International Commercial Arbitration
International commercial arbitration is a means of resolving disputes arising under international commercial contracts. It is used as an alternative to litigation and is controlled primarily by the terms previously agreed upon by the contracting parties, rather than by national legislation or procedural rules. Most contracts contain a dispute resolution clause specifying that any disputes arising under the contract will be handled through arbitration rather than litigation. The parties can specify the forum, procedural rules, place and law to be followed at the time of entering into the contract.
Arbitration can be either “institutional” or “ad hoc.” The terms of the contract will dictate the type of arbitration. If the parties have agreed to have an arbitral institution administer the dispute, it is an institutional arbitration. If the parties have set up their own rules for arbitration, it is an ad hoc arbitration. Ad hoc arbitrations are conducted independently by the parties, who are responsible for deciding on the forum, the number of arbitrators, the procedure that will be followed, place of the arbitration and all other aspects of administering the arbitration.
The parties are free to decide the place of the Arbitration and once the parties in Arbitration Agreement had decided the place of arbitration, then the tribunal will have exclusive jurisdiction to deal with the matter debarring the cause of action. For instance the contract had been entered between the parties to provide services in Gurgaon Haryana and in the agreement parties have decided place of arbitration will be Mumbai, then the clause will be a valid clause.
International Arbitration Agreement
The ability to arbitrate disputes can play an important role in a party’s risk assessment when entering into cross-border contracts. A valid agreement to arbitrate can give a party access to a neutral venue with impartial arbitrators, and the ability to enforce the final award in a far greater number of countries than a court judgment.
If the arbitration clause fails to establish a binding agreement to arbitrate (such clauses are often termed “pathological clauses”), the party may well be left with no choice but to initiate court proceedings in the “home court” of its contractual counter-party, a prospect that may have given rise to the rationale behind proposing arbitration in the first place.
The test most commonly used to determine the core elements of a valid and enforceable agreement to arbitrate is that which would be applied by a state court that is asked to recognize the agreement to arbitrate under the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention). Those core elements are as follows:
- Parties have capacity to contract.
- Agreement valid under its governing law.
- Arbitrability.
- Written evidence of the parties’ agreement to arbitrate.
- A clear agreement to submit the present or future dispute to arbitration.
Parties have capacity to contract
While the classic bases of incapacity are less likely to present problems in international commercial contracts, capacity can still be an issue in certain circumstances. In recent years a number of countries have removed the capacity of some of their state-owned entities in key sectors (for example energy) to contract subject to arbitration clauses.
The agreement is valid under its governing law
There are also still a number of countries which require parties to reconfirm their agreement to arbitrate after the dispute has crystalized. Historically, before the widespread adoption of the UNCITRAL Model Law on International Commercial Arbitration 1985 (UNCITRAL Model Law), this requirement was a much more common feature of national laws. This was a factor in the International Chamber of Commerce (ICC)’s development of the Terms of Reference mechanism, under which parties are required to sign to confirm their agreement to submit a dispute to arbitration.
Subject matter of the dispute is arbitral
Many countries still view anti-trust/competition, and patent and trade mark-related disputes, as incapable of being arbitrated. The rationale behind this is that arbitration is essentially a mechanism for the private resolution of disputes between consenting parties, whereas antitrust/competition and patent and trade mark disputes can have impact on a wider group of parties. Many countries take the view that jurisdiction over such issues should be vested solely with courts.
Written evidence of the parties’ agreement to arbitrate
At one time, written evidence had to be in a single document. Now, written evidence can be found in more than one document, and with the increase in the use of electronic devices “written” and “document” can be more widely interpreted. While that broad approach is now widespread, again there are jurisdictions in which a more restrictive view is taken and it can be more difficult to establish satisfactory evidence of the parties’ agreement to arbitrate.
A clear agreement to submit the dispute to arbitration
Perhaps the greatest cause of a pathological clause is the requirement to establish a clear agreement to submit the dispute to arbitration. Difficulties commonly arise when drafters seek to reserve certain types of issue for resolution by a different dispute resolution mechanism (for example, completion account issues by expert determination), or fail to properly structure a multi-tier dispute resolution structure (for example, negotiation between principals before mediation before arbitration).
Both of the above examples can be achieved by careful drafting. But poor drafting can cause uncertainty and therefore problems. The classic example is the clause that mandates mediation without allowing a party to “escalate” the dispute to arbitration after a set period if mediation does not result in a settlement. It can leave the parties locked in the mediation phase indefinitely.
Core provisions of an arbitration clause
These are:
- Choice of the “seat” or legal place of the arbitration.
- Choice of arbitral institution to administer.
- Choice of institutional rules.
- Choice of Law
- Number and method of selection of arbitrator.
- Language of the arbitration.
- Confidentiality.
Choice of arbitral institution to administer
One of the big decisions when drafting an arbitration clause is whether to prescribe an administering institution and, if so, which one. There are an increasing number of institutions, for example:
- International Chamber of Commerce (ICC).
- London Court of International Arbitration (LCIA).
- Chartered Institute of Arbitrators (CIA).
- International Centre for Dispute Resolution (ICDR)/American Arbitration Association (AAA).
- Stockholm Chamber of Commerce (SCC).
- Singapore International Arbitration Centre (SIAC).
- Hong Kong International Arbitration Centre (HKIAC).
- China International Economic and Trade Arbitration Commission (CIETAC).
- Cairo Centre.
- Dubai International Arbitration Centre (DIAC).
- Santiago Chamber of Commerce (CAM Santiago).
- The Arbitration Centre of Mexico (CAM).
- Swiss Arbitration Association (ASA).
The functions performed by an institution include the following:
- Tribunal appointment.
- Administration of challenges to arbitrators.
- Administration of the deposit/advance on costs.
- Scrutiny of the award (currently unique to the ICC).
Drafted and Settled by
Mr. Varun S. Ahuja
Partner
M/S Ahuja Law Offices
Email: alo@ahujalawoffices.com
Phone Nos: 011-49096435, 9971673660