By Miss.

Uttra Devi Boodan 9TH NOVEMBER 2011

IDENTIFY AND EXPLAIN THE CHALLENGES THAT ARBITRATION, AS A DISPUTE

RESOLUTION MECHANISM, POSES FOR PARTIES IN DISPUTE

A. ARBITRATION Justice is the crowning glory of all the virtues, Marcus Tullius Cicero

Arbitration is above all a flexible and fair means to justice. One of the revolutionary mechanisms of Alternative Dispute Resolution (ADR), arbitration is the process of handling disputes between parties. It is said to be a creature of Contracts. It is primarily used in commercial agreements but is not restricted to same. Arbitration can be used in a plethora of issues including intellectual property, boundary separation, marine disputes and construction among many more. The significant features of this mechanism are: i. Parties can be non state actors (individuals, corporations), states, or anti state actors (terrorists). ii. iii. Parties are allowed to resolve their disputes without formalities of their native legal systems. It is a sort of hybrid mechanism, in the sense that it can follow any judicial system such as Common law, Civil law, or Shariah law. Even the International Bar Association (IBA) Rules on the Taking of Evidence in International Commercial Arbitration allow flexibility in the disclosure rules. iv. v. vi. It involves a third partys neutral decision known as the arbitrator. The judgement of the arbitrator is known as an award. It is a mechanism that strictly follows rules of confidentiality. The arbitrator(s) sign an agreement not to divulge information of the arbitration and often do not even have the right to provide that information as evidence in a litigation process. vii. viii. The dispute is settled beyond courtroom litigation. The parties are the one to decide upon who the arbitrator(s) should be or which institution will appoint the arbitrators. ix. The dispute can be delegated to arbitration before it arises or after it arises.

x. xi.

For the award to be binding, the parties must sign and consent to same. Parties are independent to choose the procedure, the seat, the substantive law and the arbitrators.

xii.

The award of the arbitration can be enforced in various jurisdictions with some exceptions such as Iraq. The enforceability instruments are the New York Convention, and the United Nations Convention on Recognition and Enforcement of Foreign Arbitral awards of 1958. International arbitral awards cannot be enforced in Iraq since it has not ratified the New York Convention. Parties to arbitration are masters of the arbitral process to an extent impossible in proceedings in a court of law. (Redfern and Hunter 2009, p. ) Arbitration, be it domestic or international, will still have consequences for parties.

B. PARTIES OF ARBITRATION Parties finding recourse in arbitration can be States, Non State Actors (Individuals, Companies, Organisations), or Anti State Actors (Terrorists).

C. CHALLENGES OF ARBITRATION TO PARTIES Arbitration is an option out of many available remedies for dispute settlement. It does not come clean without any risks. The fact that parties control a significant part of the arbitration process if not whole, makes them a target of many challenges that accompany the arbitral process. The challenges have been listed as follows: 1. Broad Autonomy Parties have broad autonomy in an arbitration process. They may decide the agreement, the dispute, the arbitration rules, the arbitrators, the seat of arbitration, the significant laws, and so more. The menace of this elaborate liberty is seen when the choice of the parties are wrong. The wrong choices may not necessarily play in favour of a particular party.

2. Questionable Party Autonomy Basic principle in international commercial arbitration, Party Autonomy 1 refers to the independence that parties enjoy in choosing unanimously2 the procedure to be followed by arbitral tribunals. Parties have autonomy to choose arbitrators, but in cases where they do not have much knowledge about same, they may delegate this responsibility to an institution. The

1 2

Art 19(1) UNCITRAL Model Law That is, upon agreement.

Secretary General of the United Nations (UN) for instance may be provided the task to appoint arbitrators if parties agree. However, under the naivety of the parties, the arbitrators chosen are not directly the choice of parties. Hence restricted by their inexperience they may lose their own legal liberty.

3. Stay proceedings Representing states, or corporations, it is human mind that triggers dispute, and ultimately arbitration. Taking their highest precautions, certain parties may have anticipated future disputes and included a clause compromissoire to attend to the potential conflict in a contract. From a practical point of view, it is not necessary that the issue having been assumed to be catered for is taken to arbitration. Parties may realise later when the dispute arises that it is too trivial or too intricate for arbitration. They might then agree for litigation, rather than arbitration in a view to find a solution to the dispute. Nevertheless the challenge that parties will face at this instance regards the procedure to follow. If a clause compromissoire has been prepared and agreed upon then the courts will not permit the dispute in question to be judged via litigation. The Court will stay proceedings, in other words, it will stop the process. The parties are then prisoners of their own naive decision limited to arbitration.

4. Non-Arbitrability Doctrine On finalising a contract, parties generally include a clause compromissoire if they choose not to make the contract silent on certain matters. The problem that might arise in such cases is with regards to the non-arbitrability doctrine. Some disputes are not arbitrated in specific jurisdictions. Unaware of such conditions, parties might face the trouble that they most wanted to avoid in terms of court litigation. Parties end up dejected by the mechanism or by their lack of knowledge on arbitration.

5. Ad Hoc Arbitration When parties choose not to follow United Nations Commission on International Trade Law (UNCITRAL) Rules, and the Model Law, they opt for tailored rules. Nevertheless, designing the rules of an agreement, or the arbitral process can be dreadfully complex. Parties may have to spend a huge amount of time on same while they could have been resolving the dispute itself. Those rules may also be erroneous since they will have been prepared by the parties who may not necessarily have the right expertise and knowledge regarding same. Ultimately, the parties will be losers in terms of time, cost, and result.

6. Multiparty Disputes (Mass party disputes/Multi contract arbitration) Typical arbitration cases involve a multitude of contracts. These would involve several parties. Upon the genesis of a dispute, immense confusion can arise plaguing the dispute settlement. In a construction project for instance, parties involved would be the contractor, the client, the workers, the engineers, the suppliers of materials, architects, financers and perhaps more. In litigation provision is made for parallel proceedings while arbitration would address the dispute globally. Ultimately, parties of the dispute in arbitration would be victims of massive confusion, while investing time, and money in the conflict resolution.

7. New York Convention v. Revised Model Law Civilisation is evolving and at a rate that is fundamentally affecting laws worldwide. Same can be explained by the use of hardcopy documents for contracts previously in comparison facsimiles, electronic mails, and such varied communication tools today. The Model Law Art 7 (2) acknowledges the advancement of technology and broadens the meaning of in writing while referring to arbitration agreements. Nevertheless, according to the New York Convention Art 2(2), Art 4, and Art 5(1)(a), in writing does not extend to modern electronic media of communication. The risk to parties is about their award not being enforceable.

8. Confidential yet public information Arbitration is one of the methods of resolving disputes in privacy. Arbitrators sign agreements to preserve the sanctity of the arbitration. Nevertheless, pure confidentiality would not be a true version of reality. In the recent case of Lehman Bros Inc., the company filed for bankruptcy three years ago and claimed back bonuses from Jennifer Mitchell, New York based broker. The Financial Industry Regulatory Authority (FINRA) Arbitration panel denied that she had to reimburse the bonus. The proceedings were not made public but the result3 leaked or was announced. These results though not warranted form an opinion about the party in question. Lehman Bros Inc. has many more claims awaiting an award, and should the leakage of abovementioned information not affect the rest of awards, the arbitration

From Thomson Reuters - News and Insight - Legal http://newsandinsight.thomsonreuters.com/Legal/News/2011/10__October/Lehman_loses_first_broker_bonus_case/

would be exemplary. Nevertheless, not all arbitration disputes will remain unaffected by public opinion.

The International Convention for Settlement of Investment Disputes (ICSID) Financial Regulation 22, allow the Secretary General to make public information on the registration of all requests for conciliation and arbitration and to indicate in due course the date and method of termination of each proceeding. He is also empowered to publish reports of awards rendered by arbitral tribunals in ICSID proceedings with their approval. On the other hand, if consent is not provided then the ICSID Arbitration Rules allow excerpts of the legal reasoning to be published. Consent or not, in any case, the parties will see their disputes reeling in public. As long as the matter does not touch any sensitive element, parties are safe and satisfied. Otherwise, this may tarnish the image of parties or create a wave of distrust in states or fear of anti state actors despite the minimum information released by the Secretary General.

9. Implication of Arbitration Recourse to arbitration is a private decision of parties. Very often this decision is inspired by various reasons including unrest in states due to confusions, or threats of violence4. Sometimes arbitration also invokes global financial institutions to finance their conflict settlements. The World Bank5 has till date funded many arbitration disputes. Conejero, explains that The start of the decade saw Argentina face an extreme financial crisis that led to more than 30 claims against it as investors sought to recover losses. But the issue for some states is not merely the number of claims being made against them but the size of the awards being made. While some governments have quickly paid out huge awards notably Chile, Mexico and Peru others are simply unwilling to do so. The situation in any one country is highly dependent on that which gave rise to the claim, including financial and political issues. I can understand, but do not agree with, the position of some governments to avoid enforcement of awards going against them on grounds unrelated to the conventions they have ratified.6

Though a positive initiative for humanity, these actions may make parties (states) financially and morally dependent upon co-states. Some African nations have been pulled out of
4 5

India and Pakistan Conflict over the Indus River Example: World Bank and Indus River Dispute 6 By Appleton Scott, Iberian Lawyer in Madrid.

apartheid and such crimes to human race often yet political stability and social equilibrium is far from being established. Being a party to arbitration has perhaps turned the country reliant in the long run.

10. Award v. Desired result The core issue with arbitration that may render all efforts of parties to resolve their disputes futile is when the desired result of parties is not reflected in the award. As a mechanism to settle conflicts, arbitration would perhaps involve setting up fact finding committees and research but unlike conciliation and mediation, arbitrators have the last say as a binding award thrust upon parties. This challenge may be overcome by judicious discussions, and proper identification of dispute handed to experienced arbitrators.

Nevertheless, if an award has been provided and parties do not agree on same, they remain helpless and cannot appeal against same unless the matter taken to court is on a point of law that the arbitration erroneously carried forward. Otherwise, parties have to enforce the award.

11. Enforcement of the Award The ICC Rules state that an award is binding on parties and may be legally enforced thereon. The award becomes binding at the very outset when the agreement has been agreed upon and signed. Nonetheless, the losing party does not always enforce same voluntarily. At this stage the help of courts may be called upon. Again, the courts will direct parties to arbitration (Supra). The winning party will have to get an enforceable judgement. The challenge to parties in this scenario is about enforcing the award, knowing how to enforce same when the other party is unwilling to cooperate.

12. Ethics and Human Nature Arbitrators appointed by parties or the Secretary General will be required to meet some level of sophistication, training and experience. These arbitrators (if more than one) will have proven themselves in terms of ethics. However, human beings are governed by an Emotional Quotient (EQ) beside the Intellectual Quotient (IQ). This gives rise to temptations of arbitrators with respect to favours that could perhaps not mislead but divert the course of negotiations. Following same, the award reached will be binding on parties but will have been biased. The party victim to this fallacy will probably not be able to unveil this facade without media hype, and public opinion. This assumption does not prevail over the majority of arbitral processes but stains even the meagre numbers of arbitrations so affected.

Generally, arbitration may pose challenges to parties even in terms of expenditure. Distinct from permanent courtroom structures, arbitration can be costly in setting up an arbitration tribunal, and enforcing awards specially if in other countries. Sometimes, parties even though professionals in their respective fields tend to grow confused when many countries are involved in the conflict. Reaching a solution in such states is complicated. With more and more trade and business over the internet, businesspeople find it most logical to include a clause compromissoire addressing disputes to arbitration. Naive users of this platform tend to get engaged in contracts without even knowing its content. Beyond the virtual world, people tend to be more careful. Over the internet, parties to agreements may be directed to arbitration which is costly compared to court, and which requires hiring arbitrators which adds further to costs. In this sense, arbitration might pose a problem for parties. Sometimes arbitration is free from employees of a company or subsidized for members of an industry. This prevents the unexpected problems that might arise during a dispute.

D. CONCLUSION

Just because ICSID is losing favour does not mean that commercial arbitration is as well.

Fernando Pelez-Pier IBA President

As one of the most important dispute resolution mechanisms, arbitration akin to any judicial remedy is not free from perils. As in the abovementioned, parties may be challenged by their own decision to arbitrate. The international conventions provide solutions to some challenges but leave others unattended. To avoid the inconvenience that arbitration alone can trigger international practice has evolved from solely Arbitration to Mediation and Arbitration (Med/Arb) or Arbitration and Conciliation (Arb/Con). With the blend of two ADR methods, parties have lesser challenges, and are positive about the discerned award.

BIBLIOGRAPHY: ADRNow, 2010. ADR. London. Available from: http://www.adrnow.org.uk/arbitration [8th November 2011]

International Centre for Settlement of Investment Disputes (ICSID), 2011. ICSID Cases. Washington D. C. U.S.A. Available from: http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=ShowHome& pageName=Cases_Home [8th of November 2011]

Juris International Arbitration and mediation Centres, 2005. International Centre for Settlement of Investment Disputes. Washington, U.S.A., International Trade Centre, UNCTAD, WTO. Available from: http://www.jurisint.org/en/ctr/31.html [5th of November 2011]

QFinance, The Ultimate Financial Resource, 2009. Multiparty Arbitration. Bloomsberg Businessweek, Europe. Available from; http://www.qfinance.com/operations-management-bestpractice/multiparty-and-multicontract-arbitration?page=1 [8th of November 2011]

SCOTT, A. 2010 AppletonInternational Bar Association (IBA), 2010. Latin American Arbitration: The Story Behind The Headlines. Madrid. Available From: http://www.ibanet.org/Article/Detail.aspx?ArticleUid=78296258-3B37-4608-A5EE3C92D5D0B979 [8th of November 2011]

Winston Charles Arbitration Magazine, 2011. Inspiring Justice, ethics and accountability. U.S.A. Available from: http://arbitrationmagazine.winstoncharlesassociates.com/home/editorial/ [8th of November 2011]

Author can be contacted on: vidousha23@yahoo.com