Role of Arbitration in International Contracts

Submitted By
Spandan Kumar Sarma
1800217MBI

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INTRODUCTION

The mechanism of dispute resolution has constantly undergone drastic transformation

throughout the history of business conflicts. The processes of litigation have been proven to
be majorly unacceptable and prone to more damage than resolution of conflict by hampering
positive future association and relation between the parties.

In the present days, just that it is seen to have a global paradigm shift to deregulation from
governmental control in all facts of life, there also seem to be a similar shift from placing
reliance on the processes of Alternative Dispute Resolution (ADR) from strict legal
provisions in resolving business or commercial disputes, a phrased designed to cover a wide
range of processes adopted for the resolution of conflict other than through litigation. These
consist of mediation, conciliation, adjudication, expert determination, arbitration and
negotiation.

Arbitration is a procedure in which a dispute is submitted, by agreement of the parties, to one

or more arbitrators who make a binding decision on the dispute. In choosing arbitration, the
parties opt for a private dispute resolution procedure instead of going to court.

However, be the most widely embraced process for business disputes is arbitration especially
across national boundaries. As a dispute resolution mechanism, arbitration has long gained
prominence among inter/multinational and government organisations, for instance most
contracts now contain clauses that mandate parties to experience arbitration options in the
event of a disagreement.

Usually, for there to be arbitration, a number of factors must be present.

 There must have been an arbitration agreement between the parties and this gives the
arbitral tribunal its jurisdiction to hear and determine the dispute, otherwise the whole
arbitral process will fail. This is usually contained in the contractual agreement
between the parties.

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  An arbitration panel must be appointed by the parties. The process of selection
may be contained in the arbitration clause or agreement and the mandate of the
panel is to hear and determine the dispute between the parties which has been
referred to it.
 The parties can select a sole arbitrator together. If they choose to have a three-
member arbitral tribunal, each party appoints one of the arbitrators; those two persons
then agree on the presiding arbitrator. Alternatively, the Centre can suggest potential
arbitrators with relevant expertise or directly appoint members of the arbitral tribunal.

 A dispute or difference must have arisen. Also, there must be a judicial process not
necessarily in the form of litigation but there must be compliance with due processes,
fairness and impartiality, and there must be a decision in the form of an arbitral.

International Arbitration
Arbitration is considered to be international in nature, when according to Article (3) of the
UNCITRAL Model Law if it falls within the following criteria:
a. If the parties to the arbitration have at the time of completion of the agreement
confirmed the places of business in different places.
b. If one of the following places is situated outside the state in which the parties
have their business
 The place of arbitration if determined for pursuant to the arbitration
agreement

 Any place where a substantial part of the obligation the commercial

relationship is to be performed or the place with which the subject matter of
the dispute is more closely connected.
c. The parties have expressly agreed that the subject matter of the arbitration
agreement relates to more than one country.

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The dispute resolution by arbitration under international contracts is majorly
conducted under the foreboding of several rule making bodies and major international
institution.
 International Chambers of commerce
 International Centre for Dispute Resolution
 The London Court of International Arbitration
 Hong Kong International Arbitration Centre
 American Arbitration Association

Difference between Domestic and international Arbitration

 International arbitration is often affected by several factors alien to domestic
arbitration, different laws are to be relevant to an international arbitration process
while in domestic arbitration only the national law is put into consideration.
 In international Arbitration, the chairman of the arbitration tribunal may come from a
completely different country from the parties.
 The procedure adopted in an international arbitration maynot mirror any domestic
litigation procedure, and international arbitration often relies upon conventions to
allow enforcement of its arbitral award.
 It is not just the fact that international arbitration arises in the context of international
contracts that makes it different. In the international dispute resolution community, it
is widely accepted to be a different ball-game entirely, involving different practices
and rules, and being represented by a different community of arbitrators and legal
practitioners.
 An international arbitration need not have any connection with the state in which the
arbitration takes place, other than the fact that it is taking place within the territory of
that state.

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Confidentiality in Arbitration Proceedings

Confidentiality is seen as one of the main advantages of arbitration system, yet different
jurisdictions recognise secretiveness to varying extents. This arises due to the notion of
private arbitration derives simply from the very fact that the parties have agreed to solve any
dispute between them by arbitration. It is understood from this that no strangers shall be
allowed to the hearing and neither the parties nor the tribunal can insists that the dispute shall
be heard or determined concurrently with, another dispute. The requirement is that arbitration
is held in private extent to the award or documents given in the hearing.

Purpose of Arbitration in International Commercial Disputes

In the recent times of globalisation of international trade, investment and finance, there
happens to been a progressive change in the global legal field. Law is an important instrument
for globalisation. In the global marketplace, the private dispute resolution mechanism in
international market has proved popular over time. Recently, in many countries, new
arbitration laws have been adopted in place old arbitration for the present needs of the
international business community in this day and age of globalisation. As such, many
countries have adopted the UNCITRAL Model Law, which purpose is to globally harmonise
the law and practice in the field.

Since globalisation of economic aims at cross-border transactions with minimal interference

from the countries, the liberalisation of the private justice system through modernised
international commercial arbitration is considered to be most important for the purpose. This
is the main aim of the Model Law in the process of globalisation of the private justice system
in international business transactions and settlement of international commercial disputes;
international arbitration has proved effective in the global marketplace by improving and
safeguarding the efficiency of international private transactions.

RECENT CASES ON ARBITRATION IN INDIA

Case name: Kerala State Electricity Board and Anr. v. Kurien E. Kathilal- In this case of
March, 2018.
In the case, the Appellant State Electricity Board had entered into an agreement with
respondent contractor for construction of a composite dam in connection with Banasura
Sagar Scheme. Later in view of revised minimum wages of labours, the respondent contractor
claimed labour escalation charges. However, the Government of Kerala referred the matter to

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the industrial tribunal for adjudication of the dispute with regard to the said claim of
workmen. While the adjudication with reference to the concerned issue was pending, the
Appellant terminated the contract with the contractor. When the case came before the High
Court, the Court with reference to the amount payable for additional work done by the
Respondent contractor with the consent of the counsel for the parties referred the matter to
arbitration to resolve the dispute relating to items which they could not amicably resolve.

Case name: Oriental Insurance Company Limited v. M/s Narbheram Power and Steel Pvt.
Ltd.-
In this case, the Respondent had suffered damages on account of cyclone in Odisha in 2013.
Accordingly, the respondent intimated the Appellant Insurance Company of the damages
suffered by it and requested the appellant to settle the claim. However, the claim was not
settled and consequently the respondent invoked the arbitration agreement and requested the
appellant to concur with the name of the arbitrator whom it had nominated.
The appellant on the other hand objected to arbitration proceedings and declined to refer the
disputes to arbitration in view of Clause 13 of the policy which stated that once the claim was
repudiated and the insurer had disputed or not accepted the liability under or in respect of the
policy, no difference or dispute could have been referred to arbitration.

Advantages and Disadvantages of Arbitration in International Commercial Dispute

Resolution and contracts

In international private transactions, many parties may face many different choices when it
comes to involving a mechanism for resolving commercial disputes arising under their
contract. If they remain silent, they will have to face the courts of wherever a disaffected
party decides to initiate legal proceedings and believes it can dominate jurisdiction over the
other party. This may not accommodate well with parties that need to know at the time of
entering into their contract and about their contractual rights will be enforced. The alternative
to silence is to specify a method of binding dispute resolution, which can be either litigation
before the domestic tribunal of one of the parties or arbitration. If the parties choose to resolve
their disputes in the courts, however, they may encounter various difficulties. The first is that
they may be confined to choosing one or the others' courts, as the courts of a third country
may decline the invitation to devote their resources to deciding a dispute that does not involve
any of that country's citizens, companies, or national interests. The second, and perhaps more
sometimes significant difficulty, is that judicial decisions are not very “portable” in that it is
difficult and impossible to enforce a court decision in a country other than the one in which it
was rendered. The ability to resolve disputes in a neutral forum and the enforceability of

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binding decisions are therefore major advantages of international arbitration over the
resolution of disputes in domestic courts.

Furthermore, parties for international business contracts they can decide to site their dispute
resolution process in a third or neutral country, knowing that the award can be easily enforced
in any other country, though with few exceptions. An international award has much greater
legal force than a domestic court decision. For majority of international business contract and
majority of the disputes arising from them, the capability to refer the matter to arbitration can
have real advantages. Similarly, unlike all the other forms of Alternate Dispute Resolution
mention at the beginning of the work, the part which is played by arbitration is completely
outstanding and noteworthy. Recognising that international commercial clients attach a very
great importance to avoiding disputes is one giant stride International Arbitration has taken
that is very worthy of note. While good legal advice and management can reduce the risk of
disputes arising, as and when they do, the route through which they are dealt with is of an
even greater significance. And this is where arbitration has become indispensable

Considering the prevalence of arbitration clauses in contracts today, it is imperative

that parties consider the advantages and disadvantages of arbitration proceedings and
make an informed decision before entering into such an agreement.

Advantages

Cost: - Arbitration proceedings will result in quicker dispute resolution than in the
court system. This, results in lower overall costs. In addition, only limited discovery is
granted in arbitration, which helps to reduce the costs of reaching a resolution.

Informality: - Arbitration processes are less formal than a trial. Unlike trials, which are to be
held in a courtroom, parties can agree to have arbitrations in any convenient setting of there.
Also, the rules of procedure and evidence are very relaxed and simplified, making the entire
process much less formal than a trial and also giving the parties more control.

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Privacy: - Arbitration processes are generally held in private, and parties can agree to keep
the final resolution as confidential. This is mostly appealing if the subject matter of the
dispute includes private or embarrassing information.

Control: - Parties have the ability to maintain great control over the dispute resolution
through arbitration. Parties select the arbitrator. Unlike in a trial, where the judge may know
very little about the matter of the dispute, the parties of arbitration have the ability to select an
arbitrator with expertise in a certain area, which may lend to a more equitable and informed
decision.

Disadvantages

Inability to Appeal: - As a general and practical rule, appeal cannot be made in arbitration
decision. Only in certain situations, such as when the arbitrator exceeded his or her proof of
corruption or authority, undue influence or fraud, district court will review arbitrator’s
decision. As the arbitrator as more power than a judge or jury this can be more troubling.
Therefore, the unaltered nature of the determination and the general inability to seek recourse
from an not correct decision make the repercussions of the arbitration more profound.

Lack of Formal Discovery: - Although the short comings of a full fledge formal uncovering
process in arbitration process may result in decreased costs, it may also mean that the parties
involved (or one party in particular) may or may not have all of the information required to
fully examine the case. Therefore, one party may present its case in front of the arbitrator
without being aware of to all of the appropriate facts that could have been disclosed had more
formal discovery, such as interrogatories, requests for deposition and production, which is
been conducted.

Discretion of the Arbitrator:-An arbitrator may make his or her decision without issuing
any written explanatory statement or opinion . Furthermore, since arbitrations are private
processes and that’s why they are so not frequently reviewed by courts, in decision making
process if there is lack of transparency this may leave room for bias in the process of
arbitration

Rising Costs: - Although the processes of arbitrations are typically going to be less expensive
than litigation, the cost of arbitration process is on the rise, comparing with Alternate Dispute
Mechanism arbitration is a bit expensive.

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However, the pros and cons of arbitration, the particular transaction and the needs of the
parties should all be carefully considered before agreeing to arbitrate a dispute. Furthermore,
since the arbitrator is greatly governed and guided by what the parties state in their ADR
provision, any issues or concerns with the process can largely be addressed through a well-
drafted agreement to ensure a more fair and efficient resolution for all parties involved.

CONCLUSION
Although ADR techniques are supposed to be cheaper than the cost of litigation, international
commercial arbitration can often prove to be more expensive than litigation especially in
complex international cases whereby both parties appoint distinguished lawyers and eminent
and expensive arbitrators.
There is no strict application of the rules of evidence, irrelevant and inflammatory materials
may be presented to the arbitration panel and time and money is spent on issues which are
unnecessary
It is greatly desirable for the rules and practices of all or most nations to be the same with
respect to international commercial arbitration whether those rules and practices concern
public policy or not. If such uniformity were already in existence there would of course not be
any objection whatsoever against it. The position however as at present is that no such
uniformity exists most especially with respect to public policy rules.
The model of international arbitration has lead to three main models in the legal literature.
1. In presence of arbitration the courts concentrate progressively on less productive
traders or contracts who cannot afford arbitration. This increase the gap between the courts
system and the larger arbitration system.
2. The proportion of parties choosing arbitration increases at higher productive level and
with a larger international market.
3. The possibility to recur to arbitration influences the formation of market. The
expansion of trade and commerce leads to increasing the cost of arbitration but to a higher
need of effective legal system.

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BIBLOGRAPHY
1. The Role of Arbitration in International Commercial Disputes Wuraola O. Durosaro
PhD Student, School of Law University of Manchester United Kingdom.
2. The Role of Arbitration in International Business Igor Ellyn, QC, CS, FCIArb.
Chartered Arbitrator, Mediator, Legal Counsel Certified Specialist in Civil
Litigation.
3. https://scottisharbitrationcentre.org/
4. Arbitration in International Trade. Alessandra Casella NATIONAL BUREAU
OF ECONOMIC RESEARCH. Cambridge
5. https://www.louisianalawblog.com/business-and-corporate/advantages-and-
disadvantages-of-arbitration/

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