Advantages and Disadvantages of International Commercial Arbitration

In this century the market has globalized more and more and as a result of the growth of international business, the number of international transactions has increased and gained a significant importance in the last decades. Even if a transaction or a contract is planned well, still it is possible to face some disputes. Parties should consider this possibility beforehand and therefore there is a considerable need for including dispute resolution mechanisms in a commercial contract. (Bradgate et al., 2008)

The main forms of commercial dispute resolution are; negotiation, arbitration, litigation and alternative dispute resolution mechanisms such as conciliation, mediation and mini-trials. Each method of dispute resolution has its own distinct features and advantages. This essay will only deal with one type of commercial dispute resolution: arbitration. Arbitration is a consensual private process, in which parties refer their disputes to a third person, an independent arbitrator, which they have selected to make a decision based on the evidence and argument presented before them. (Bradgate et al., 2008)

In the first part of this essay a brief historical overview and legal framework of international commercial arbitration will be described, considering both the Law of England and Wales and international regulations in this area which have also a direct or indirect effect on the development of international commercial arbitration in England and Wales. Following this, in the second part of this essay perceived advantages and disadvantages of international commercial arbitration will be discussed mainly in comparison to litigation involving international commercial disputes in national courts.

A Brief Historical Overview and the Legal Framework of International Commercial Arbitration

The concept of arbitration as a method of dispute resolution was historically a simple self-regulated system. It was very common that two or more traders, in dispute over their commercial relationship, would turn to another person to act on their behalf in finding a solution to their dispute. However, international commerce cannot stay within national boundaries and international commercial arbitration crosses borders. These characteristics created a need for international regulations which would connect national laws and offer a uniform solution as national laws could not alone cope with the problems of enforcement of arbitration agreements and arbitral awards. (Redfern et al., 2004)

The Geneva Protocol of 1923, which was the first protocol on arbitration clauses, provided a basis for the international enforcement of arbitration agreements and arbitral awards. The Geneva Protocol of 1927 extended the scope and the United Nations Convention on Recognition and Enforcement of Foreign Arbitral Awards (the ‘New York Convention’) of 1958, which was the first major contribution made by the United Nations to international arbitration, strengthened these provisions. The establishment of these international treaties, most importantly the New York Convention, was influenced considerably by arbitral institutions such as the London Court of International Arbitration founded in 1892. (Redfern et al., 2004)

The New York Convention has been ratified by many trading states, by 142 of the 192 United Nations Member States, and it obliges them to recognize and enforce both international commercial arbitration agreements and arbitral awards. In recent years, there have also been efforts to harmonize national laws relating to international arbitration. (Born, 1994) The UNCITRAL Model Law which was adopted by the United Nations Commission on International Trade Law in 1985 is the other important contribution made by the United Nations to international arbitration and it provides a simple and clear form for the arbitral process from the beginning to the end. (Sutton et al., 2007)

The New York Convention was not entered into force until 1975 in England and Wales, when the Arbitration Act 1975 implemented the Convention into English Law. The Arbitration Act 1996 is the primary source of English Arbitration Law which restated the former arbitration legislation, Arbitration Acts 1950-1979, with some changes and also taking into consideration the developments which occurred as a result of work carried out by United Nations. Even though the UNCITRAL Model Law is not completely adopted in England and Wales, it had also a great influence on the development of Arbitration Act 1996. Advisory Committee of the Department of Industry (‘the DAC’) published two reports in 1996 and 1997, which have considerable assistance relating to the interpretation of the Arbitration Act 1996. (Sutton et al, 2007)

It is generally agreed that arbitration is a particularly suitable method for the resolution of disputes arising out of commercial relationships. (Sutton et al., 2007) Accordingly, there have been many developments in terms of the Arbitration Law both in national laws and in the international area in the last decades. However, arbitration, as an alternative to submitting the dispute to a national court of law, is still not considered as an ideal but a better method than the alternatives by comparison to its perceived advantages and disadvantages. (Born, 1994)

The Advantages and Disadvantages of International Commercial Arbitration

Even though the usual way of resolving disputes is submitting them to a national court of law, the popularity of arbitration as a method of resolving international commercial disputes has increased considerably over the past several decades. The question is why parties choose to go to arbitration rather than to an established national court and why arbitration becomes a common method for resolving international commercial disputes. (Casella, 1996)

Regardless of the popularity of international commercial arbitration as an alternative method for resolving international commercial disputes, this method has both strengthens and shortcomings in many aspects. The neutrality of arbitrators or international arbitration institutions, the enforceability of arbitral awards in foreign countries, the flexibility in arbitration process and confidentiality of arbitration proceedings are often considered as the most advantageous features of international commercial arbitration, with some criticisms on these aspects, while generally the cost and the slowness of this method makes it disadvantageous.

In this part of this essay these characteristics will be described and detailed considering both positive and negative aspects of these features where relevant.

A Neutral Decision

International commercial contracts consist of parties who are almost always from different countries. This characteristic of international commercial contracts makes arbitration preferable as a dispute resolution method rather than submitting the dispute to another parties’ national court. Parties may either appoint an arbitrator from another country or request an international arbitral institution to make an appointment. In this way they acquire neutrality in the choice of law, venue, procedure and tribunal. (Sutton et al., 2007)

National courts may be biased or they may be lack of competence, resources or experience to provide a satisfactory resolution for many international commercial disputes while arbitration offers a theoretically competent decision-maker who is in principle unattached to either party or any national authority. (Born, 1994)

Even though arbitration apparently provides a neutral process in terms of the choice of law and arbitrators and this makes arbitration more advantageous for the parties from different countries, there are still concerns about complete neutrality. Neither New York Convention nor The UNCITRAL Model Law contains a provision concerning matters such as fraud, arbitrator bias or misconduct. It is suggested that similar to national courts private arbitrators might also have financial, personal or professional relations with one of the parties and they might be also biased, maybe even greater than national courts and the arbitral awards may be also questionable. (Born, 1994)

An Enforceable Decision

The final award of an arbitral tribunal, which is a binding decision rather than a recommendation, is a directly enforceable decision both nationally and internationally. In this respect the award from an arbitral tribunal differs from the judgement of a national court of law. The international treaties concerning the enforcement of arbitral awards such as New York Convention are more acceptable internationally than reciprocal enforcement of judgements. (Casella, 1996) However, there is a widespread perception in some developing and other counties that international commercial arbitration is biased towards Western commercial interests. This assumption causes some countries to be hostile towards international commercial arbitration and to pose some obstacles to enforcement of international arbitration agreements and awards in their countries. (Kassis in Born, 1994)

Additionally, it may be very difficult to construct an effective arbitration agreement and regime especially in multi-party contracts. Therefore there is a need for careful consideration of arbitration clauses in a draft contract as defective or incomplete arbitration clauses may result multiple judicial proceedings in different national courts. (Born, 1994)

Flexibility of Arbitral Process

In an arbitration process there are no standard rules which it is compulsory to follow. International commercial arbitration provides the parties a great freedom to agree on procedural rules and timetables and to select a technically expert decision-maker which will be most suitable to the particular circumstances of their unique dispute. (Redfern et al., 2004)

On the other hand, since there are no detailed procedural rules, this situation may cause misconduct in favour of one or more parties or it may create even greater disputes on the arbitral procedure between parties while determining the procedure that will be applied. (Born, 1994)

Confidentiality

International commercial arbitration is essentially a private process, in which press and public are not entitled to be present unlike the proceedings in national courts and the confidentiality of arbitral proceedings is often taken to be one of the important advantages of arbitration. (Redfern et al., 2004)

The UNCITRAL Arbitration Rules provide that;

‘‘Article 21 Hearings

…

3. The Arbitral Tribunal shall be in full charge of the hearings, at which all the parties shall be entitled to be present. Save with the approval of the Arbitral Tribunal and the parties, persons not involved in the proceedings shall not be admitted.’’

The English Court of Appeal in Hassneh Insurance Co. of Israel v Mew suggested ‘If it be correct that there is at least an implied term in every agreement to arbitrate that the hearing shall be in private, the requirement of privacy must in principle extend to documents which are created for the purpose of that hearing. The most obvious example is a note or transcript of the evidence. The disclosure to a third party of such documents would be almost equivalent to opening the door of the arbitration room to that third party. ‘

Even though the fact that arbitral hearings ensure the confidentiality of the entire proceedings, covering also the documents and evidence in an arbitral hearing, there might be a need to distinguish between the privacy of the hearing of the dispute and the confidentiality of the arbitral proceedings as a whole especially where there is a genuine public interest. If the decision of an arbitral proceeding may affect general public, as it is concluded by the Australian Court in Esso Australia Resources Ltd and the others v The Honourable Sidney James Plowman and the others, confidentiality may not be absolute and the public’s interest in obtaining information prevails. (Redfern et al., 2004)

Cost and Delay

International commercial arbitration is an expensive process for the parties as they must pay the fees and expenses of the arbitrators. Additionally, it may be necessary to pay the administrative fees and expenses of an arbitral institution. (Redfern et al., 2004) These costs will be subject to an increase if there is more than one member of the tribunal or if an arbitral institution is involved. In addition to arbitration fees, there may be the expenses of hiring rooms for meetings and hearings instead of using the public facilities of the courts of law. (Sutton et al., 2007) On the other hand, the awards of arbitration are final decisions; it is unlikely to be followed by a series of costly appeals to superior courts. (Redfern et al., 2004)

Due to busy arbitrators, counsel and clients from different counties, it may be difficult to schedule hearing dates and the need to agree on most procedural steps makes the pace of this procedure slower. (Born, 1994) However, again, as there is a limited scope for recourse against the award, this situation may save time in the end by avoiding the possibility of appeals. (Sutton et al., 2007)

Conclusion

International Commercial Arbitration has not been a completely ideal way to resolve international disputes yet, but Born suggests that it is the least ineffective way and comparatively better than the alternatives. (1994) Even though in domestic disputes litigation in national courts may be preferable to arbitration depending on the circumstances in each particular case, in international disputes opinions are strongly in favour of international commercial arbitration as the nature of international disputes differs from domestic disputes in many aspects.

This essay has attempted to address the question of what are the advantages and disadvantages of international commercial arbitration. Despite the disadvantages of this method, such as the possibility of biased private arbitrators, the difficulties of the enforcement process in some countries who are not members of New York Convention, the opportunity of creating procedural rules in favour of one party, limited discovery rights in terms of public interest to provide confidentiality and in some cases slow and expensive nature of this kind of dispute resolution, it would be true to say that international commercial arbitration becomes more and more preferable with regard to its overwhelming advantages. Offering theoretically competent arbitrator as a neutral decision-maker, easily and reliably enforceability in many foreign states than foreign court decisions, providing greater freedom in terms of procedural rules and timetables, giving a chance to disclosure business secrets in terms of confidentiality are mostly more advantageous in comparison to the possible disadvantageous sides of these characteristics. In conclusion, as a most suitable way to resolve international commercial disputes, international commercial arbitration has come to be the accepted method of resolving international commercial disputes.