloyd’s Rep 643, p 651; see also Insurance Co v Lloyd’s Syndicate [1995] 1 Lloyd’s Rep 272; The ‘Hamtun’ and ‘St John’ [1999] 1 Lloyd’s Rep 883.

25The public interest exception was recognised in London and Leeds Estates Ltd v Paribas (No 2) [1995] 2 EG134.

26Potter LJ, however, preferred the use of the phrase ‘interests of justice’ to ‘public interest’ in ‘order to avoid the suggestion that use of the latter phrase is to be read as extending to the wide issues of public interest contested in the Esso Australia case’: Ali Shipping Corp v Shipyard Trogir [1998] 1 Lloyd’s Rep 643, at p 652.

27Ali Shipping Corp v Shipyard Trogir [1998] 1 Lloyd’s Rep 643, at p 654.

28 Pioneer Shipping Ltd and Others v BTP Tioxide Ltd (The Nema) [1981] 2 All ER 1030; see ‘Challenging arbitral awards’, pp 598–602 below.

29Section 45(1) of the Arbitration Act 1996 provides that: ‘. . . unless otherwise agreed by the parties, the court may on the application of a party to arbitral proceedings (upon notice to the other parties) determine any question of law arising in the course of the proceedings which the court is satisfied substantially affects the rights of one or more of the parties’.