Arbitration Law (National)

From Max-EuP 2012


by Ben Steinbrück

1. Subject matter and functions; terminology

National arbitration law provides the legal framework for the conduct of private arbitration proceedings. It primarily regulates the relationship between arbitration and the national courts and specifies under which conditions arbitration agreements and arbitral awards are valid and binding. National arbitration law continues to be of prime importance in international arbitration, since international treaties on arbitration (arbitration (international)) only address specific issues like the recognition and enforcement of arbitral awards.

Most European nations have enacted special arbitration statutes, which can be divided into three different categories: French and Swiss arbitration law, for example, provide separate bodies of rules for national and international arbitration. Other countries, like Belgium, Italy or Sweden, have statutes on domestic arbitration supplemented by special rules on international arbitration. Instead of distinguishing between domestic and international arbitration, an increasing number of legislatures have opted for a uniform arbitration law that applies to all types of arbitration. Germany, Austria, Spain and England, for example, follow this approach.

National arbitration law has to be distinguished from institutional arbitration rules, other private procedural rules and emerging international (or transnational) standards of conduct and procedure (arbitration (international)). These sets of private arbitration rules focus on the internal conduct of the arbitration. Operating within the ambit of national law, they form the basis of an increasingly harmonized international arbitration practice. These rules are chosen by the parties and may be modified according to their individual needs and wishes. National arbitration laws, in contrast, mainly address the external procedural questions, ie the relation between the courts and the arbitration. This distinction is not always reflected in the terminology. The law applicable to the arbitration is often called the procedural law, arbitration law or curial law. French law usually refers to the loi d’arbitrage. The Latin expression lex (loci) arbitri is also widely used.

National arbitration law has several functions. First, countries that regulate fundamental questions of private arbitration recognize private adjudication by arbitral tribunals as an alternative means of dispute resolution to national court proceedings. Secondly, mandatory provisions of national arbitration law place a framework of compulsorily applicable rules around the realm of arbitration as a privately administered, autonomous system of dispute resolution (mandatory law (fundamental regulatory principles); mandatory law (basic features of regulation in European private law)). Claims involving an economic interest, for instance, can usually be the subject of an arbitration agreement. In contrast, family or patent matters are not arbitrable in most countries because they concern important public interests. Furthermore, mandatory law regulates the formal validity of arbitration agreements, guarantees fundamental procedural standards and ensures the binding character of the arbitral award. Last but not least, mandatory provisions guarantee effective national court control of the arbitration proceedings and the arbitral award. In its third function, national arbitration law provides a set of supplementary non-mandatory rules that fill gaps in the arbitration agreement. The parties are therefore free to tailor the procedural rules according to their specific needs (freedom of contract). Non-mandatory rules concern in particular the establishment and composition of the arbitral tribunal, the conduct of the arbitration proceedings and national court measures in aid of arbitration. Such rules are most often found in uniform arbitration statutes that do not distinguish between national and international arbitration.

2. Tendencies in the legal development

The origins of private arbitration as a method of dispute resolution can be traced back to ancient times (arbitration (international)). In the Middle Ages and early modern times arbitral tribunals were widely used and recognized in most European legal systems. Initially, they typically dealt with small claim disputes within a family or between close friends and aimed at guaranteeing the stability of such long-term and confidential personal relationships. Until the beginning of the 20th century this purpose was still reflected in many national arbitration laws, eg in French law.

In contrast, due to England’s pivotal role in the expansion of global trade in the 17th century, English arbitral tribunals also became increasingly involved in commercial disputes. English judges, whose income at that time depended upon the court fees, disapproved of this development as they felt that arbitral tribunals deprived them of the cases which were not only of the greatest legal interest but also proved the most lucrative. Furthermore, they feared until well into the 20th century that dispute resolution by ‘inferior tribunals without legal training in matters of law’ would inevitably lead to an ‘erroneous administration of law, and therefore injustice’ (Czarnikow v Roth, Schmidt and Co [1922] 2 KB 478, 488 f). The English judges therefore tried to counteract the proliferation of private arbitration by refusing to recognize arbitration agreements. As a consequence the parties were free to break their agreements to arbitrate without any legal sanctions. At the end of the 17th century the courts also prohibited penalty clauses that were inserted into contracts in order to ensure compliance with arbitration agreements. At the same time the principle of party autonomy (freedom of contract) was severely restricted, as parties were no longer entitled to oust the jurisdiction of the national courts. The early Arbitration Acts 1889–1934 did not do much to change this legal status but rather laid down the existing common law. It was only the arbitration defence that was slowly recognized in national court proceedings.

Thus, for a long time private arbitration was subordinated to national court justice. The liberalization of arbitration eventually started with the enactments of the Arbitration Acts 1950, 1975 and 1979. For the time being, this modernization process came to an end with the Arbitration Act 1996, which in many respects mirrors the UNCITRAL Model Law on International Commercial Arbitration of 1985. Although the English legislature refused to adopt it in its entirety, the Model Law influenced both the structure and content of the new law in order to enable (foreign) commercial parties familiar with the Model Law to apply the law without difficulty.

Yet, some legacies of the former arbitration law can still be found in the new Arbitration Act. One such example is the limited effect of the arbitration defence on national court proceedings. A valid arbitration agreement does not derogate, ie exclude entirely, the jurisdiction of national courts. Proceedings brought in breach of an arbitration agreement are merely stayed. On the basis of their continuing inherent jurisdiction, English judges have therefore wide powers to support and control the arbitration. Furthermore, their controlling powers still go beyond the competences of most civil law courts. Arbitral awards, for example, are subject to a review on the merits, albeit only under rather narrow conditions. In this respect English arbitration law differs considerably from civil law systems that restrict the supervision of arbitral awards, in particular in international arbitration, to merely a review on whether they violate public policy.

Similarly, the legislatures in continental Europe only began to gradually reduce national court supervision over arbitration proceedings since the end of World War II. Although substantial changes were achieved on the international plane, most notably in the form of international treaties like the New York Convention of 1958 (arbitration (international); recognition and enforcement of arbitral awards), not all reform projects succeeded. The Council of Europe’s (Council of Europe (institutional aspects); Council of Europe (harmonization of private law)) European Convention providing a Uniform Law on Arbitration, for example, failed, as only Belgium enacted the uniform law. Thereafter, the efforts to modernize the different arbitration statutes were restricted to the national level. One popular concept was the delocalization of private international arbitration, which aimed at limiting the supervising competences of national courts. The different delocalization models that have been developed since the 1970s reject the approach that arbitration proceedings are inevitably subject to the law of its country of origin (recognition and enforcement of arbitral awards). But not every reform project proved successful, as again demonstrated by a Belgian example. In 1985 the Belgian legislature, aspiring to promote Belgium as an international place of arbitration, abolished the right to challenge arbitral awards in cases where the parties had no connection to Belgium. These hopes were soon dashed, as parties were apparently unwilling to forego their right to have recourse against an award. As a consequence, in 1998 Belgium adopted the solution of Swiss arbitration law. According to Art 192 of the Swiss Private International Law Statute (PILS), parties of a Swiss arbitration that have no links to Switzerland may, by explicit agreement, renounce their right to challenge the arbitral award before the Swiss courts. The most progressive delocalization system has been adopted in France. Since its reform in 1981 French international arbitration law consists of very liberal rules that attach the greatest importance to the principle of party autonomy. The new reform of 2011 keeps with this arbitration-friendly tradition since it does not only codify well-established French case law but also contains some innovations. For instance, the new French arbitration law allows the parties to waive at any time their right to challenge the award by way of annulment, ie contrary to Swiss or Belgian law, the new law grants the right to exclude annulment proceedings not only to foreign but also to French parties.

Since the middle of the 1980s a growing number of nations have been modernizing their national arbitration laws on the basis of the UNCITRAL Model Law on International Commercial Arbitration. The UN General Assembly adopted the Model Law in 1985 and recommended that all countries should give due consideration to it. Together with representatives from industrialized and developing countries, UNCITRAL developed the Model Law as a special law designed for international commercial arbitration. It mostly reflects the predominant ideas of how appropriate rules on international commercial arbitration should be drafted. By now more than 50 countries have adopted, or closely follow, the Model Law, among them Germany, Austria, Spain, Russia, Poland, Hungary and, most recently, Slovenia. Thus, although some countries, including traditional arbitration venues like France and Switzerland, do not follow the Model Law regime, it can be noted that in Europe and many other parts of the world there exists a common basic understanding of the legal framework for international arbitration.

3. Basic principles of modern arbitration laws

The UNCITRAL Model Law contains very detailed but non-exhaustive provisions designed to deliver effective arbitral justice. They are well structured and easy to understand. It follows that, in particular, foreign parties or lawyers will have no difficulties in applying national arbitration acts that were based on, or at least inspired by, the Model Law. As an internationally acceptable regime it may therefore serve as a good illustration of a modern arbitration law.

Apart from its general arbitration-friendly orientation, the Model Law is based on two main principles. First, it restricts (perhaps too much) the auxiliary powers of the national courts. Article 5 provides: ‘In matters governed by this Law, no court shall intervene except where so provided in this Law’. This provision primarily aims at clarifying rather than in itself regulating the role of national courts in arbitration proceedings. It has been adopted by the vast majority of Model Law nations, eg in § 1026 of the German Code of Civil Procedure (ZPO) or in § 578 of the Austrian ZPO. Section 1(c) of the English Arbitration Act 1996, in contrast, grants the courts discretion in this respect: ‘In matters governed by this Part [Part I of the Arbitration Act] the court should not intervene except as provided by this Part’. In practice, however, these differences have little impact since, in exceptional cases, German or Austrian courts may also issue (supportive) measures even in the absence of an explicit legal basis.

The second principle advocated by the Model Law is party autonomy. Many provisions of the Model Law are non-mandatory, ie the parties are free to agree on different rules. The parties may, for example, diverge from the rules on the establishment of the arbitral tribunal (Arts 10 and 11). Furthermore, Art 19 stipulates that parties may agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings. These rules have not only been adopted in Model Law nations (see eg §§ 1034, 1035, 1042(3) of the German ZPO; §§ 586, 587, 594(1) of the Austrian ZPO). Other modern arbitration statutes also grant the parties considerable freedom in determining the rules of the proceedings. Apart from English law (ss 15 ff, 34(1) Arbitration Act 1996), such provisions can be found, inter alia, in Swiss (Arts 179(1), 182(1) PILS) and French law (Arts 1508, 1509 Code de procédure civile (CPC)).

A particularly important provision of the Model Law is Art 1(2), which deals with its scope of application. As a general rule, the Model Law only applies if the place of arbitration is in the territory of the respective Model Law country. Only the rules on the effect of the arbitration agreement (Art 8), the national courts’ competences to grant interim relief (Art 9) and the recognition and enforcement of arbitral awards (Arts 35, 36) apply to foreign arbitrations as well. Thus, the connecting factor (connecting factors (PIL)) for the determination of the applicable law to the arbitration (lex arbitri) is the place (or seat) of the arbitration. This so-called territoriality principle based on a mandatory and, ostensibly, objective criterion is widely recognized. In addition to the Model Law nations (see eg § 1025 of the German ZPO, § 577 Austrian ZPO), Switzerland (Art 176(1) PILS), England (s 2 Arbitration Act 1996) and many other countries have adopted this rule.

The opposing concept is the procedural theory, or ‘autonomistic approach’, which allows the parties to freely choose the law governing the arbitration (choice of law by the parties). Although most regimes presently reject the procedural theory, parties are still able to choose the lex arbitri. By determining the seat of the arbitration the parties may indirectly select the governing law, since most legal systems distinguish between the legal seat of the arbitration and the place where the arbitral proceedings actually take place. Understood as a purely legal concept, the seat of the arbitration simply connects the arbitration to a national legal system without restricting the freedom of the parties and the tribunal to hold hearings wherever they see fit. Many arbitration laws even recognize an entirely fictitious seat that does not have any connection to the place of the hearing and/or taking of evidence.

However, the territoriality principle only seems to solve the problems that might arise under the procedural theory. If the parties have not expressly chosen the seat of the arbitration in their contract, the legal seat, in contrast to the factual place of the arbitration, will often be as difficult to determine as the governing law where the parties have failed to stipulate a choice of law.

France is the most prominent example of a country that rejects the traditional conflict-of-laws approach and does not restrict the scope of application of its international arbitration law. As a result French courts are bound to apply French law to every international arbitration case before them, irrespective of the seat of the arbitration. This allegedly progressive method is often praised as being in the interest of the parties because of the liberalism of French arbitration law. On closer examination, however, the French model is based on a simple lex fori rule which can lead to serious problems, if, for example, the French court decisions taken in respect of a foreign arbitration contradict judgments on the same matter rendered by the courts at the seat.

In those systems that generally restrict the application of their arbitration laws to arbitrations having their seat within the country, the seat also serves as connecting factor for the national courts’ jurisdiction, allowing it to assist and control the arbitration. These competences are therefore closely linked to the lex arbitri. Such a rule is not mandatory though. As in other areas of private international law (PIL), jurisdictional and substantive issues have to be distinguished (connecting factors (PIL)). Thus, the widespread idea that the parties may find their juge naturel for all auxiliary proceedings at the seat of the arbitration is untenable. While it is correct that only the local courts at the seat have powers of supervision, including the competence to annul arbitral awards, the national courts’ supportive jurisdiction should not be restricted to domestic arbitration. In certain cases, judicial assistance may also be granted in relation to foreign arbitrations. In particular, recently reformed arbitration laws, being sensitive to the needs of commercial practice, contain such rules. The Austrian Arbitration Act of 2006 is a particularly good example in this respect (§ 577(2) Austrian ZPO, see also § 1025(2) German ZPO, s 2(3) and (4) Arbitration Act 1996 and Art 1505(4) CPC).

The greatest impact of the close connection of arbitration proceedings to the law of the seat can be observed in the area of national court control of arbitration. In practice, one of the most crucial issues concerns the jurisdiction of the arbitral tribunal. It is generally recognized that the arbitral tribunal is competent to rule on its own jurisdiction (Kompetenz-Kompetenz, competence-competence, compétence-compétence; see Art 16 (1) Model Law). This decision, however, is subject to national court review. Often the arbitral tribunal issues a preliminary ruling on jurisdiction. When this decision can be reviewed by the competent national court depends on the applicable law. In most countries, a preliminary ruling on jurisdiction can be immediately challenged before the courts at the seat of the arbitration. In Belgium, the Netherlands, Italy and Sweden, however, the courts cannot review the tribunal’s jurisdictional decision alone, but only the final award, including the ruling on jurisdiction.

National arbitration laws also differ considerably in how detailed national courts may review final arbitral awards. Although in most countries, and in particular in Model Law systems (see Art 34 Model Law), the statutory grounds for setting aside an arbitral award are more or less identical with the grounds for refusing to recognize foreign arbitral awards under Art V of the New York Convention (recognition and enforcement of arbitral awards), the interpretation of these provisions may well differ from court to court. Especially with regard to ordre public violations, national courts often apply different standards. An arbitral tribunal’s breach of European competition law, for example, inevitably leads to the annulment of the award in some European countries while others do not consider such a breach as a public policy violation. Thus, the ultimate benchmark for the recognition of party autonomy under a given national arbitration law is the scope of the national courts’ procedural and substantive review of arbitral awards.

Literature

Howard M Holtzmann and Joseph E Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration (1989); Peter Schlosser, Das Recht der internationalen privaten Schiedsgerichtsbarkeit (2nd edn, 1989); Michael J Mustill and Steward C Boyd, International Commercial Arbitration (2nd edn, 1989, 2001 Companion 2001); Emmanuel Gaillard and John Saville (eds), Fouchard, Gaillard, Goldman on International Commercial Arbitration (1999); Pieter Sanders, Quo Vadis Arbitration (1999); Georgios Petrochilos, Procedural Law in International Arbitration (2004); Bernhard Berger and Franz Kellerhals, International and Domestic Arbitration in Switzerland (2nd edn, 2010); Jean-François Poudret and Sébastien Besson, Comparative Law of International Arbitration (2nd edn, 2007); Dennis Solomon, Die Verbindlichkeit von Schiedssprüchen in der internationalen privaten Schiedsgerichtsbarkeit (2007); Gary Born, International Commercial Arbitration (3rd edn, 2009).

Retrieved from Arbitration Law (National) – Max-EuP 2012 on 06 December 2022.

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