02. arbitration

The question

The previous sub-unit identified the limitations of litigation in the cross-border setting, the uncertainty of forum, the submission to a foreign court, and the difficulty of enforcing a judgment abroad, as the reasons international commercial parties so often resolve their disputes otherwise. The principal alternative they choose is arbitration, the resolution of a dispute by a private tribunal that the parties themselves empower, and this sub-unit examines it. The question is what arbitration is, how it rests on the parties' agreement, how the resulting decision is made and enforced, and why arbitration has become the dominant means of resolving international commercial disputes. The answer shows party autonomy operating to construct a private system of adjudication, and it draws together the New York Convention examined in the previous module and a model law that has made the law of arbitration broadly uniform across the trading world.

What arbitration is

Arbitration is the resolution of a dispute by one or more private persons, the arbitrators or arbitral tribunal, whom the parties have agreed to empower to decide the dispute, and whose decision the parties have agreed to accept as binding. Arbitration is, in essence, a private alternative to litigation: instead of submitting their dispute to the courts of a state, the parties submit it to a tribunal of their own choosing, which hears the dispute and decides it, and the parties are bound by the decision as they would be by a judgment, but the authority of the tribunal derives from their agreement rather than from the state.

Arbitration connects to the party autonomy that runs through this course and to the consensual foundation of so much commercial law. The defining feature of arbitration is that it rests on the parties' agreement: the tribunal has authority to decide the dispute only because the parties have conferred it, and the scope of that authority is defined by what the parties have agreed to submit. This consensual foundation gives arbitration its characteristic advantages over litigation, for the parties may shape the process to their needs, choosing the arbitrators, often for their expertise in the subject matter, choosing the place and language of the arbitration, choosing the procedure, and keeping the proceedings private, none of which they can do in litigation before the courts of a state. Arbitration is, in this sense, a creature of party autonomy, a private system of adjudication that the parties construct by agreement, and it is supported, but not constituted, by the state, whose courts and law assist arbitration and enforce its results while leaving the decision of the dispute to the private tribunal. The contrast with litigation is fundamental: litigation is the state's adjudication, imposed by the state's authority; arbitration is the parties' adjudication, empowered by their agreement.

Consider parties to an international contract who prefer not to litigate any dispute in either party's courts. They agree to submit disputes to a tribunal of arbitrators they will choose, in a neutral place, conducting the arbitration in an agreed language and procedure, in private. Should a dispute arise, the tribunal, empowered by their agreement, hears and decides it, and the parties are bound by its decision. The example shows arbitration as the parties' own private adjudication, constructed by their agreement in place of litigation.

Arbitration is therefore the resolution of a dispute by a private tribunal that the parties have agreed to empower and whose decision they have agreed to accept as binding, a private alternative to litigation resting on party autonomy, which allows the parties to shape the process and which the state supports and enforces while leaving the decision to the private tribunal.

The arbitration agreement

The foundation of arbitration is the arbitration agreement, the agreement by which the parties undertake to submit their dispute, or disputes that may arise between them, to arbitration rather than to the courts, and which confers on the arbitral tribunal its authority to decide. The arbitration agreement is commonly made as a clause in a commercial contract, providing that disputes arising under the contract shall be resolved by arbitration, though it may also be made after a dispute has arisen; in either case it is the source of the tribunal's authority and the parties' obligation to arbitrate.

The arbitration agreement connects to the law of contract examined earlier in this course, for it is itself a contract, by which the parties bind themselves to arbitrate, and it produces two principal effects. First, it obliges the parties to submit the covered disputes to arbitration and not to litigate them, so that if one party nonetheless brings the dispute before a court, the court will ordinarily, at the other party's request, decline to hear it and hold the parties to their agreement to arbitrate, an effect supported by the law of most commercial systems and by the New York Convention. Second, it confers on the tribunal, once constituted, the authority to decide the covered disputes, defining the scope of that authority by the scope of the agreement. A feature of central importance, recognised broadly across the modern law of arbitration, is that the arbitration agreement is treated as separable from the contract in which it is contained, so that the invalidity of the main contract does not of itself destroy the arbitration agreement, and the tribunal may decide even a challenge to the validity of the main contract; this separability protects the parties' chosen method of dispute resolution against attacks on the underlying contract. The arbitration agreement is thus the indispensable foundation of arbitration, the consensual source of the tribunal's authority and the parties' obligation.

Suppose a commercial contract contains a clause providing that any dispute under it shall be resolved by arbitration. The clause is an arbitration agreement, binding the parties to arbitrate such disputes and conferring authority on the tribunal to decide them. If one party sues in court despite the clause, the court will ordinarily hold it to the agreement and decline to hear the matter; and if the other party challenges the validity of the main contract, the separability of the arbitration agreement allows the tribunal nonetheless to decide the challenge. The example shows the arbitration agreement obliging the parties to arbitrate and empowering the tribunal, surviving even a challenge to the main contract.

The arbitration agreement is therefore the foundation of arbitration, the contract by which the parties undertake to arbitrate and confer authority on the tribunal, producing the effects of obliging the parties to arbitrate rather than litigate and empowering the tribunal to decide, and treated as separable from the main contract so that it survives challenges to that contract's validity.

The seat of arbitration and the arbitral award

Although arbitration is private, it is not detached from all law, and the connection of an arbitration to a legal system is made through the concept of the seat of arbitration, the legal place of the arbitration, the country whose law governs the arbitration as a legal proceeding and whose courts exercise the supervisory and supportive jurisdiction over it. The seat is chosen by the parties, or determined for them, and it is distinct from the physical place where hearings may happen to be held; it is the legal home of the arbitration, fixing the law that governs the arbitral process and the courts that supervise and support it.

The seat connects arbitration to the law and the courts of a state in a defined and limited way, and understanding it clarifies the relationship between arbitration and the state. The law of the seat, the law governing the arbitration, regulates such matters as the validity of the arbitration agreement, the conduct of the arbitration, and the grounds on which the resulting decision may be challenged before the courts of the seat; the courts of the seat support the arbitration, for example by assisting in the constitution of the tribunal or the taking of evidence, and supervise it, for example by entertaining a limited challenge to the resulting decision on defined grounds. The arbitration concludes in an arbitral award, the decision of the tribunal determining the dispute, which is binding on the parties and which, like a judgment, declares their rights and may order a remedy, but which derives its authority from the parties' agreement and the law of arbitration rather than directly from the state. The award is subject to challenge before the courts of the seat only on limited grounds, concerning the integrity of the process rather than the merits, so that the tribunal's decision on the merits is, in general, final, a finality that commercial parties often value. The seat and the award thus connect the private arbitration to a legal system, which governs and supervises the process and stands behind the award, while preserving the private and final character of the tribunal's decision on the merits.

Imagine parties who choose a neutral country as the seat of their arbitration. The law of that country governs the arbitration, and its courts support and supervise it; the tribunal conducts the arbitration under that law and renders an award determining the dispute. The award binds the parties and may be challenged before the courts of the seat only on limited grounds, not on the merits, so the tribunal's decision is in general final. The example shows the seat connecting the arbitration to a legal system and the award concluding it as a binding and generally final decision.

The seat of arbitration is therefore the legal place of the arbitration, the country whose law governs the process and whose courts supervise and support it, and the arbitral award is the tribunal's binding determination of the dispute, subject to challenge before the courts of the seat only on limited grounds rather than on the merits, the seat and the award connecting the private arbitration to a legal system while preserving the finality of the tribunal's decision.

Why arbitration prevails in international commerce

Arbitration has become the dominant means of resolving international commercial disputes, and the reasons for its prevalence, which draw together several threads of this course, explain why commercial parties so often choose it over litigation. The reasons are partly the advantages of party autonomy already noted, the parties' ability to choose a neutral tribunal, expert arbitrators, and a private and tailored procedure, but the decisive reason is the superior enforceability of the arbitral award across borders, secured by the New York Convention examined in the previous module.

This decisive reason connects arbitration to the recognition and enforcement examined earlier. The previous module showed that a foreign judgment may be difficult to enforce, the enforcement of judgments being comparatively uneven, whereas a foreign arbitral award is enforceable in the many states party to the New York Convention of 1958 with a uniformity and reliability that judgments do not enjoy, the convention requiring the courts of each contracting state to recognise and enforce awards made in others subject only to narrow grounds. This superior enforceability addresses the most serious limitation of litigation in the cross-border setting, for it means that a party who arbitrates can obtain an award enforceable against the other party's assets wherever they lie within the very wide reach of the convention. The prevalence of arbitration is further supported by the broad uniformity of the law of arbitration across the trading world, achieved through the UNCITRAL Model Law on International Commercial Arbitration, a model law that many states have adopted as the basis of their national arbitration law, so that the legal framework of arbitration is broadly similar from one country to another, reducing the uncertainty that divergent national laws would create. Together the neutrality and flexibility that party autonomy permits, the enforceability that the New York Convention secures, and the uniformity that the Model Law provides make arbitration the natural choice for international commercial disputes, answering the limitations of litigation that the previous sub-unit identified. The reader should appreciate how the threads combine: arbitration is chosen because it is neutral, flexible, private, broadly uniform in its law, and, above all, productive of an award that travels across borders as a judgment does not.

Consider again parties to an international contract weighing how to resolve disputes. Arbitration offers them a neutral tribunal in place of either party's courts, arbitrators chosen for their expertise, a private and tailored procedure, a legal framework made broadly uniform by the Model Law, and, decisively, an award enforceable across borders under the New York Convention. These advantages, and especially the enforceability of the award, lead them to choose arbitration over litigation. The example shows the combination of reasons that makes arbitration prevail in international commerce.

Arbitration prevails in international commerce therefore because it combines the neutrality, expertise, flexibility, and privacy that party autonomy permits with the broad uniformity of its law under the UNCITRAL Model Law and, decisively, the superior enforceability of the arbitral award across borders under the New York Convention, a combination that answers the limitations of litigation in the cross-border setting and makes arbitration the dominant means of resolving international commercial disputes.