Arbitration (International)

From Max-EuP 2012


by Martin Illmer

1. Term and function

Arbitration is a means of alternative dispute resolution recognized throughout the world. Parties opt for arbitration for various reasons (eg shorter duration than state court proceedings, lower costs, confidentiality, expertise of the arbitrators, flexible procedural rules that may be tailored to the specific dispute, equality of arms, neutrality of place and arbitrators, global recognition and enforcement of arbitral awards). Various forms of arbitration must be distinguished with respect to their legal basis, parties and subject matter: private commercial arbitration, statutory (compulsory) arbitration (as it was the case in the former socialist countries), investment arbitration (regularly based on bi- or multilateral investment treaties, the ICSID treaty of 1965 in particular), employment arbitration and international arbitration between states.

Private commercial arbitration may be defined as dispute resolution based on the parties’ agreement to submit their dispute to one or more persons (the arbitrator(s)) designated by the parties instead of a state court. The decision, taking the form of an arbitral award, has in many respects the same effect as a judgment by a state court. It has res judicata effect, is binding upon the parties and may be enforced, although, in the case of foreign arbitral awards, enforcement only occurs after recognition in the enforcement country (recognition and enforcement of arbitral awards).

Considering these key elements, private commercial arbitration has to be distinguished from other forms of alternative dispute resolution. A negotiation is a process by which the parties alone seek to reach a settlement of their dispute. In mediation, a third neutral person, the mediator, is involved. However, the mediator does not decide the dispute. Usually, he does not even suggest a solution. He rather leads and supports the parties along the way to a solution and the parties negotiate themselves. In conciliation, again a third neutral person, the conciliator, is involved. As opposed to the mediator, the conciliator regularly suggests how to solve the dispute after having heard both parties. But still the parties are free to accept (or reject) that solution.

Arbitration has to be further distinguished from expert determination (expertise amiable, Schiedsgutachten) including commodity arbitration (which is not arbitration but a special form of expert determination). The appointed expert issues a binding decision, which is not concerned with the dispute as a whole, but only with a single aspect relevant to the decision of the dispute. Usually, the decision concerns specific factual issues (eg the quality of the delivered goods) or distinct questions of law.

With regard to private commercial arbitration, there is a basic distinction between ad hoc arbitration and institutional arbitration. In case of an ad hoc arbitration, an arbitral tribunal is established for the singular purpose of deciding the dispute in question. It has to administer all issues in cooperation with the parties. Apart from the mandatory provisions of the arbitration law at the arbitral seat, the parties are free to determine all aspects relating to the arbitration, in particular the procedure to follow. In any event, the dispositive provisions of the respective national arbitration law provide default rules. In case of an institutional arbitration, the arbitration is administered by an arbitral institution, regularly taking the form of a private organization. This includes regulating fees, contracts with the arbitrators and organization issues (such as venue and distribution of submissions amongst the parties). With the arbitral institution the parties regularly choose the institution’s arbitration rules. These arbitration rules provide a procedural regime for the arbitration proceedings replacing and supplementing the (mainly) dispositive provisions of the national arbitration laws. Most arbitral institutions provide a standard arbitration clause that can be used to choose arbitration under its auspices.

A final distinction must be drawn between national and international arbitration since the question whether to apply the same statutory framework to national and international arbitration is answered differently throughout the European national arbitration laws (arbitration law (national)). French and Swiss law provide for different regimes. The distinguishing criterion under French law (Art 1504 Code de procédure civile) is an objective one: ‘are interests of international trade and commerce affected?’ In contrast, Swiss law provides for a subjective criterion: ‘the domicile or habitual residence of the parties in different countries’ (Art 176 Swiss Private International Law Act). The UNCITRAL Model Law was designed for international arbitration; its Art 1(3) distinguishes between international and national arbitration using subjective criteria (places of business in different states) and objective criteria (seat of the arbitral tribunal, place of performance of the characteristic contractual obligations or closest connection of the dispute to a state other than the one where the places of business are located). Many European countries that have based their national arbitration law on the UNCITRAL Model Law apply it nevertheless to international as well as national arbitration (arbitration law (national)). By doing so, they avoid a difficult differentiation and strengthen arbitration overall. Instead of providing for a more liberal regime for international arbitration, they apply the liberal regime of the Model Law equally to national arbitration. Consequently, the differentiation between national and international arbitration is irrelevant under most European arbitration laws. Usually, they apply once the place of arbitration is within their territory (cf § 1025(1) and (2) German Code of Civil Procedure (Zivilprozessordnung) and s 2(1)–(3) English Arbitration Act 1996). International Conventions in the field of arbitration usually require a cross-border element (cf Art 1(1) of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (New York Convention) and Art 1(1)(a) of the European Convention on International Commercial Arbitration of 1961).

2. History and development of the law

Private arbitration has been recognized as a form of dispute resolution since ancient times. Under Roman law foreigners as well as Roman citizens could agree on dispute resolution by a private arbitral tribunal. In the classical period arbitration was founded on the agreement of the parties alone. The arbitration agreement was the basis for the arbitration proceedings and for the enforcement of the arbitral award by way of corresponding penalty clauses for the case of disregarding the award (compromissum). In the post-classical period the purely contractual foundation of enforcement was supplemented by granting the successful claimant an action for enforcement, the actio in factum, and the successful defendant a defence, the exceptio veluti pacti. This regulatory structure is still in place in today’s modern arbitration laws: recognition and enforcement of arbitral awards may be sought with the state courts in the country of enforcement. Thus, the hybrid character of arbitration as a system of private dispute resolution embedded in the state’s enforcement mechanisms was already present in Roman law.

In the Middle Ages and in the early modern age, private arbitration was recognized in most European legal systems, although it was mainly concerned with national or even local disputes. The relationship to state court adjudication was difficult, particularly in England. It was rather characterized by antagonism than cooperation (arbitration law).

In the 20th century, the Geneva Protocol of 1923 (concerned with arbitral clauses in relation to future disputes) and the Geneva Convention of 1927 (concerned with the recognition and enforcement of foreign arbitral awards once declared enforceable in the country of the arbitral seat) were first steps towards harmonizing certain aspects of international arbitration; today both are superseded by the New York Convention (see Art VII(2)). Interrupted by the years of confrontation and World War II, efforts continued in the early 1950s. They resulted in the New York Convention of 1958 which is an unsurpassed success and the cornerstone for the rise of international arbitration in the second half of the 20th century. It ensures recognition and enforcement of arbitral awards nearly worldwide as it currently applies in 145 countries (as of June 2011). The European Convention of 1961, aiming for the same goal in relation to trade and commerce between the eastern and western blocks, was a further important step towards internationalization of arbitration. However, it did not come close to the success of the New York Convention and is today practically irrelevant in practice, except for Art IX (setting aside arbitral awards).

The real success story of international commercial arbitration started in the 1970s. Cross-border trade and commerce were rising rapidly, while the national regimes on jurisdiction, recognition and enforcement of foreign judgments were not meeting the expectations of the business community. Lacking any harmonization even as to minimum standards, recognition and enforcement were often uncertain, particularly in more remote countries. Apart from the Brussels Convention of 1968, there was no significant multi-lateral Convention in place in relation to jurisdiction as well as recognition and enforcement of foreign judgments. As a result, cross-border litigation before state courts was time-consuming, costly and afflicted by a considerable degree of legal uncertainty due to the differences in the national regimes.

This vacuum was increasingly filled by international commercial arbitration (supplemented by further advantages in an international context, see 1. above). Arbitral institutions emerged, initially often attached to the respective chambers of commerce. The most prominent is the International Chamber of Commerce (ICC) with its general secretariat for arbitration in Paris. The ICC was and still is one of the driving forces of international commercial arbitration and the leading arbitral institution. Among the numerous other arbitral institutions operating worldwide are the American Arbitration Association (AAA) with its International Centre for Dispute Resolution (ICDR), the London Court of International Arbitration (LCIA), the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), the German Institution for Arbitration (DIS), the China International Economic and Trade Arbitration Commission (CIETAC) as well as several sector-specific institutions (eg the German and the London Maritime Arbitration Associations). The institutionalization of international arbitration increased its professionalism and quality and facilitated access to arbitration for inexperienced parties. At the same time, the UNCITRAL Model Law, adopted in 1985, led to a liberalization of national arbitration laws (currently 73 arbitration laws are based on it). The supervisory powers of state courts are very limited and most provisions are of a dispositive nature. This enables arbitral institutions to design arbitration rules deemed best suited for the resolution of disputes and fosters competition for the best procedural framework among them. Today, arbitration is the leading mechanism for the resolution of international commercial disputes.

3. European law and arbitration

There is no coherent body of European law on arbitration, neither statutory nor by way of case law.

The only provision of the EC Treaty (European Community) dealing with arbitration, Art 293 4th indent (repealed at Lisbon), was concerned with negotiations between the Member States on the simplification of formalities governing the recognition and enforcement of arbitral awards. It never played any role or brought about any Convention. Consequently, the provision was repealed under the TFEU. This development accords with the overall strategy of the European Union to leave the regulation of arbitration to international conventions, the national arbitration laws and private law-making. The EU regulations in the field of private international law and international civil procedure regularly exclude arbitration from their substantive scope (Art 1(2)(e) Rome I Regulation (Reg 593/2008) excludes the issue of the law applicable to arbitration agreements from its scope; Art 1(2)(e) Brussels I Regulation (Reg 44/2001) excludes arbitration as such from its scope).

The ECJ’s case law is rather fragmentary. The ECJ held relatively early that arbitral tribunals are not courts of a Member State within the meaning of Art 267 TFEU/234 EC so that they do not qualify for referring a matter to the ECJ for a preliminary ruling (ECJ Case 102/81 – Nordsee [1982] ECR 1095, para 13). Additionally, an arbitral award may be set aside by a national court as being contrary to the ordre public (public policy) if it violates and/or disregards mandatory provisions of European law (ECJ Case C-126/97 – Eco Swiss [1999] ECR I-3055, para 37, concerned the cartel prohibition of Art 101 TFEU/81 EC but may equally apply to secondary EU legislation). In such cases, recognition and enforcement of the respective arbitral award are likely to be refused under Art V(2)(b) of the New York Convention even if the award has not been set aside by the national court at the arbitral seat.

Recently, the ECJ had to decide on various aspects of the exclusion of arbitration from the substantive scope of the Brussels I Regulation that were unclear and controversially discussed amongst the arbitration community. It is commonly accepted that the arbitral process itself (governed by the national arbitration laws and institutional or ad hoc arbitration rules) as well as recognition and enforcement of arbitral awards (governed by the New York Convention) are excluded from the scope of the Brussels I Regulation. Beyond that it is in particular unclear whether proceedings before Member State courts in support of arbitration are covered by the Brussels I Regulation or are—even if not covered—nevertheless incompatible with the Brussels I Regulation. The Schlosser Report on the Brussels Convention (the exclusion of arbitration having the same wording as in the Brussels I Regulation) merely lists some examples of proceedings within or outside the scope, but it does not provide an abstract criterion. The ECJ’s jurisprudence has to date only been on a case-by-case basis (state court proceedings for the appointment of an arbitrator are outside the scope of the Brussels I Regulation—ECJ Case C-190/89 – Marc Rich [1989] ECR I-3855; interim relief proceedings before a state court for the protection of those claims which have to be brought before an arbitral tribunal in the main proceedings are within the scope—ECJ Case C-391/95 – van Uden [1998] ECR I-7091). It is difficult to deduce a general principle or criterion from those decisions. At most, it seems to be settled by now that proceedings before a Member State court directly concerned with an ongoing or future arbitration, ie the subject matter of which is arbitration, are outside the scope of the Brussels I Regulation.

Of particular interest was the question whether anti-suit injunctions (provisional measures) by the English courts for the enforcement of arbitration agreements governed by English law and providing for London as the place of arbitration are compatible with the Brussels I Regulation. Recently, the ECJ held that they are incompatible (ECJ Case C-185/07 – West Tankers [2009] ECR I-663) as they interfere with the right of the court seized under the jurisdiction of the Brussels I Regulation to determine itself whether it actually has jurisdiction (including the preliminary issue of the validity and scope of the arbitration agreement) and in doing so harm the regulation’s effet utile. Following up on a green paper in 2009 on the reform of the Brussels I Regulation (COM (2009) 175 final), largely based on the so-called Heidelberg Report by Professors Hess, Pfeiffer and Schlosser, in June 2010 the Commission appointed an expert group on the arbitration interface. Based on its recommendation, the Commission’s proposal for a reformed Brussels I Regulation of December 2010 (COM (2010) 748 final) suggests partially deleting the exclusion of arbitration from the substantive scope of the regulation in order to introduce a special lis pendens rule in Art 29(4) addressing the interface of arbitration and state court proceedings. It provides that once the arbitral tribunal or the state courts at the seat are seized of proceedings to determine the validity of the alleged arbitration agreement, whether as their main object or as an incidental question, the courts of any other Member State whose jurisdiction is challenged on the basis of this arbitration agreement have to stay proceedings or, if their national law so prescribes, decline jurisdiction. If stayed, the non-seat court has to decline jurisdiction once the validity of the arbitration agreement is established by the seat courts or the arbitral tribunal.

4. Transnational developments

International arbitration is increasingly regulated by transnational rules, regularly in the form of private law-making done by arbitral institutions and professional associations. Although it is nowadays widely accepted that even international arbitration is not entirely detached from the national arbitration laws (so-called delocalization theory), but rather embedded into a national arbitration law, usually that of the arbitral seat, most arbitration laws leave extensive room for private law-making since they contain only very few mandatory provisions. These concern in particular the neutrality of the arbitrators, procedural minimum standards (fair trial, right to be heard) and the recognition and enforcement of arbitral awards. Most other aspects of the arbitration, such as a free choice of the applicable law (even non-state law such as the UNIDROIT Principles of International Commercial Contracts (PICC)), composition and appointment of the arbitrators and the actual design of the procedure to be followed by the arbitral tribunal are the subject of dispositive provisions. This enables the parties to agree on a tailor-made dispute resolution mechanism, which may even be adapted and amended during the arbitral proceedings. If they want to make use of an approved and tested mechanism, they may choose from the arbitration rules of the various arbitral institutions. Often, arbitral institutions offer not only one set of rules, but also different sets for different types of disputes. In addition, the parties may even amend specific aspects of those rules by individual agreement (see eg Art 14.1 LCIA Rules; Art 1(a) International Arbitration Rules of the AAA/ICDR; Art 4(2) CIETAC Rules; Art 1.2 and 24.1 DIS Rules). Although the arbitration rules of the leading arbitral institutions tend to align along a best practice standard, there are still considerable differences among them. But neither the national arbitration laws nor the institutional arbitration rules provide for every detail of the arbitral proceedings. Most importantly, the often crucial but problematic aspect of establishing the facts of the case is not regulated. In particular, parties from countries with different concepts and cultures of civil procedure often have a substantially different understanding of the arbitral process. The demarcation line runs between common law and civil law jurisdictions. To bridge the gap, a best practice accepted by the arbitration community beyond borders is emerging with regard to many aspects of the arbitral process. It combines elements of common law and civil law, though with a slight prevalence of the common law. Usually, such best practice takes the form of private law-making by arbitral institutions or professional associations such as the International Bar Association (IBA) and is worked out by groups of experienced arbitration practitioners from common law and civil law jurisdictions.

These sets of transnational rules apply automatically if they are part of the regulatory framework of the arbitral institutions chosen by the parties (eg the ICDR Guidelines for Arbitrators Concerning Exchanges of Information), but may also apply if they are independently chosen by the parties in addition to institutional arbitration rules or are chosen in ad hoc arbitrations (eg the IBA Rules on the Taking of Evidence in International Arbitration).

The IBA Rules on the Taking of Evidence in International Arbitration (the revised version came into effect on 29 May 2010) are a prime example of transnational private rule-making with an effort to combine elements of common and civil law as well as civil procedure adapted to the arbitral process. It is exactly this ‘legislative history’ that has led to their worldwide acceptance in international arbitration. With regard to document production, they provide for a solution between the extremes of restrictive rules such as § 142 German Code of Civil Procedure (Zivilprozessordnung) and an extensive US-style discovery (see Art 3(2) and (3)). Regarding witness testimony, they provide, as in common law, for written witness statements followed by direct and cross-examination of the parties but develop these concepts further, providing for modern solutions such as witness and expert conferencing (Art 5(3) and 8(2)) to avoid the weaknesses discovered in the national laws; IBA Rules, Art 5 provides alternatively for party appointed experts (similar to the common law model) and Art 6 provides for the appointment of experts by the arbitral tribunal (as in the civil law model).

Transnational sets of rules do not only concern the procedure to be followed by the arbitral tribunal in deciding the case, but equally govern other aspects such as bias on the part of the arbitrators (see the IBA Guidelines on Conflicts of Interest in International Commercial Arbitration and the IBA Rules of Ethics for International Arbitrators, both substantiating the rather vague rules on bias in most arbitration rules and laws).

With new arbitral institutions and arbitration rules, issue-related private sets of rules and the development of an internationally accepted best practice, an increasingly comprehensive system of transnational rules for international arbitration is emerging. Some already refer to a lex mercatoria arbitralis. Nevertheless, despite these transnational harmonization tendencies, there is a growing competition between places of arbitration and arbitral institutions. Arbitral institutions market their services as a product for dispute resolution. States point at their allegedly liberal, yet supportive arbitration law and policy in order to attract foreign arbitration. International commercial arbitration has become a service sector of considerable economic importance and is regarded as a business operating on a global market.

Literature

Peter Schlosser, Das Recht der internationalen privaten Schiedsgerichtsbarkeit (2nd edn, 1989); Jonathan L Greenblatt and Peter Griffin, ‘Towards Harmonization of International Arbitration Rules’ (2001) 17 Arbitration International 101; Siegfried H Elsing and John M Townsend, ‘Bridging the Common Law-Civil Law Divide in Arbitration’ (2002) 18 Arbitration International 59; Jean-François Poudret and Sébastien Besson, Comparative Law of International Arbitration (2nd edn, 2007); Burkhard Hess, Thomas Pfeiffer and Peter Schlosser (eds), The Brussels I Regulation 44/2001. Application and Enforcement in the EU (2008) paras 105 ff; Nigel Blackaby, Constantine Partasides, Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration (5th edn, 2009); Gary Born, International Commercial Arbitration, 2 vols (2009); Frank-Bernd Weigand (ed), Practitioner’s Handbook on International Commercial Arbitration (2nd edn, 2009); Burkhard Hess, ‘Improving the Interfaces between Arbitration and European Procedural Law—the Heidelberg Report and the EU Commission’s Green Paper on the Reform of the Regulation Brussels I’ (2010) Cahier de l’Arbitrage 17; Martin Illmer, ‘Brussels I and Arbitration Revisited – The European Commission’s Proposal COM(2010) 748 final’ (2011) 75 RabelsZ 645.

Retrieved from Arbitration (International) – Max-EuP 2012 on 02 October 2022.

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