Arbitration World

Geoff Nicholas and Briana Young - Freshfields Bruckhaus Deringer

INTRODUCTION

There are few areas of legal practice, both in terms of substance and procedure, that are as truly global as international commercial arbitration. Arbitration can be conducted in myriad ways, bringing together, in one process, differing substantive laws, procedural rules, national legislation and international treaties.

Various commentators, practitioners and academics have identified the essential characteristics of arbitration. While the descriptions of these key features may vary, there are three essential elements:

• an agreement to arbitrate disputes privately outside the framework of national courts;
• party autonomy in determining the mechanism, including the selection of arbitrator(s); and
• a final, binding and enforceable determination of the parties’ rights and obligations, in the form of an award.

COMPARISON OF ARBITRATION AND LITIGATION

Practitioners, in-house counsel and those involved in negotiating transactions are frequently faced with the question whether to choose arbitration as the dispute resolution mechanism in their contract documents. A comprehensive comparison of international arbitration and litigation is beyond the scope of this overview, but the salient characteristics can be summarised as follows:

* With acknowledgements to James Castello, Mitesh Kotecha, Suzanne Noble, Sylvia Noury, and Peter Yuen.

ADVANTAGES

• Enforceability and finality. In contrast to court judgments, arbitral awards benefit from a simplified international enforcement regime, namely the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (New York Convention), to which 137 countries are party. Moreover, an arbitration award is intended to produce a final and binding result with very limited scope for challenge and appeal.
• Confidentiality. Arbitration is a private process, and, while there are increasingly exceptions to the general rule, confidentiality is widely perceived to be one of the key advantages of arbitration.
• Procedural flexibility. The parties, or, if they fail to agree, the arbitrators, are free to determine the way the arbitration is conducted.
• Neutrality. The selection of a neutral forum by way of arbitration, may be preferable to submitting to the courts of a counterparty or the courts of a country unconnected with the parties.
• Speed and cost. Procedural flexibility may result in savings of time and costs, but this will depend on the number of arbitrators, the complexity of the arbitration and the degree of cooperation between the parties.

LIMITATIONS

• Multi-party and multi-contract situations. These present additional challenges but they can be addressed by appropriate drafting and/or selection of certain institutional rules.
• Limited powers of arbitrators. The powers of the court are more extensive, for example in terms of interim remedies, and arbitrators are unable to impose sanctions for failure to comply with their orders.

TYPES OF INTERNATIONAL ARBITRATION

There are two principal types of international commercial arbitration, namely institutional and ad hoc.

An institutional (or ‘administered’) arbitration is one where the parties choose to refer their disputes to arbitration conducted under the rules of a particular institution, for example the ICC or the LCIA. The institution will assist in matters such as the initiation of the arbitration, the formation and appointment of the tribunal and general administration of the arbitration. In some cases, arbitral institutions will simply act as appointing authority for the tribunal.

An ad hoc (or ‘non-administered’) arbitration is conducted by the parties and the arbitrators without the assistance of an arbitral institution. In some cases, the parties may decide to adopt a set of arbitration rules as the basis of their ad hoc arbitration, most notably the UNCITRAL (United Nations Commission on International Trade Law) Arbitration Rules, which set out a framework for the proceedings.

TRENDS AND STATISTICS – A GLOBAL OVERVIEW

Arbitration institutions have witnessed a steady growth in international arbitration since the late 1990s, with CIETAC experiencing particularly strong growth. However, many of the major institutions have seen the number of requests for arbitration level off in the last year or two, with the ICC, HKIAC, AAA, SCC and ICSID all receiving fewer requests in 2004 than in 2003. (The LCIA experienced a similar fall, but notes that requests increased again in 2005.)

The statistics for 1998–2004 are set out below.

* These statistics include domestic as well as international arbitrations.

There are certain trends and fluctuations that are interesting to note.

The ICC has in the past been perceived as the institution favoured by Western parties. However, its annual statistical reports show that since the mid1990s, the prevalence of parties from Western Europe has decreased, while the same period has seen a significant increase in the number of parties from Eastern Europe and the Middle East. Moreover, the ICC figures indicate that parties from the ten European Union ‘accession states’ are increasingly involved in ICC arbitration, and that those countries are also being selected as the place of arbitration. The LCIA reports an increase in parties from Europe overall and an increase in Middle Eastern parties, combined with a fall in UK and North American parties. The SCC Institute notes a general decrease in arbitrations, but growth in the number of cases involving East–West arbitration, citing the perception of Sweden as a neutral country as the cause for its popularity.

Eastern European parties (notably those from Russia and the Caspian region) are also increasingly referring disputes to arbitration in London.

Fluctuations in the preference for the institutions may be explained by changes in the political and economic environment in a particular geographical area. It is interesting to note, for example, that the number of requests for arbitration to the AAA has continued its decline since 2002, following the economic effects of the events of 11 September 2001.

Another area affected – positively this time – by political and economic circumstances is Asia, where the increase in number of requests received by some local arbitral institutions might be attributed to the region’s economic recovery, combined with increasing economic investment following China’s integration into the World Trade Organisation (WTO). Between 2003 and 2004, CIETAC saw a 20 per cent increase in the number of requests for arbitration it received. SIAC saw a 24 per cent increase.

CIETAC also introduced its new Arbitration Rules on 1 May 2005. There are a number of key changes from the October 2000 Rules, in particular the ability of parties to select a seat of arbitration outside China for the first time and the ability to choose arbitrators who are not on CIETAC’s Panel of Arbitrators, which may open the door to more non-Chinese nationals sitting as arbitrators in CIETAC arbitrations.

The new rules, which are more in line with accepted international practices, represent a leap forward in CIETAC’s efforts to establish itself as a global arbitration institution, and are likely to have a profound influence on the future direction of arbitration in China. However, it remains to be seen whether they will lead to a further increase in the number of arbitrations under CIETAC’s auspices.

Arbitrating under the auspices of other institutions still poses difficulties in China, as the country’s 1995 arbitration law states that arbitrations inside China can be administered only by Chinese ‘arbitration commissions’, registered with Chinese government authorities. Although more than 170 such commissions have been registered, none of the international arbitral institutions outside China – notably the ICC – is among them. Chinese courts have taken a generally hostile view of the ICC’s model clause for its lack of reference to a designated arbitration commission or institution, making it susceptible to being invalidated by the Chinese courts, particularly in contracts governed by Chinese law. Chinese judicial authorities are working on a solution to this clearly unsatisfactory situation, which denies both Chinese and foreign parties access to arbitration in China under the rules of one of the best known, and most highly regarded, international institutions. A compromise solution has recently been proposed, which (if implemented) would allow the Chinese courts to enforce ICC awards made in China as ‘foreign-related’ awards. However, although this interim solution is well known within the Chinese arbitration community, the Supreme People’s Court has yet to recognise formally the status of an ICC award made in China.

Another Asian country where international arbitration is a ‘hot topic’ is India. India has had an arbitration-friendly legal regime in force for almost a decade, in the form of the Arbitration and Conciliation Act 1996. The Act, which is based on the UNCITRAL Model Law on International Commercial Arbitration (Model Law), has sought, inter alia, ‘to minimise the supervisory role of courts in the arbitral process’. In large part, it has succeeded. Recent decisions of India’s Supreme Court demonstrate that India’s judiciary has come some way since the early 1990s in respecting the finality of arbitral awards, and India’s courts have made attempts to limit judicial intervention more generally in the arbitral process. The Act cannot yet claim, however, to have overhauled previous court practice in this regard. Recently, a two-member bench of the Supreme Court (in ONGC v Saw Pipes Ltd (2003) 5 SCC 705) interpreted public policy under the Act extremely broadly in relation to awards rendered in India, and reopened the merits of the parties’ dispute on the basis that the arbitral tribunal had misapplied the law. Foreign awards appear to fall outside this extension of public policy, which might otherwise have led to a refusal to recognise and enforce in India awards made in other countries.

Indian law also contains a peculiar requirement in relation to the enforcement of New York Convention awards, namely that such an award can be enforced in India only if India’s central government has (by notification in the Official Gazette) declared that the territory in which the award has been made is one to which the New York Convention applies. To date, only 43 countries (out of the current total of 137 signatories to the Convention) have been so notified by the government, leading to unnecessary difficulties in enforcing awards made in the remaining Convention countries.

Arbitration is also on the increase in the Caspian region. A number of foreign investors entered major production sharing agreements with Caspian states in the mid- to late-1990s, to enable them to exploit the region’s rich hydrocarbons resources. The first signs of disputes are now emerging, notably in Kazakhstan and, to a lesser extent, Azerbaijan and Turkmenistan. To date, these disputes have related to construction issues, contractual cost recovery mechanisms and changes in tax regimes that are perceived by investors as being unfair and inequitable, and in breach of contractual stabilisation provisions. As disputes mature over the next few years, we are likely to witness an exponential rise in arbitrations in the region, with investors invoking dispute resolution clauses in both their contracts and relevant investment treaties with greater frequency.

Beyond the Caspian, investor-state arbitrations generally have undergone exceptional growth. This growth has been particularly significant as regards arbitrations conducted under the auspices of ICSID, which was established by the Washington Convention of 1965 to promote the settlement of investment disputes. ICSID reported an increase in the number of arbitrations filed of almost 100 per cent between 2001 and 2003 (although growth began to level out in 2004). This largely reflects the rapid growth in the number of bilateral investment treaties (BITs) that have been concluded in recent years, under which parties are now increasingly arbitrating disputes.1

Indeed, a recent ICSID publication suggests that approximately 80 per cent of the Centre’s pending cases were instituted on the basis of arbitration clauses in BITs.

The majority of these claims (57 of the 102 cases pending before ICSID tribunals) involve Latin American states. Of those, a staggering 36 cases are against Argentina, most commenced by foreign investors seeking redress against that country for the adverse impact on their investments of its 2002 ‘emergency’ economic measures. These claims, which principally concern Argentina’s public utility sector, are worth approximately $15 billion in total.

In addition to Argentina, it is likely that other Latin American states will see an increase in treaty arbitrations against them in coming years, as a result of government measures that have had an adverse impact on foreign investors. In Bolivia, for example, recent seizures of private land under a 2001 land law may lead a number of foreign investors to bring BIT claims in a bid to protect their rights. Bolivia is also predicted to see an increase in treaty arbitrations as a result of requirements under new hydrocarbons laws that give greater control to state-owned hydrocarbons companies and dilute royalties payable to foreign investors. Recent popular revolts against foreign ownership of Bolivian natural resources, including the public water supply, may also lead to claims by foreign investors.

It is not just treaty arbitration that is on the rise in Latin America; the region has also witnessed rapid growth in international commercial arbitration. In the 1980s, the average Latin American share of ICC arbitrations was less than 3 per cent. In 2004, more than 11 per cent of the ICC’s caseload involved a Latin American or Caribbean party, with Argentina, Brazil and Mexico featuring in the 16 most common nationalities in ICC proceedings. The AAA has recorded a similar increase; on last count, one in every six cases had a participant from Latin America. A number of Latin American countries, including Brazil, Chile, Mexico, Peru and Venezuela, have also implemented new arbitration laws in the last ten years. Although these laws (many of which are based, in whole or part, on the Model Law) are not without their problems, their enactment demonstrates the priority accorded by the region to arbitration as an effective means of dispute resolution and its importance to foreign investment.

RESPONSE OF ARBITRAL INSTITUTIONS TO GROWTH IN ADR

In addition to the quantitive growth outlined above, there is growth in the wider range of arbitration and alternative dispute resolution (ADR) services offered by the institutions and other organisations in the private and public sectors. These include:

• the ICC’s ADR Rules (launched in 2001 to replace the 1988 Rules of Conciliation) and Dispute Board rules (launched in 2004);
• the LCIA’s Mediation Rules (effective 24 June 2002) and the provision of ‘fast track’ arbitration (either by agreement of the parties or as directed by the tribunal);
• the UNCITRAL Model Law on International Commercial Conciliation (adopted 28 June 2002);
• the AAA’s list of 46 arbitration and mediation rules and procedures tailored to particular states or industry sectors;
• the HKIAC Mediation Council’s sub-committees in various areas
  including commercial and construction;
• the World Intellectual Property Organisation (WIPO)’s arbitration and mediation rules and dispute resolution service for domain names;
• the Asian Domain Name Dispute Resolution Centre, jointly established by HKIAC and the CIETAC in 2000;
• the SIAC SGX-DT Arbitration Rules (effective 1 July 2005), for
  expedited arbitration of derivatives trading disputes;
• CIETAC’s Financial Disputes Arbitration Rules (effective 1 May 2005);
• ICSID’s Rules of Procedure for Conciliation Proceedings; and
• the SCC’s Expedited Arbitration Rules and Mediation Rules.

PUBLICATION OF AWARDS

There has, over the last 20 years or so, been a movement towards wider publication of arbitration awards. This is in the interests of establishing a body of decisions that may be a useful reference for arbitrators, although published awards will not be binding on subsequent arbitrations in the usual sense.

Generally speaking, awards remain confidential unless otherwise agreed by the parties, but there are certain categories of awards that are publicly available, either in their entirety, or alternatively in a ‘sanitised’ format with the parties’ names and identifying features of the case having been redacted.

• ICSID publishes awards on its website (www.worldbank.org/ICSID/), in accordance with its objective of making its facilities available to promote an atmosphere of mutual confidence between states and foreign investors. If the parties consent, the whole award may be published. If not, ICSID may publish extracts from the award.
• Certain investor-state awards can also be found at http://ita.law.uvic.ca.
• Extracts of some ICC awards may be found on its website (www.iccwbo.org/court/english/awards.asp) or on www.kluwerarbitration.com.
• The LCIA does not publish any awards made under its rules.
• The AAA is currently rolling out plans to publish ‘selected awards, decisions and rulings that have been edited to conceal the names of the parties and other identifying details that have been made publicly available in the course of enforcement or otherwise.’
• The Permanent Court of Arbitration (PCA), which administers the resolution of disputes involving states, intergovernmental organisations and private parties, publishes awards on its website (www.pca-cpa.org/), in particular certain awards rendered in state-to-state disputes.
• Certain awards under the UNCITRAL Arbitration Rules are available on www.uncitral.org/uncitral/en/case_law.html.

The arbitration agreement

The cornerstone of any arbitration procedure is the consent of the parties. There will be no arbitration if the parties have not entered into an arbitration agreement to resolve specified disputes by arbitration.

An arbitration agreement takes the form of either an arbitration clause or a submission agreement. An arbitration clause is a clause in the underlying contract, in which the parties agree to submit future disputes to arbitration. A submission agreement is an agreement to submit existing dispute(s) to arbitration. Since it is typically harder to reach agreement after a conflict has arisen, parties are well advised to obtain agreement to arbitrate at an early stage of their contractual relationship, in the form of an arbitration clause. Such a clause will later be separable from the underlying contract.

Both national laws and applicable international instruments currently require the arbitration agreement to be in writing. However, the UNCITRAL Arbitration Working Group (the Working Group) is currently considering alterations to the Model Law, including changes to the requirement that the arbitration agreement be in written form. Proposals include relaxing the definition of ‘agreements in writing’ to include agreements concluded orally whose terms are recorded in any retrievable format, or removing the requirement altogether and leaving it to the applicable law of contracts to determine whether an agreement to arbitrate exists.

An effective arbitration clause – which reduces the potential for conflict over its validity, scope and applicability – requires careful drafting.

The most significant choice for the drafter is between institutional and ad hoc arbitration. Institutional arbitration is often preferable, as the institutional rules provide a framework and assist in the administration of the proceedings. The choice of institution will depend on factors such as: the nationality of the parties; the nature of the transaction; the nature of the parties (private or state); the choice of applicable law and place of arbitration; issues affecting enforceability of the award; and, perhaps, cost. Where, for instance, one party (eg a state) will not agree to institutional arbitration, ad hoc arbitration using the UNCITRAL Arbitration Rules may be preferable to truly ad hoc arbitration, as it provides a framework designed to govern the proceedings, which is generally easier than leaving it to the parties and/or tribunal to agree on the procedure once a dispute has arisen.

Choice of the place (or ‘seat’) of arbitration is important for several reasons. First, the venue should ideally be convenient for the parties, who may also require it to be culturally neutral. If no mutually convenient location can be found, the parties may choose a place that is equally inconvenient to them both. Second, as many signatories to the New York Convention will enforce only awards made in other Convention countries, the place of arbitration should be a signatory to the New York Convention. Third, the seat determines the procedural law underpinning the arbitration, which affects the conduct of the proceedings and can impact on the enforceability of the award. The seat may also, in some cases, be considered to determine the governing law of the arbitration agreement. The legal environment at the place of arbitration should therefore be favourable to arbitration, providing support from national courts where necessary without undue interference with the arbitral process.

One way to determine whether a particular country will offer a favourable legal environment is to ascertain whether it has adopted the Model Law. The Model Law is not a convention or treaty, but sets an example for states to follow, or at least consider, in developing their own national arbitration legislations. The Model Law seeks to codify internationally acceptable standards of arbitration procedure (for example, challenges to arbitrators and the conduct of proceedings) and reflects the importance of party autonomy and the principle of non-intervention by national courts. Legislation based on the Model Law has been enacted in 56 countries (see www.uncitral.org/enindex.htm).

In addition, the parties are advised to make express choices of: applicable substantive law (ensuring that the arbitration clause meets its requirements and that the dispute is regarded as arbitrable); the language of the arbitration, and the number and method of appointing arbitrators. In the absence of express provision by the parties, most arbitration rules afford the arbitrator(s) discretion to make those choices for the parties. Naturally, the parties signing the arbitration agreement must have the capacity to do so, and, where relevant, the authority to bind the party to the arbitration.

In addition to these essential elements, the increasing complexity of contracts may require drafters to give particular consideration to other matters, for example the availability of interim measures and the scope of the obligation of confidentiality in arbitral proceedings. These are discussed in more detail below, as are the challenges presented by multi-party and multi-contract transactions.

Increasingly, parties are opting for clauses that provide for disputes to be referred to arbitration, but give one party (only) the right to litigate instead, or vice versa. While these so-called ‘sole option’ clauses appear to be enforceable (in many European jurisdictions, at least), it is crucial that they are carefully negotiated and properly drafted, to avoid any uncertainty at a later date as to the parties’ chosen method of dispute resolution, which might ultimately result in a challenge to an arbitral award.

Multi-party/multi-contract issues and non-signatories

Multi-party situations can present particular challenges in international arbitration. Such situations may arise where there are more than two parties to a single contract or where there are related contracts between the same or different parties. Potential difficulties may arise in connection with the appointment of arbitrators and in relation to the consolidation of related arbitrations and the joinder of parties who are not signatories to the arbitration agreement.

NON-SIGNATORIES

The question whether a related person who has not signed the arbitration agreement can take the benefit of it, or be compelled to arbitrate under it, will be determined by the legal theories available under the applicable legal system(s) and institutional rules, typically based on principles of agency, contract, representation and corporate identity. The exercise is essentially to determine what must have been the true intent of the original parties to the contract and the parties related to them.

The theories may be summarised as follows: (1) incorporation by reference (contract containing an arbitration agreement incorporated by reference into a completely separate agreement not containing one); (2) assumption by conduct (non-signatory’s conduct indicates it is assuming the obligation to arbitrate); (3) third party beneficiary (the right to arbitrate can be conferred on a third party if the intention to do so can be discerned from the contract); (4) agency (where a party signing an arbitration agreement was acting as agent for another, the latter will be bound by the arbitration agreement); (5) equitable estoppel (usually used to prevent a signatory from avoiding arbitration with a non-signatory when the issues the non-signatory seeks to resolve in arbitration are intertwined with an agreement that the estopped party has signed); (6) alter ego (one company acts as the alter ego of another, so as to justify the piercing of the corporate veil); (7) assignment (generally the assignee may invoke an arbitration agreement contained in the assigned contract); and (8) group of companies theory (typically used to bring a parent company or a subsidiary under an arbitration agreement not signed by it but by other members of the group). Sometimes arbitral tribunals and national courts look at whether it is fair to allow or compel a non-signatory to arbitrate and then fit the available theories to the facts. Some decisions also seem to be based more on the good administration of justice rather than on legal principle.

The assertion of arbitral jurisdiction over non-signatories often requires resolution of complex issues of law and fact. This can be expensive and time consuming. It can also be controversial and national courts at the place of arbitration or enforcement may review the arbitrators’ decision. Contract drafters should therefore take appropriate precautions.

INTERVENTION, JOINDER, CONSOLIDATION

Can a person who is not a party to the original arbitration agreement (whether originally or by non-signatory theory) nevertheless participate in arbitral proceedings by way of intervention or joinder? When may two or more arbitrations be consolidated?

Generally, in the absence of agreement between all parties to the arbitration agreement and the party to be added to the proceedings, third party intervention is impossible (a limited exception is art 22.1(h) of the LCIA Rules, which gives the arbitral tribunal power to allow a third person to be joined to the proceedings provided the third person and the applicant party to the arbitration consent in writing).

Where the same parties make separate contracts concerning the same legal relationship and containing arbitration agreements in the same terms, there is no reason in principle why the claimant may not submit claims arising from the different contracts to a single arbitral tribunal. The situation is more difficult where one of the contracts involves additional parties or the arbitration agreements are different. If it is impossible to discern an intention by the parties that the claims arising out of the various agreements should be heard together, consolidation will not be possible under many systems of national law (a notable exception being the Netherlands).

In multi-party, multi-contract situations, careful drafting so as to give consent in advance to intervention, joinder and consolidation as appropriate can save time and money because battles over jurisdiction (who can or must participate in the arbitration) will be avoided. It will also avoid the danger of inconsistent results (and additional costs) from different proceedings involving related parties and contracts.

SELECTION OF ARBITRATORS BY MULTIPLE PARTIES

What happens where there are multiple parties to an arbitration and two respondents insist on each naming an arbitrator of their own, raising the possibility of an unworkable, four-person tribunal?

If the respondents are forced to name an arbitrator jointly, and the single claimant is allowed to name an arbitrator on its own, this may lead to a challenge based on inequality between the parties. This can be avoided by choosing arbitration rules that deal with this issue (eg the LCIA or ICC Rules) or by providing in the arbitration agreement for joint nomination of arbitrators by multiple parties and a default position in the case of failure to agree.

Evidence and procedure and the common law/civil law approach

One of the key advantages of international arbitration is the procedural flexibility it affords. The parties or, if they fail to agree, the arbitrators, are free to determine the way the arbitration is conducted, and are not bound by the national court procedure of the country which is the seat of the arbitration (subject to the mandatory procedural rules of that country) or by the legal system of either of the parties.

Such flexibility allows the procedure to be ‘custom-made’ to take account of the facts of the case and the parties concerned. This is particularly important as international arbitration frequently involves parties, counsel and arbitrators from different jurisdictions, who are used to the markedly different procedures of the common and civil law systems.

The common law system, found in England, the United States, and the Commonwealth, is adversarial in nature. The parties are responsible for defining the issues and presenting their version of the facts and interpretation of the law to the judge, whose role is to hear both sides’ arguments and to choose between them. In the civil law system, which is inquisitorial, the judge actively conducts his or her own investigation into the facts and law, with the assistance of the parties and their counsel.

This different emphasis on the players’ roles has a major impact on the procedure before common and civil law courts. The most important area of difference relates to document disclosure. In common law systems, the parties seek to expose all the facts to allow the judge to determine the objective truth. The disclosure obligation is therefore very wide – broadly, the parties are required to disclose all the documents in their control which are relevant to the dispute (unless they are protected by privilege), including internal memoranda and documents that are harmful to their cases. In civil law systems, a party need produce only those documents on which it relies to prove its case; although the judge may later require further documents to be produced as part of his investigation, the parties are very unlikely to be required to disclose confidential internal memoranda.

Another important difference relates to the role of witnesses of fact. The common law system places great weight on witness evidence. Each party presents its witnesses to the court and the credibility of the witness’ recollection of events is tested during the trial by a process of examination and cross-examination by lawyers on both sides, regulated by a complex set of procedural rules governing the admissibility of evidence. The civil system favours documentary evidence, and witness evidence plays a much more limited role – where there are witnesses the court itself asks the questions and there is no cross-examination by lawyers or even, in some jurisdictions, contact with witnesses before the trial.

The common law/civil law divide is also manifest in the use of expert witnesses. In the common law system, each party typically appoints its own expert, who generally produces a written expert report and is then cross-examined upon it at the hearing. In the civil law system, there is no such battle between party experts – the court may appoint a neutral expert whose duty is to the court, and who is empowered to conduct a defined enquiry through interviewing witnesses and requesting documentary evidence.

The procedural rules to be adopted in an international arbitration are determined by the parties and the tribunal. If institutional arbitration has been chosen, most institutional rules grant a wide discretion to the parties to determine the procedure that will apply, and in the absence of agreement, the tribunal has considerable scope to determine the procedure. The procedure is usually determined at a hearing held after the constitution of the tribunal and further procedural orders are issued during the course of the arbitration as the need arises. The parties often adopt, or are guided by, the International Bar Association Rules on the Taking of Evidence in International Commercial Arbitration 1999 (the IBA Rules). These rules, drafted by eminent members of the International Bar Association from both common and civil law backgrounds, are a useful harmonisation of the procedures commonly used in international arbitration. The parties may also rely on the checklist of procedural points set out in the UNCITRAL Notes on Organising Arbitral Proceedings.

In international arbitration, the tribunal generally adopts elements of both common and civil law procedure, often with a bias towards one or the other depending on the legal background of the tribunal and, in particular, of the chair and also influenced, to some extent, by the background of the parties and their legal advisers. This ‘middle way’ enables a tribunal to cater to the different expectations of the parties and to fulfil — and to be seen by the parties to fulfil — its obligation to treat the parties equally and fairly.

In practice, most arbitrations are a variation on a common procedural theme. The parties submit written memorials on fact and law, and disclose those documents which support their case. Although expansive US-style discovery is generally considered inappropriate for international arbitration, it is now accepted practice for the tribunal to order some form of more limited disclosure, even where the parties are both from civil law jurisdictions. The IBA Rules, for example, allow disclosure but require a party to limit its request to named documents or narrow and specific categories of documents and to state why they are relevant. The parties generally rely on witnesses to support their case. Written witness statements (which usually act as the witness’ evidence-in-chief) or witness summaries are submitted in advance of the hearing, then the other side has the opportunity to cross-examine at the hearing. The use of party-appointed and/or tribunal-appointed experts is accepted practice in international arbitration. In the case of tribunal-appointed experts, the parties are generally involved in the briefing, choice and interrogation of the expert. Some arbitrators use more innovative procedures such as witness conferencing, whereby all witnesses are heard simultaneously rather than one by one. In general, there is an oral hearing for short opening and closing statements from the lawyers and examination and cross-examination of witnesses. The hearing is adversarial rather than inquisitorial in nature, however the tribunal may take a more active role than the judge of a common law court.

Interim and conservatory measures

Either immediately before or during arbitration proceedings, a party may wish to seek an interim measure of protection – typically, to maintain a certain state of affairs until the dispute is resolved. Such an order might, for example, be to preserve evidence, to preserve assets, to bar the sale or removal of disputed goods, or to require continued performance of a contract.

Prior to the constitution of the arbitral tribunal, an interim measure can be sought only from a competent court. This will also be the case if the requested measure is directed against a person or entity not party to the arbitration agreement. In other circumstances, however, the measure may be obtained either from a court or from the tribunal itself.

To determine which forum may be available, parties in a given case must carefully analyse the applicable legal regime (ie the arbitration agreement, the applicable institutional rules, and the procedural law of the seat). For example, the applicable procedural law or institutional rules may restrict a court’s ability to grant interim measures in support of a pending arbitration or restrict the availability of interim measures from a tribunal.

The Model Law, which has formed the basis for many countries’ own arbitration statutes, authorises tribunals to grant interim measures ‘in respect of the subject matter of the dispute’ (art 17). It also makes clear that a party’s request for such a measure from a court (and a court’s granting of that request) do not violate an agreement to arbitrate. Several of the most commonly used institutional arbitration rules adopt a similar approach, although some of these rules also provide that, once a tribunal is seised of a dispute, requests for interim measures should normally be directed to the tribunal, rather than a court.

If a party believes it can seek a particular interim measure from either a court or the tribunal, several considerations may influence its choice. The tribunal may have the advantage of already being familiar with the dispute. In addition, the tribunal may be the more flexible forum. Whereas a court’s power to grant interim relief is usually conditional on certain statutory requirements, tribunals often have broad discretion – as reflected in the Model Law – to order any measure they ‘consider necessary’. On the other hand, a tribunal may not be able to act as quickly as a national court. Further, courts have more extensive powers than arbitral tribunals. For example, a court is usually the only forum competent to issue an order ex parte (ie before giving notice to or hearing from the affected party) and, generally speaking, an arbitral tribunal will not be able to order summary disposition or judgment. Moreover, courts – unlike arbitral tribunals – can deploy coercive measures to enforce an order.

In practice, most parties comply voluntarily with tribunal orders for interim measures, because they realise that if they do not do so, they risk incurring the displeasure of the tribunal before it determines the case on the merits. However, if a party does not voluntarily comply with a tribunal order, its opponent must then take the added step of seeking court enforcement.

The UNCITRAL Working Group is considering possible additions to the Model Law concerning interim measures, and these may portend similar changes in national arbitration statutes. First, it has been suggested that the Model Law should require courts, upon request, to enforce arbitral orders for interim measures, subject to certain limited defences. Although the New York Convention requires courts in signatory countries to enforce foreign arbitral ‘awards’ (subject, again, to limited defences), arbitral orders for interim measures are often viewed as not constituting ‘awards’. Second, the Working Group is considering whether the Model Law should establish courts’ power to grant interim measures in support of a pending arbitration, including when the arbitration is seated in another jurisdiction. Finally, the Working Group is considering whether the Model Law should specify the types of interim measures that a tribunal may order and the conditions for granting them. In this connection, the Working Group is considering whether to permit arbitrators – subject to several restrictions – to grant interim measures on an ex parte basis, when the affected party might otherwise take steps in advance of the measure to defeat its effectiveness. This proposal has prompted objections that it would be incompatible with the consensual nature of arbitration for arbitrators to act without giving both parties a chance to be heard and therefore that ex parte measures should remain the exclusive province of national courts. The Working Group’s final recommendations are expected to be sent to the UNCITRAL Commission in mid-2006.

Remedies

While there are some limitations on the scope of interim remedies that may be ordered by an arbitral tribunal, it is generally thought that the scope of final remedies available to national courts is largely also available to tribunals. Certain remedies, however, depend on the law of the contract or of the seat, and arbitral tribunals lack the power of a court to enforce sanctions.

The main remedy available in international arbitration is the payment of money, either as compensation for loss suffered (including actual loss and loss of profit), or as payment of a debt owed under a contract. Difficulties may arise in respect of punitive damages, which seek to punish a party at fault rather than merely to compensate the injured party for loss. The concept of punitive damages, while accepted in some jurisdictions such as the United States, may not be recognised by others, and such damages cannot be awarded if the law of the contract does not recognise them. Moreover, an award of punitive damages may not be enforceable under the New York Convention for public policy reasons, if the country of enforcement does not recognise them. The tribunal should therefore be mindful of the law of the contract, the law of the seat and the scope of the arbitration agreement when considering punitive damages.

The tribunal may also award interest on a debt or damages, although this will depend on the provisions of the applicable procedural law or the law of the contract, as will the availability of compound interest. Given the generally confidential nature of arbitration, it is difficult to ascertain to what extent compound interest is being awarded. However, the indications are that compound interest awards are still relatively uncommon in the absence of a specific contractual agreement between the disputing parties requiring or providing for such a remedy, or by virtue of the law of the contract.

In respect of non-monetary awards, specific performance of a contract may be a suitable remedy and may be awarded if provided for by the parties in the arbitration agreement or allowed by the applicable law. However, although an arbitral tribunal may order specific performance, it does not have the power to enforce compliance, and a party will need to obtain a court order to obtain enforcement. This may not be entirely consistent with the rationale of the New York Convention, which anticipates minimal intervention by the courts of the place of enforcement. Court intervention may also be required where the tribunal orders injunctive relief against a third party over which it has no jurisdiction. Another remedy that is available, although seldom used as it is generally considered to be impractical, is restitution, which seeks to put a party back into the position it would have been in had the wrongful act not occurred. Where a dispute arises as part of an ongoing relationship or project, the parties may seek a binding declaration of the legal position, without other remedy, to settle a difference while maintaining their relationship.

Whatever the findings of the tribunal, the award should be unambiguous and must contain an effective determination of the issues in dispute, so that the successful party can proceed to enforce the remedy that it has been awarded.

Enforcement

It is in the area of enforcement that the resolution of international commercial disputes by arbitration provides its most tangible benefit over litigation. Arbitral awards are today more readily and more widely enforceable around the world than the judgments of national courts.

An arbitral award is binding on the parties to it. The obligation to carry it out is not only implicit in the terms of every arbitration agreement, but is also reinforced by express provision in all of the major international and institutional rules of procedure commonly used in the international arbitral process. Failing voluntary settlement once rendered, and providing that it is in conformity with any mandatory requirements or formalities imposed by the law of the country of its origin, an award may be enforced by the successful party in the courts of that country or, alternatively, abroad, directly through the courts of any other country.

In contrast to court judgments, arbitral awards benefit from a simplified international enforcement regime under one of the most extensively ratified treaties in the world, the New York Convention. While not the only international instrument pursuant to which arbitral awards may be enforced across jurisdictions, the New York Convention currently binds the greatest number of countries. As at the date of publication, a total of 137 states had signed, ratified or acceded to it.

At its core, the New York Convention provides for a minimum international standard by which the courts of all of its member jurisdictions are obliged to recognise as binding arbitral awards made in another Convention country, and to enforce them by way of proceedings that are not substantially more onerous than those applicable to awards made within their own jurisdictions.

At the national level, not surprisingly, procedures in relation to the enforcement of awards vary. In Switzerland, for example, an award must be deposited or registered with a court or other authority, but can then be enforced as if it were a judgment of that court. Other countries usually either permit the direct enforcement of awards with the leave of a court, as in England and Wales, or require the prior application to a court for their recognition before enforcement, as in France.

The formalities required under the New York Convention are minimal: a party seeking enforcement need only supply the enforcing court with an original or certified copy of the arbitral award and an original or certified copy of the arbitration agreement, including certified translations if necessary. No review of the award itself is permitted under the New York Convention, even if its enforcement is opposed by the unsuccessful party.

In this regard, the exceptions provided by the New York Convention to the general duty on the courts to enforce awards are few, and limited to those grounds that are recognised internationally, in summary: (a) the invalidity of the arbitration agreement; (b) the inability of a party to present its case; (c) the nonconformity of the award or the arbitral procedure to that envisaged by the parties’ arbitration agreement; and (d) the non-arbitrability of the subject matter in dispute, or if enforcing the award constitutes a violation of public policy, in the country of enforcement. The award may also be set aside if it is not yet deemed binding at its place of origin, for want of legal formalities for instance, or if it has already been set aside or suspended at that place. However, the entire regime introduced by the New York Convention has generally shown itself in proceedings before the national courts of the New York Convention countries over the last 47 years to be both pro-finality and pro-enforcement. Not only is the onus on the party opposing enforcement to raise and prove any of these grounds, but the grounds themselves are discretionary. A court is not obliged to refuse enforcement of an award if, for instance, it is empowered by its own laws to enforce it. This power is expressly preserved by the New York Convention, and indeed used by the courts of jurisdictions with more liberal enforcement regimes than the minimum standard prescribed by the New York Convention, to enforce awards even if they have previously been set aside by the courts at their place of origin.

Confidentiality

Confidentiality is widely perceived to be an integral feature of arbitration, and for many it is one of the principal advantages of arbitration as compared with litigation. There is commonly an expectation not only that the proceedings will take place in private, but also that documents, evidence, the award, and the existence of the arbitration, will remain confidential. However, in the absence of express agreement on confidentiality, whether any implied duty arises is controversial, and there are notable discrepancies across different countries and institutions. There are also differences as to what exactly is to be kept confidential, and whether such obligations as there are apply to witnesses, experts and other third parties as well as to the parties, arbitrators and institutions.

Arbitration legislation has tended to avoid defining the scope and obligation of confidentiality, although certain national laws do include express provisions on information relating to arbitral proceedings. New Zealand’s Arbitration Act 1996, for example, generally prohibits ‘disclosure of information relating to arbitral proceedings and awards’ unless the parties agree otherwise, and Spain’s 2003 Arbitration Act requires arbitrators, parties to the arbitration and any arbitral institution to maintain the confidentiality of information that comes to their attention in the course of the arbitral proceedings. On the other hand, Norway’s new Arbitration Act, which came into force on 1 January 2005, expressly provides that neither the award nor the content of arbitration proceedings are confidential unless the parties so agree.

National case law on confidentiality is sporadic and inconsistent. English cases have recognised an implied obligation of confidentiality, although the award itself has been held to be different in character and potentially a public document for enforcement purposes (see Dolling-Baker v Merrett [1990] 1 WLR 1205; Hassneh v Mew [1993] 2 Lloyd’s Rep 243, and Aegis v European Re [2003] UKPC II. In City of Moscow v Bankers Trust [2005] QB 207, the English Court of Appeal decided that claims brought before the English courts relating to arbitration are not necessarily confidential, and that the court should determine the confidentiality of such claims on a case-by-case basis. France has also recognised an implied duty and has imposed heavy damages on parties for having ‘caused a public debate of facts which should remain confidential’, contrary to ‘the very nature of arbitral proceedings that they ensure the highest degree of discretion on the resolution of private disputes’ (see F Aiter v A Ojjeh Court of Appeal, Paris, 18 February 1986, (1986) Revue de l’arbitrage 583). At the other end of the spectrum, the Australian High Court, the US Federal District Court and the Swedish Supreme Court have rejected the notion that a general or implied duty of confidentiality exists (see Esso v Plowman [1995] 128 ALR 391 (Australia); United States v Panhandle Eastern Corp et al 118 FRD 346 (D Del 1988) (US); Bulbank v AI Trade Finance [Case T6111–98] (Sweden)).

As for the arbitral institutions, again there is little uniformity over what in the absence of agreement should be kept confidential, and who is to be bound by the duty. Aside from the privacy of the hearing, the ICC rules provide no general duty of confidentiality, while the UNCITRAL, ICSID and AAA rules set out to protect the confidentiality of the award. The AAA rules also require the tribunal to maintain confidentiality of all information disclosed during the proceedings, but this does not extend to the parties. The LCIA rules provide greater protection, requiring that the parties, arbitrators and tribunal keep confidential the award together with all facts or documents produced during the proceedings. The new CIETAC Rules prohibit disclosure of matters of substance or procedure arising out of the arbitration. The WIPO Rules contain comprehensive confidentiality provisions, reflecting the importance of confidentiality in intellectual property disputes. Some institutions (including the ICC) give the tribunal specific powers to protect trade secrets and confidential information, and most confer a general power to conduct the proceedings as the tribunal sees fit, which may give scope for an application to prevent or restrict disclosure on grounds of commercial sensitivity or extreme confidentiality.

Given the conflicts between the different jurisdictions and institutions, it is likely that this area will continue to develop. In the meantime, parties would be well advised not to take anything for granted and, if confidentiality is important to them, to consider including express confidentiality provisions in their arbitration agreement or in procedural directions at the outset of the case.

Ethics

It is a fundamental principle of procedural fairness that disputes be decided by an unbiased decision-maker. In international arbitration, this principle is typically articulated as the requirement that arbitrators remain ‘independent’ or ‘impartial and independent’ throughout the proceedings. The arbitration rules of the major international arbitration institutions incorporate these standards. Lack of independence or impartiality of arbitrators may form the basis for refusal to enforce an arbitral award under the New York Convention.

Although a widely accepted requirement, impartiality and independence are not easily defined and can refer to at least three types of circumstances: a direct or indirect financial connection to the parties or dispute; a personal connection; or a previously expressed opinion on the issues that are the subject of the dispute. Clearly, the parties to the dispute may not also act as arbitrator; nor may an arbitrator have a direct financial interest in the outcome of the dispute or have advised any party on the merits of the dispute. By the same token, when arbitrators subjectively believe they cannot render an unbiased award, they should not serve. Questions remain, however, about how close a connection must be between an arbitrator (or the arbitrator’s law firm or spouse) and a party (or the party’s counsel or parent company) to disqualify him or her from acting in a particular case or, more seriously, to provide grounds for refusal of enforcement of an arbitral award. The approach taken by the major international arbitration institutions is to require potential arbitrators to disclose to the parties anything that might reasonably lead a party to question their impartiality or independence.

The IBA has provided further guidance in its Rules of Ethics for International Arbitrators (Rules of Ethics) and Guidelines on Impartiality, Independence and Disclosure in International Commercial Arbitration (Guidelines). The Rules of Ethics require disclosure of circumstances creating the appearance of bias, defined as ‘[f]acts which might lead a reasonable person, not knowing the arbitrator’s true state of mind, to consider that he is dependent on a party.’ The Rules of Ethics also impose obligations of diligence and confidentiality on arbitrators. The Guidelines provide additional specificity, setting out three categories of potential conflicts (and examples thereof) – those that would prevent a person from serving as an arbitrator (and a subcategory of conflicts which cannot be waived); those that must be disclosed; and those that would not normally give rise to a duty to disclose.

The concepts of independence and impartiality become most difficult in the context of the selection of arbitrators by the parties themselves. Some national practice allows party-appointed arbitrators to be non-neutral. International practice, however, is to the contrary, requiring that even party-appointed arbitrators remain independent.

A concept related to impartiality and independence is that of ‘neutrality’, which in the context of international arbitration refers to the requirement that the arbitrators (or at least the chair of the arbitral tribunal) not be of the same nationality as the parties. It is thought that neutrality serves to preserve the appearance of fairness of the proceedings. Some arbitration rules merely express a preference for neutrality (eg the ICC Rules, art 9(5)), while others make it a strict requirement (eg the ICSID Arbitration Rules, r 3).

1 The first BIT (Germany/Pakistan) was concluded in 1959. In 1990, there were approximately 385 BITs in existence. By 2005, this number had jumped to 2,200.