The Concept of Arbitration

 

This paper shall discuss the concept of arbitration in relation to the interim protection it provides with using discussion regarding the definition of arbitration, the UNCITRAL Model law and the Hong Kong Arbitration Ordinance. Arbitration is a device whereby the settlement of a question, which is of interest for two or more persons, is entrusted to one or more other persons, the arbitrator or arbitrators, who derive their powers from a private agreement, not the authority of a State, and who are to proceed and decide the case on the basis of such an agreement. (David, 1985) Moreover, arbitration has also been defined as a mechanism for the settlement of disputes between parties, either by a person appointed by themselves or by relying upon procedures or institutions chosen by the parties. (Van den Horen, 1984) In his definition of arbitration, Robert highlights the similarity between arbitration and litigation: "Arbitration means instituting a private jurisdiction by which litigations are withdrawn from the public jurisdictions, in order to be resolved by individuals vested, for a given case, with the powers to judge such litigations.'' (Robert, 1967)

Based on the definitions stated above, it is thus possible to outline the certain essential attributes of arbitration. One of the cornerstones of arbitration, which also serves as a semblance of an interim protection, is its consensual nature. (Redfern and Hunter, 1991) The power and jurisdiction of arbitrators are determined by the intention of the parties as reflected in their contractual agreement. Thus, the wording of the arbitration agreement circumscribes the scope of an arbitrator’s power. (Walton and Victoria, 1982) The cordial nature of arbitration has led one writer to contend that arbitration is a private system of adjudication and that it is the parties, not the State, that control the powers and duties of arbitrators. (Lew, 1978) This view is accurate to the extent that it underlines the private character of arbitration. However, it is misleading in suggesting that parties to arbitration have the exclusive right to assign powers and duties to the arbitrators. Although arbitration is essentially a private process, the assistance of national legal systems is in some cases sought to assist the arbitration proceedings or to enforce an ensuing award. Furthermore, the effectiveness of the arbitration process is guaranteed by the assistance of national courts. (Redfern and Hunter, 1991)

There are different perspectives on how to view arbitration. To illustrate, one perspective is the contractual theory emphasizes the contractual nature of arbitration. The jurisdiction and powers of an international arbitrator are, as noted above, dependent on the mutual intention of the parties as reflected in their agreement, and without their agreement there can be no valid arbitration. Another perspective is the jurisdictional theory focuses on the authority of a State to regulate all arbitrations conducted within its territory. The theory maintains that the validity of the arbitration agreement, the powers of the arbitrators, and the enforcement of the arbitral award all derive from a particular national legal system. (Titigawa, 1967) In this sense, arbitration cannot be carried on without the regulation of a national legal system. (Lew, 1978) Similarly, another view is the mixed or hybrid theory recognizes the dual influence that defines the nature of arbitration. As its originator, G. Sauser-Hall, points out, "although deriving its effectiveness from the agreement of the parties as set out in the arbitration agreement, it arbitration has a jurisdictional nature involving the application of the rules of procedure." (Sausser-Hall, 1952) Moreover, another concept is the autonomous theory of arbitration insists that arbitration should be viewed in a broad context: rather than emphasizing the structure of the institution, emphasis should be placed on its goals and objectives. A complete picture of arbitration can only be presented by considering its use and purpose, and the way in which it responds to the needs of the business community. (Lew, 1978)

The theories of arbitration discussed above shed light on the various and often contradictory demands that influence the arbitration progression. A contractual theorist would necessarily advocate unhindered party autonomy, whereas a jurisdictionalist would argue for substantial judicial supervision of arbitration. An adherent of the mixed or hybrid theory is likely to favor an effective mixture of autonomy and regulation, whereas an autonomist would focus on what is necessary to ensure that arbitration meets the needs and objectives of the parties.

In the end, each legal system must struggle to reconcile these conflicting interests. As argued above, no one approach is entirely satisfactory. Each represents a way of looking at arbitration. A fuller and richer view must, of course, contemplate its object from all possible perspectives. In this regard, the law should reflect a blend of the above theories so as to ensure that arbitration meets the larger needs of society. The mixed or hybrid theory meets this objective by focusing on both the contractual and the jurisdictional basis of arbitration. This theory cautions us always to remember that international arbitrations cannot be entirely divorced from the legal systems with which they come into contact. For as Robert and Carbonneau (1983) prompts, "the validity of arbitral adjudication is directly dependent upon the recognition by the legal system that the arbitral process responds to the felt needs of society."

The fact that the process of arbitration at some point draws assistance from national legal systems suggests that the latter could demand and ensure that the arbitration process meets minimum standards of fairness and justice. One way of ensuring this is by imposing on arbitrators a positive duty to maintain due process in the conduct of arbitrations, a duty that is indirectly enforced by national courts refusing to enforce awards made by arbitrators who do not follow due process in the conduct of arbitration. (Van den Berg, 1981) It is therefore misleading to suggest that parties to arbitration have exclusive right to assign the powers and duties of arbitrators. However, the point should be made that, unlike litigators before a national court who have very little control over the judge's powers and duties, parties to an arbitration, together with the relevant national legal systems, regulate the powers and duties of arbitrators. Moreover, arbitration is also characterized by the fact that the parties themselves appoint the arbitrator. The parties may delegate this responsibility to an arbitration institution. (Craig, Park and Paulsson, 1990) Equally, they may select a few arbitrators and mandate them to appoint other arbitrators. The parties to arbitration also determine the procedure to be followed in the conduct of the arbitration. They may do this by enumerating detailed procedural rules as part of their arbitration agreement or by adopting the in-house rules of an established arbitration institution, such as the International Chamber of Commerce. It is disputed to what extent they can exclude certain procedural rules of the place of arbitration, especially those that are considered mandatory. (Smit, 1989)  

Another important feature of arbitration is that awards made by arbitrators, in contrast to the decision or recommendations of conciliators and mediators, are binding on the parties. Arbitrators perform the "judicial function" of settling the parties' dispute based on their determination of the rights and obligations of the parties. Under narrowly defined situations, international arbitral awards could be appealed against in appropriate courts. In handling international arbitrary disputes, the United Nations Commission on International Trade Law (UNCITRAL) is among the major players by formulating a universal model law that if enacted by member countries of the United Nations would modernize and harmonize the law relating to international commercial arbitration. UNCITRAL is the "core legal body within the United Nations system in the field of international law, with a mandate to coordinate legal activities in this field in order to avoid duplication of effort and to promote efficiency, consistency and coherence in the unification and harmonization of international trade law." (UNGA Res. 40/71)

A draft text of the model law formulated by the UNCITRAL Working Group on International Contract Practices was considered and amended by representatives and observers from 60 states and 18 international and intergovernmental organizations. On December 11, 1985, the United Nations General Assembly adopted a resolution approving the Model Law on International Commercial Arbitration (the Model Law). The resolution recommended that States give due consideration to the Model Law "in view of the desirability of uniformity of the law of arbitral procedures and the specific needs of international arbitration practice."(Holtzmann and Neuhaus, 1989)

The Model Law deals, inter alia, with arbitration agreements, the composition of arbitral tribunals, the jurisdiction of arbitral tribunals, the conduct of the arbitral proceedings, the making of awards and the termination of proceedings, recourse against awards, and the recognition and enforcement of awards. It thus covers virtually all aspects of arbitration, including those dealt with by other conventions. Article 1 of the Model Law provides that the Model Law is subject to treaty law. In areas of conflict between the Model Law and any other treaty dealing with international arbitration, the former is subservient to the latter. The main domain of the Model Law is those stages preceding the phase for the recognition and enforcement of awards. (Hermann, 1989)

Moreover, the strength and effectiveness of the Model Law lie in the fact that it is designed to refurbish and harmonize national laws dealing with international commercial arbitration, and the fact that it was elaborated by arbitration experts and representatives from various countries and international agencies who strove to reach an acceptable consensus. The Model Law has been described as the "most remarkable development and influential accomplishment in the field of commercial arbitration in the eighties."(Holtzmann and Neuhaus, 1989) The Model Law has been adopted with some modifications in Australia, Bulgaria, Canada, Cyprus, Nigeria, and several states in the United States. (Goodman, 1990) Its adoption has been opposed in countries that regard the consensus embodied therein as inconsistent with their policy objectives. For instance, the Mustill Committee in the United Kingdom recommended against the adoption of the Model Law in England, Wales and Northern Ireland on the ground that one-third of its provisions were either of debatable benefit or detrimental when compared with English law. (Somarajah, 1989) Apart from the above conventions, there are regional conventions dealing with arbitration. These include the European Convention on International Commercial Arbitration (the Geneva Convention), and the Inter-American Commercial Arbitration Convention (the American Convention). It is hardly useful to stress that the above conventions and the Model Law apply only in those countries that have either ratified or enacted them into law. Despite this fact, this book makes constant reference to these conventions and the Model Law because they embody an emerging consensus on how the practice of international arbitration should be organized and regulated.

The Model Law on International Commercial Arbitration, which is aimed at harmonizing State practice in relation to international commercial arbitration, rejected the idea of a single formula, and provides four alternative tests for determining when arbitration is international. An arbitration is international if the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different States; one of the following places is situated outside the State in which the parties have their place of business the place of arbitration if determined in, or pursuant to, the arbitration agreement; any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject matter of the dispute is most closely connected; or the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.

The definition adopts both the identity of the parties and the nature of dispute tests, in addition to two other ones: the "situs test," the situation of the arbitration proceedings outside the place of business of one of the parties and the "opt-in test," the parties expressly agree that the subject matter of the arbitration agreement relates to more than one country. This definition effectively expands the test of internationality, although the opt-in provision may create some difficulties. The opt-in clause gives the parties the opportunity to internationalize an arbitration with exclusively domestic elements merely by stating that "the subject matter of [their] arbitration agreement relates to more than one country." This provision is objectionable in that nationals of the same State seeking to benefit from the liberal treatment of international commercial arbitration may find tenuous grounds for proclaiming that their agreement relates to more than one country, and thereby internationalizes their arbitration proceedings. There is evidence that the drafters of the Model Law were aware of this possibility that it was understood by those who participated in drafting the Model Law, that the States will be prepared to allow the "opting-in" only if an element of internationality is present. Such elements should have been that not all of the following places are situated in the same State: place of offer of contract containing the arbitration clause or of separate arbitration agreement; place of corresponding acceptance; place of performance of contract or of location of subject matter; place of registration or incorporation or nationality of each party; place of arbitration. (Szasz, 1984)

However, the final draft of the Model Law fails to incorporate the above requirements, with the result that arbitrating parties could declare an otherwise domestic arbitration to be international. In response to this point, two commentators assert that domestic arbitration laws tend to provide protections that are not needed by sophisticated parties likely to use the opt-in provision. (Holtzmann and Neuhaus, 1989)This observation misses the point: the issue is not the sophistication of the parties, but their ability to circumvent mandatory rules that are specifically designed to regulate domestic arbitrations--a category into which their arbitration may otherwise fall. No doubt many countries will find it difficult to accept a situation where parties might internationalize an arbitration that is otherwise purely domestic. (Szasz, 1984) Under the framework of the Model Law, there exist possible avenues for dealing with parties who abuse the opt-in provision.

In looking at Hong Kong, there is a distinction between international and domestic arbitrations. However, this distinction only affects the type of rules applied to the arbitration, and not the choice of institution in which to engage in the arbitration. The Hong Kong International Arbitration Center (HKIAC) is the dominant arbitration institution in Hong Kong. (McInnis, 1998) It was established in 1985 as a not-for-profit company in an effort to make Hong Kong one of the major international arbitration destinations in the world, particularly as regards to shipping and Asia-related disputes. (Crawford, 1995) Although the HKIAC initially received a portion of its funding from the Hong Kong government, it is currently constitutionally and financially independent of the government. HKIAC offers its facilities for the staging of and provides an applicable set of rules for both domestic and international arbitrations. (Fishburne and Lian, 1997) For international arbitrations, the HKIAC adopted the Arbitration Rules of the United Nations Commission on International Trade Law ("UNCITRAL Rules"), but for domestic arbitrations, the HKIAC applies a set of domestic arbitration rules. However, disputing parties are also free to adopt their own ad hoc rules. (Crawford, 1995) Moreover, the HKIAC's institutional or ad hoc rules operate within Hong Kong's legislative framework for arbitration. Today, arbitration legislation in Hong Kong features two ordinances: one for international arbitration and the other for domestic arbitration. (Fishburne and Lian, 1997) This division is far more simple and liberal than the legislative regime for arbitration. (Crawford, 1995) Nevertheless, particularly regarding the recognition and enforcement of foreign arbitral awards, there is problematic friction between the legislative frameworks of Hong Kong.

When Hong Kong adopted a law, the 1982 Arbitration Ordinance, to further accommodate international business and to promote the viability of Hong Kong as an international arbitration venue. (Simmons and Hill, 1987) Even though, like the British legislation, the 1982 Arbitration Ordinance formally abolished the old British special case procedure, courts retained the ability to review arbitral decisions in most circumstances. The 1982 Arbitration Ordinance retained the right of a disputing party to appeal an Arbitration award to a Hong Kong court for judicial review. (Arbitration Ordinance, 1982) Moreover, the 1982 Ordinance also retained the jurisdiction of Hong Kong courts to determine any question of law arising out of Arbitration. In practice, the only real development for arbitral institutions was that the 1982 Ordinance allowed parties to "waive" their right to appeal questions of law to the local courts by means of a mutually agreed to clause in the arbitration agreement. (sec. 23b)

Furthermore, the 1982 Arbitration Ordinance was the first attempt by Hong Kong, in order to follow international practice, to distinguish between international and domestic arbitrations. Despite this effort, the same 1982 Arbitration Ordinance governed both types of Arbitration. It was not until 1990, as a result of the efforts of Hong Kong's Law Reform Commission, that Hong Kong established truly separate legislative regimes for international and domestic arbitrations. (Fishburne and Lian, 1997)

Similarly, under the Arbitration Ordinance of 1990, the government of Hong Kong adopted the UNCITRAL Rules, previously employed by HKIAC, as the law applicable to all international arbitrations. Today, the 1990 Arbitration Ordinance governs international arbitrations, but the 1982 Arbitration Ordinance continues to apply to domestic Arbitrations. However, to allow contractual flexibility and to accommodate the international business community, both Arbitration Ordinances remain interchangeable through the contracting parties' choice of law provision. (Fishburne and Lian, 1997) Parties to a domestic arbitration can mutually agree to use the UNCITRAL Rules, while parties to an international arbitration can mutually agree to follow the domestic arbitration system of the 1982 Arbitration Ordinance. Therefore, in practice, parties choose which set of rules to apply to their arbitration, with the statutory distinction used only as default.

In comparing both of Hong Kong’s Arbitration Ordinance and England’s Arbitration Act of 1996, it shows that both creates a clear and wide scope of procedures that may be followed by parties in an arbitration. The measures are set out in defaults, which the parties may supersede if they have the same opinion on substitute arrangements. In approximately all subjects of a practical temperament the "parties are free to agree" some other understanding if they desire. In practice parties do not concur to one another's proposals when a dispute arises because of the inevitable assumption of both parties that a suggestion from the opposing party will invariably provide them an upper hand in the agreement. Within the defaults there is range for fashioning almost any dispute declaration procedure that even the most protective lawyer can devise. One would forecast the end of the so-called "expert determination" process because its sole advantage will be that it has become about the only dispute resolution process where it will be possible to bring the like of an arbitrator into a court action as a delaying tactic. The Arbitration Act 1996 and the Arbitration Ordinance of Hong Kong sets out a supple dispute resolution process that is there to be subjugated for the advantage of disputing parties, for the benefit of arbitrators and for the assistance of lawyers who are equipped to come to terms with the new law. Make no mistake about it, the new statute has changed responsibilities and authorities and it will be uncomfortable for the few who do not notice.

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