The Fundamentals of Arbitration
- Susan FranckSusan FranckWashington College of Law, American University
Used for hundreds of years and adapted to a variety of contexts, arbitration is a form of adjudicative dispute settlement where parties consent to selecting third-party neutrals that resolve a specific dispute by applying the applicable law to the facts. Part of arbitration’s success involves its flexibility in adapting procedures and selecting applicable law to meet parties’ unique needs, including having some control over the appointment of an arbitrator who may have unique substantive expertise. Parties may agree to arbitration hoping to avoid the time-consuming, expensive, and complex process of litigation by streamlining or tailoring dispute mechanics. Yet, it is not empirically verifiable that arbitration always saves time and costs, as assessing relative savings requires comparison to a national court and there are over 190 national judiciaries to which arbitration could be compared, as well as nonadjudicative forms of dispute resolution like direct negotiation and mediation. As parties inevitably negotiate in the “shadow of the law,” arbitration aids the assessment of conflict management options; and, particularly internationally, arbitration remains a powerful tool that incentivizes voluntary compliance with awards and streamlines enforcement.
Despite the availability of many types of arbitration with different policy considerations, the parties’ consent to it and their agreement to arbitrate (including the applicable law) is the backbone of this form of dispute settlement. Arbitration agreements require parties to make core choices, such as deciding on the scope of agreements submitted to arbitration, the legal place of arbitration, and applicable rules. Such an agreement then provides the framework for fundamental elements of the proceedings, namely, the basis of the tribunal’s jurisdiction and power over the dispute, the standards for appointing arbitrators, the structure and rules of the proceedings, and the content and form of derivative awards. Having a valid arbitration agreement (and an arbitration proceeding conducted in accordance with those legal obligations) also influences whether courts at the place of arbitration will set the award aside and whether courts at a place of enforcement will recognize and enforce an arbitration award. In the modern era, arbitration will continue evolving to address concerns about local policy considerations (particularly in national arbitration), confidentiality and ethics, technology and cybersecurity, diversity and inclusion, and to ensure arbitration is an ongoing value proposition.
Introduction and Framework for Understanding Arbitration
When parties have conflicts, they require some form of dispute resolution. Less formal and nonadjudicative methods of dispute resolution—like negotiation, mediation, or expert determination—have material value (Freedman & Farrell, 2014; Menkel-Meadow, Love, & Schneider, 2013; Menkel-Meadow, Schneider, & Love, 2014). Yet, parties often require a form of adjudicative dispute resolution, whether to permit them to “bargain in the shadow of the law” (Mnookin & Kornhauser, 1979) or to actually use the adjudication process to resolve their dispute by applying the relevant facts to the applicable law.
Arbitration is a core form of adjudicative dispute settlement that has been in use since the time of the ancient Greeks and Romans (Fraser, 1926; Wolaver, 1934). Although its form and application has shifted over time, particularly given its procedural flexibility and adaptability to addressing parties’ needs, the general approach is distinct from national court litigation. Often national litigation has general procedural rules from which parties cannot typically derogate (such as the US Federal Rules of Civil Procedure, 2018). By contrast, arbitration permits parties to craft dispute settlement rules according to their own unique needs and specific disputes.
This article explores the modern doctrine of arbitration, with both a national and international focus, with a primary emphasis on arguably the most common form of arbitration, namely, International Commercial Arbitration. It first discusses how to identify what type of arbitration is being used, as this is necessary for purposes of isolating the applicable law and relevant policy concerns. Second, as consent is a fundamental prerequisite to arbitration, the article next discusses how parties can create a valid and enforceable consent to arbitration. Recognizing that the agreement to arbitrate provides the framework for the arbitration process, it then explores how arbitral tribunals are formed, and the nature of arbitral powers. Next, it explores how parties use their power by analyzing the conduct of the proceedings and the making of the arbitration award. Finally, the article explores post-award activity, including challenges to and enforcement of awards, and ultimately closes by focusing on the future of arbitration.
Types of Arbitration
In the modern era, arbitration typically breaks down into two main categories, namely domestic or international arbitration. In domestic arbitration, the parties and subject matter tend to be wholly domestic (i.e., relating to a single country). The content of domestic arbitration can vary depending upon a state’s national law, as, for example, countries like the People’s Republic of China (Yifei, 2018) and the United States (Carbonneau, 2017; Weston, Blankley, Gross, & Huber, 2018) have distinct conceptions of what is purely “domestic” arbitration. France’s Arbitration Law (2011) likewise contains distinct provisions addressing both domestic and international arbitration.
In international arbitration, disputes tend to be transnational—involving parties, activities, subject matter, or laws from multiple countries—and often involve either commercial or investment-related activity (Born, 2014; Lew, Mistelis, & Kröll, 2003). Domestic and international arbitration are decidedly different. Although they share some common doctrinal issues, the applicable law, policy implications, and underlying purpose of the two arbitration types are distinguishable (Cordero-Moss, 2013; Stipanowich, 2017; Strong, forthcoming).
Part of the reason why the distinction is important involves providing stakeholders with an opportunity to assess arbitration’s net value, particularly as compared to a national court. Parties, in theory, agree to arbitrate to avoid the time, expense, risk, and complexity of national court litigation (Moses, 2017). Roughly countries (United Nations, 2019) and national judiciaries on the planet, in order to assess whether arbitration can save time and costs as compared to litigation, it is necessary to understand whether arbitration is domestic or international. If the arbitration is domestic, a direct comparison to the local litigation system is possible, particularly as each country may have different normative assessments about arbitration’s social and legal value as compared to litigation. By contrast, if the dispute is international, direct comparisons about the relative net value of arbitration as compared to litigation in one national court (or multiple national courts simultaneously litigating parallel proceedings; Parrish, 2010) is far more complex.
Domestic arbitration is a function of the domestic law and social and political priorities of each country. In the United States, for example, there are various types of domestic arbitration with different policy concerns and statutory schemes, such as consumer arbitration, employment arbitration, and labor arbitration. These three types, with different parties in different policy contexts with unique power imbalances, are offered here to illustrate potential local social debates indigenous to domestic arbitration.
Consumer arbitration involves the arbitration of disputes between businesses and a consumer who is the end user of a business’s products. For example, cellphone providers and credit card companies have consumer arbitration clauses in their agreements with end users (Szalai, 2019). Consumer arbitration agreements limit a consumer’s recourse to courts and/or can limit consumers’ right to file class action claims (see, e.g., AT&T Mobility v. Concepcion, 2011), a right which some—but certainly not all—countries offer as a mechanism in national court litigation (Hensler, 2009). There has been criticism in the United States of the use of arbitration clauses in consumer contracts (Shierholz, 2017; Silver-Greenberg & Corkery, 2015; Silver-Greenberg & Gebeloff, 2015).
The American Arbitration Association (AAA) Consumer Arbitration Rules (AAA, 2014) address unique policy concerns and issues of consumer arbitration. They include processes for appointing a single arbitrator by the AAA’s national roster and various options for hearings, which may be held in person, over the telephone, or using online video communications. Parties may also waive the right to a hearing and conduct proceedings by submitting documents only. A consumer filing under the AAA’s Consumer Arbitration Rules must pay a $200 filing fee (AAA, 2018), which might exceed filing fees for small-claims local courts.
Employment arbitration involves the resolution of employment disputes between employers and employees. Some studies have estimated that nearly half of all US workers have agreed to mandatory employment arbitration (Colvin, 2017). US courts have enforced employment arbitration agreements, including agreements where an employee has waived the right to file a class action claim (see, e.g., Epic Systems Corp. v. Lewis, 2018). Claims historically litigated in federal courts—including civil rights claims under Title VII (42 U.S.C. § 2000e, et seq.) and the Family and Medical Leave Act (29 U.S.C. § 2601, et seq.)—must then be arbitrated under the parties’ agreement (see, e.g., Ashbey v. Archstone, 2015). Other courts have held that these claims were outside the scope of the parties’ arbitration agreement (Brown v. Trans World Airlines, 1997). Rule 12 of the AAA’s Employment Arbitration Rules (2009) requires arbitrators to be “experienced in the field of employment law,” meaning that all arbitrators must have subject-matter expertise. Employers may prefer the confidentiality and decreased discovery that is possible in arbitration; whereas employees may have concerns about an unfair disadvantage, lack of access to the courts, decreased capacity for discovery, and an inability to utilize class actions.
Labor arbitration in the United States involves a different statutory framework from consumer and employment arbitrations, which are typically governed by the Federal Arbitration Act (FAA) (9 U.S.C. § 1, et seq.). Labor arbitration generally involves disputes between unions and employers arising from a collective bargaining agreement and the National Labor Relations Act (29 U.S.C. §§ 151–169) (National Labor Relations Board, 1997). A common choice is an agreement to arbitrate grievances from the collective bargaining agreement (Ellis, 2000), with unions agreeing not to strike in exchange for having a neutral arbitrator resolve any disputes arising between the parties.
International arbitration involves parties, subject matter, and conduct that arises from different countries with different legal traditions, norms, and expectations about how justice and adjudication will be provided. International arbitration, unlike domestic arbitration, involves international law, international relations, and political economy concerns (Blackaby, Partasides, Redfern, & Hunter, 2015; Born, 2014; Franke, Magnusson, & Dahlquist, 2016; Lew, Mistelis, & Kröll, 2003). It also can involve commercially experienced parties with roughly equivalent commercial bargaining power, which is another distinction from domestic arbitration. In the modern era, there are two primary types of international arbitration: namely, International Commercial Arbitration and Investment Treaty Arbitration, the latter of which is sometimes erroneously called Investor-State Dispute Settlement or ISDS (Franck, 2019a; Franck, van Aaken, Freda, Guthrie, & Rachlinski, 2017).
International Commercial Arbitration
Disputes that arise between transnational parties can be difficult to resolve. Litigating before national courts can be problematic for many reasons, including perceived imbalances (i.e., a home-court advantage), problems involving the competency and impartiality of the local judiciary, difficulties with the enforcement of foreign court judgments, and the possibility of parallel proceedings in multiple jurisdictions simultaneously taking jurisdiction and thereby increasing costs (Blackaby, Partasides, Redfern, & Hunter, 2015; Born, 2014; Buhring-Uhle, 2005). In order to redress these issues—creating a process to streamline dispute resolution into a single neutral, enforceable forum that has adjudicators with subject-matter expertise—parties engaging in transnational commercial activities often resort to International Commercial Arbitration (ICA). Where parties agree to ICA, they can create a streamlined dispute resolution process in a single neutral and enforceable forum with adjudicators who have subject-matter expertise and can apply the applicable law.
In ICA, parties agree to resolve the merits of commercial disputes in a final and binding manner between, or among, transnational actors through the use of one (or more) arbitrators. ICA is facilitated by the New York Convention (1958), an international treaty ratified by roughly 160 countries (UNCITRAL, 2019). Under the Convention, the domestic courts in states that have signed and ratified the Convention must both: (a) enforce arbitration agreements (i.e., compel arbitration if one party goes to court instead of arbitrating disputes), and (b) enforce final arbitration awards. These twin obligations make ICA an efficient form of dispute settlement that minimizes the potential risks (and costs) involved in the resolution of commercial disputes. Perhaps this is why, in transnational business, International Commercial Arbitration is the default method of dispute settlement (Blackaby, Partasides, Redfern, & Hunter, 2015; Born, 2014) and has been so for decades, making it arguably the most prevalent form of arbitration (Drahozal, 2020; Drahozal & Naimark, 2005).
Investment Treaty Arbitration
The second form of international arbitration is Investment Treaty Arbitration (ITA) (Franck, 2019a). ITA arbitration is not like ICA. Although it shares some features with ICA, it is distinguishable from it. Beyond doctrinal distinctions in how consent to arbitration is procured through unilateral offers to arbitrate (Paulsson, 1995) and the potential use of a distinct enforcement regime under the International Centre for Settlement of Investment Disputes (ICSID) Convention (see the section “Enforcement Grounds and Bases for Refusing Recognition or Enforcement”), ITA requires resolution of disputes under the international law of an applicable treaty (rather than the resolution of disputes under a national law or general commercial principles, as in ICA). ITA is used to resolve disputes involving allegations of improper government conduct which is argued to violate promises contained in a treaty and which negatively affects a foreign investor’s investment within the host country (Franck, 2005; Hobér & Dahlquist Cullborg, 2018; McLachlan, Shore, & Weiniger, 2017). Further, given the public nature of state conduct, ITA’s emerging norm is for the transparency of proceedings and awards (Convention on Transparency in Treaty-Based Investor-State Arbitration, 2014; Maupin, 2013; UNCITRAL Rules on Transparency, UNCITRAL, 2013), rather than the traditional confidentiality norms discussed in the section “Confidentiality and Ethics.”
Historically, foreigners investing abroad had limited remedies for government misconduct that harmed the foreign investor. Aggrieved foreigners whose property was expropriated, for example, were required to petition their home governments for diplomatic protection (Dugard, 2009), which might lead to the state’s espousal (Law, 2018) of a claim at the International Court of Justice (ICJ) (Quintana, 2015), where states might take multiple decades to pay an adverse judgment, as in the Corfu Channel Case (1949; O’Connell, 1990), and winning states need not provide any awarded damages to the aggrieved investor (Franck, 2019a). Alternatively, states that were sufficiently disgruntled by the treatment of their investor could resort to gunboat fdiplomacy (St. John, 2018).
To avoid the challenges related to international relations, the difficulties of gunboat diplomacy, and the complications of pursuing ICJ litigation, states began signing treaties called international investment agreements, which might take the form of a Bilateral Investment Treaty (BIT) or even a multilateral treaty that incorporated a chapter involving investment and investment disputes (Vandevelde, 2005). The North American Free Trade Agreement (NAFTA) is an example of a multilateral treaty containing an international investment agreement. Estimates from around 2018 suggest there are nearly 3,000 investment treaties (UNCTAD, 2019), although the precise number of treaties in force and effect is less certain (Franck, 2019a). While specific treaty text varies, treaties often offer foreign investors multiple rights, including the right to compensation from a host state that expropriates the investor’s property (Cox, 2019; UNCTAD, 2012a), a promise of national treatment (i.e., a commitment to not discriminate against foreign investors) (UNCTAD, 1999; Yannaca-Small, 2018), an obligation on states to afford fair and equitable treatment to the foreign investment (Dumberry, 2013; Paparinskis, 2013; UNCTAD, 2012b), and other substantive legal protections (McLachlan, Shore, & Weiniger, 2017; Newcombe & Paradell, 2009). Most treaties also provide dispute resolution rights, permitting foreign investors with disputes arising under the treaty to arbitrate their disputes against the host states. While there are other options, including ad hoc or institutional arbitration (Allee & Peinhardt, 2010; Franck, 2005), many treaties permit arbitration under the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (1965), known as the ICSID Convention (Broches, 1972; ICSID, 2019; Schreuer, Malintoppi, Reinisch, & Sinclair, 2009).
The Arbitration Agreement
Arbitration is a creature of consent, and it must always derive from party agreement. Parties must agree to submit their disputes to binding arbitration. The agreement typically occurs ex ante in a contract (i.e., an arbitration agreement) or ex post after a dispute arises (i.e., a submission agreement) (Blackaby, Partasides, Redfern, & Hunter, 2015). The failure to have a valid and binding agreement to arbitrate means that any court in the world that could possibly exercise jurisdiction may actually take jurisdiction over disputes, risking multiple parallel lawsuits in several countries. By contrast, a valid arbitration agreement decreases dispute resolution risk by providing a clear, single, predictable forum for resolving conflict; this means time, costs, and resources are not spent on fighting about where to resolve a dispute but can instead be channeled into resolving the actual dispute.
Although there may be variations under applicable national law, in many countries, parties are generally free to arbitrate commercial disputes, regardless of whether claims are contractual or noncontractual (including torts and potential statutory matters). Whether or not the subject matter of the dispute is capable of resolution by arbitration is referred to as the doctrine of “arbitrability,” with such questions of substantive arbitrability remaining a perennial question in arbitration.
In the United States, for example, in the classic case of Mitsubishi Motors v. Soler Chrysler-Plymouth (1985), the US Supreme Court determined that private claims involving violations of an antitrust statute were arbitrable, could be resolved by arbitrators, and parties could draft arbitration agreements to cover those disputes. By contrast, family law (i.e., divorce and child custody) and criminal law disputes in most countries are generally not capable of being resolved by arbitration (Born, 2014). Some countries may impose limitations upon the arbitrability of antitrust (i.e., competition law) or intellectual property disputes (Lew, Mistelis, & Kröll, 2003). Should the substance of the dispute be nonarbitrable, arbitration will likely be unavailable, and the parties must revert to a national court of competent jurisdiction.
For those disputes that are arbitrable—including contract disputes, tort claims, and appropriate statutory claims—parties must provide a clear agreement that identifies the scope and type of disputes subject to their consent to arbitrate. An effective arbitration clause, at a minimum, will contain a clear and unequivocal choice that disputes be resolved by arbitration, identify the scope of disputes subject to arbitration, choose the law applicable to the underlying contract, and state the legal place of arbitration (i.e., the “seat”; Born, 2014; Vagts, Koh, Dodge, & Buxbaum, 2019). The sections “Law of the Seat of Arbitration” and “Setting Aside the Award” explore why picking the legal seat is fundamental and affects the parties’ rights and the tribunal’s obligations in arbitration.
One of the reasons that clauses must be drafted with care is the following: The scope of the clause determines what disputes must be submitted to arbitration. For example, should an arbitration agreement only cover disputes directly under the contact (and omit related tortious disputes or statutory claims), these claims will not be procedurally arbitrable. Likewise, there are open questions about whether nonsignatories—who are nevertheless directly related to signatories of the agreement, like a group of companies—should be bound to an arbitration agreement (Brekoulakis, 2009; Romero & Verlarde Saffer, 2016; Wilske, Shore, & Ahrens, 2007). Should disputes fall outside the agreed procedure and be nonarbitrable, arbitration will be unavailable for those specific disputes, and the parties must revert to a national court of competent jurisdiction (Blackaby, Partasides, Redfern, & Hunter, 2015; Born, 2014).
Well-drafted clauses should also identify the procedural rules governing the arbitration, whether they derive from ad hoc rules (such as the UNCITRAL Arbitration Rules; UNCITRAL, 2010) or the rules of an arbitration institution (such as the AAA Commercial Rules; AAA, 2013a; Hong Kong International Arbitration Centre [HKIAC], 2018; International Centre for Dispute Resolution [ICDR], 2014; London Court of International Arbitration [LCIA], 2014; LCIA, 2020; International Chamber of Commerce [ICC], 2017; Singapore International Arbitration Centre [SIAC], 2016; Stockholm Chamber of Commerce [SCC], 2017, or another major institution). Picking such rules is vital, as they offer parties enhanced control over procedure and prevent the surprise application of default rules deriving from national law (presumably from the law of the seat). Institutional rules have the added benefit of neutral administration, which can enhance efficiency, aid communication, and prevent arbitrators from being in the awkward position of asking parties to pay fees and expenses. The section “Institutional or Ad Hoc Arbitration Rules” discusses issues regarding selection of applicable arbitration rules further.
Parties may wish to select other critical elements including the number of arbitrators, the language of the arbitration, and standards related to confidentiality (see the section “Confidentiality and Ethics”). When doing so, parties should consult the default standards from the rules they have selected, as there can be major variations among defaults contained in the applicable rules. For example, unlike the AAA Commercial Rules, the ICDR Rules (2014) (Article 31.5) expressly limit the possibility of punitive damages, unless the parties agree otherwise, or the applicable law may require such damages.
Both the New York Convention (1958) (Article II) and domestic provisions of the Federal Arbitration Act (FAA, Chapter 1) require that arbitration agreements must be “in writing.” Questions sometimes arise as to the meaning of an agreement in writing (Strong, 2012). In some jurisdictions, there may be an issue surrounding whether digital arbitral agreements like click-wrap agreements meet the requirement for an “agreement in writing.” Rather than using court interpretation, countries adopting the UNCITRAL Model Law (UNCITRAL, 2006) may have legislation clarifying that electronic communications, including electronic data interchange, qualify as written agreements.
National courts (see, e.g., Buckeye Check Cashing, Inc. v. Cardegna, 2006) and national legislation (particularly states adopting the UNCITRAL Model Law [Article 7]), typically view arbitration agreements in contracts as separate, or separable, from the rest of the contract. This somewhat artificial but legally necessary distinction is referred to as the doctrine of separability (Feehily, 2018; Mistelis & Lew, 2006). Treating the arbitration agreement as separable is fundamental. If the arbitration agreement were not distinct and treated as an autonomous agreement, then, if the substantive contract were void, there would be no underlying consent to arbitrate. Without the agreement to arbitrate, arbitrators would be without authority to assess the validity (or invalidity) of the substantive contract; and any court in the world could exercise jurisdiction under its local rules to resolve the dispute, risking parallel proceedings of the same dispute in multiple locations.
The separability doctrine can vary somewhat from country to country (Lew, Mistelis, & Kröll, 2003). France has a straightforward approach to separability. Its arbitration law simply states: “An arbitration agreement is independent of the contract to which it relates. It shall not be affected if such contract is void” (France Arbitration Law, 2011; Articles 1447, 1506). In the United States, as a function of case law, arbitration clauses are generally presumed valid even if the underlying contract is unenforceable, unless there is a challenge to the arbitration agreement itself (see, e.g., Rent-A-Center, West, Inc. v. Jackson, 2010) for grounds such as fraudulent inducement or undue influence (Buckeye Check Cashing, Inc. v. Cardegna, 2006; The Bremen v. Zapata Off-Shore Co., 1972). England and Wales’s approach to separability is somewhat similar to that of the United States in terms of their statute (England and Wales Arbitration Act, 1996; Section 7) and related case law (see, e.g., Premium Nafta Products Limited v. Fili Shipping Co. Ltd., 2007).
There is an abundance of resources available about drafting an effective arbitration clause, including the International Bar Association’s Guidelines for Drafting International Arbitration Clauses (IBA, 2010b). Arbitral institutions—like the AAA (2019), ICC (2019), Judicial and Arbitration Mediation Services (JAMS) (2014, 2018), SCC (2020), and LCIA (2019)—likewise offer sample arbitration clauses.
Tribunal Formation and Powers
Once there is both a valid arbitration agreement and a derivative dispute, in order to resolve the matter, the tribunal must be formed and have the capacity to exercise its powers to finally resolve the dispute in accordance with the parties’ agreement and the applicable law.
Composition of the Arbitral Tribunal
Typically, arbitrators are either directly nominated by the parties or by the institution that administers the case. Selection depends on the default appointment procedures provided by the applicable rules and whether the parties varied those rules in their arbitration agreement, discussed in “The Arbitration Agreement.” For instance, the American Arbitration Association (AAA), Judicial and Arbitration Mediation Services (JAMS), and the International Institute for Conflict Prevention & Resolution (CPR) have a default that permits parties to choose the arbitrators from a list, or “roster,” maintained by each institution (Williams, 2018). In contrast, the default at the International Chamber of Commerce, or ICC (2017) (Rule 12–13), Stockholm Chamber of Commerce, or SCC (2017) (Article 17), and Hong Kong Arbitration Centre, or HKIAC (2018) (Articles 7 and 8) is for parties to nominate their own arbitrator; and at the London Court of International Arbitration, or LCIA (Articles 5 and 7), the rules permit parties to nominate arbitrators if expressly agreed, while the LCIA Court retains final appointment power. As a general matter, unless the parties specify the number of arbitrators in their arbitration agreement, several (but not all) arbitration rules have a default that one arbitrator decides the dispute.
Parties may choose ex ante to require arbitrators to have particular characteristics or subject-matter expertise (i.e., experience in a particular industry, technical area, or substantive national law). Nevertheless, as it permits parties to make appointments on the basis of a live (rather than theoretical) dispute, it is common for parties to consider both arbitration and substantive expertise when deciding who to nominate as an arbitrator. There are also ongoing issues about the diversity and inclusiveness of the international arbitration bench and bar, which may prevent parties from having a broader pool of arbitrators from which they can select an appropriate candidate (Davis, 2020; Franck, Freda, Lavin, Lehmann, & van Aaken, 2014; Greenwood, 2017). One interesting recent development is Arbitrator Intelligence, a web-based portal spearheaded by Professor Catherine Rogers from her scholarship (2005a, 2005b, 2007, 2018), which offers unique quantitative and qualitative feedback about key features of potential arbitrator decision-making to consider in connection with appointments.
Challenge of Arbitrators
Arbitrators have various duties (Hunter & Philip, 2014), which may be a function of parties’ arbitration agreement, the applicable rules, the substantive law, and the place of arbitration, among other factors. The fundamental duties, which are usually embodied in institutional rules and national law, is that arbitrators must provide parties with due process, avoid bias and prejudice, and engage in independent and impartial decision-making (Hascher, 2012; Park, 2015a). For example, the ICC (2017) requires that arbitrators “must be and remain impartial and independent of the parties” (Article 11) and tribunals “shall make every effort to make sure that the award is enforceable at law” (Article 42). Arbitrators must also possess any qualities that the parties expressly define ex ante in their arbitration agreement. Should an arbitrator fail in one of his/her duties, lack a requisite qualification, exhibit an improper bias, and/or fail in a duty to be independent or impartial, parties may challenge arbitrators and disqualify them from proceeding as an arbitrator in the dispute.
Although some domestic arbitration in the United States may historically have permitted arbitrators to be nonneutral, this is no longer the dominant practice. Particularly in international arbitration, given the need to protect procedural due process, arbitrators must remain neutral and independent. Domestically, the AAA and American Bar Association created a Code of Ethics for Arbitrators (ABA & AAA, 2004). The International Bar Association (IBA, 2014) has a widely used set of guidelines on conflicts of interest in international arbitration that provide soft-law guidance to identify what types of relationships and interactions create a conflict of interest and/or disqualify an arbitrator from sitting on a tribunal. For instance, an arbitrator cannot have a personal interest in the outcome of a case or be part of a law firm that regularly represents one of the parties to a dispute. Various national courts have used the IBA Guidelines on Conflicts when resolving challenges to arbitrators or challenging awards rendered by an arbitrator who has allegedly engaged in problematic conduct (China State Construction Engineering Corp. v. CJSC INTEKO, 2013; Moses, 2017). If an arbitrator is challenged and removed (or resigns) they are then replaced in accordance with the parties’ arbitration agreement and the applicable arbitration rules. See the section “Composition of the Arbitral Tribunal.”
Jurisdiction of the Tribunal
Arbitrators derive their jurisdiction—or authority to issue a final and binding decision—from the agreement to arbitrate (see, e.g., Stolt-Nielsen, S.A. v. Animalfeeds International Corp., 2010). Arbitrators must not exceed the authority granted to them by the parties, namely they must not act in a way that is ultra vires (Blackaby, Partasides, Redfern, & Hunter, 2015; Born, 2014).
There can, however, be instances when it is not clear that: (a) there is any valid and binding agreement to arbitrate, (b) the subject matter of the dispute in the request for arbitration is arbitrable under the applicable law, or (c) the dispute falls within the scope of the matters submitted to arbitration under the arbitration agreement. In all of these cases, there are problems with the existence, validity, scope, and applicability of the arbitration agreement. Much like national courts have jurisdiction to decide whether they have jurisdiction to hear the merits of a dispute, arbitrators may also have jurisdiction to decide whether they should retain their authority to decide the substance of the dispute or whether the claims should be dismissed and be resolved in another forum. This doctrine is called competence-competence or kompetenz-kompetenz (Cook, 2014; Landolt, 2013; Smit, 2002).
There are, however, thorny issues as to who decides the preliminary or “gateway” issue of a tribunal’s jurisdiction over a dispute, namely, whether courts or arbitrators should decide questions about the validity, scope, and application of the arbitration (Bermann, 2012; Park, 2006). Having clarity about which body has jurisdictional authority is efficient and helpful, lest both arbitrators and courts have jurisdiction to determine jurisdiction, which would render dispute resolution less efficient, more costly, and possibly subject to inconsistent outcomes across multiple national courts and/or the arbitration tribunal.
There are also questions as to when disputes about a tribunal’s jurisdiction can be contested. Jurisdictional disputes typically occur at the outset as a preliminary matter in terms of identifying whether an arbitral tribunal or a court (or perhaps multiple courts) should resolve the dispute. Jurisdictional disputes might be initiated or renewed at the end of a case, after an award has been rendered, as the lack of a valid and binding arbitration agreement (i.e., a tribunal had no contractual authority to resolve the dispute) is often a ground for either setting aside or denying enforcement of the award (see the section “Post-Award Activity”; Park, 2007). Less typically, jurisdictional considerations might be raised in the middle of a case, although these may be subject to waiver (Bennett, 2012; England and Wales Arbitration Act, 1996 [Sections 30–32]).
Various countries have different ways of resolving questions about the competence-competence of arbitration tribunals (Barceló, 2003, 2017; Lew, Mistelis, & Kröll, 2003). French arbitration law has a clear procedure whereby arbitrators have exclusive jurisdiction to rule upon their own competence (Articles 1465, 1506). Moreover, if a party requests a court hear the case, French courts must decline to take jurisdiction, unless the tribunal is not yet formed or the agreement is manifestly void or inapplicable (Articles 1448, 1506; France Arbitration Law, 2011; Gaillard & Banifatemi, 2008). Somewhat similarly, the UNCITRAL Model Law (UNCITRAL, 2006) (Article 16) expressly provides that a “tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement,” and creates a time limit for raising jurisdictional issues. There is, however, some ambiguity in how courts may (or may not) intervene in connection with preliminary jurisdictional questions (Articles 5, 6, 16). The United States’ approach is more unpredictable. The FAA offers no clear delineation about whether courts or arbitrators should be resolving jurisdictional disputes and when. While US courts acknowledge arbitrators can sometimes have power to determine their own jurisdiction, the contours of that authority are somewhat uncertain and sometimes depend upon the text of the parties’ arbitration agreement and evolving jurisprudence (see, e.g., GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, 2020; First Options of Chicago, Inc. v. Kaplan, 1995; Henry Schein, Inc., v. Archer & White Sales, Inc., 2019; New Prime Inc. v. Oliveira, 2019).
Helpfully, to clarify the parties’ agreement about the authority to resolve jurisdictional matters, many prominent arbitral rules expressly empower the arbitral tribunal to decide questions of arbitrability (Park, 2015b). For example, the ICC (2017) (Article 6) provides that problems “concerning the existence, validity or scope of the arbitration agreement . . . shall be decided directly by the arbitral tribunal.” Arbitration rules may also clarify that parties’ failure to make objections—including objections to jurisdiction—results in a waiver of a right to object. Under some national laws, like the England and Wales Arbitration Act (1996), provide tribunals with a clear authority to rule on their own jurisdiction (Section 30) and objections to jurisdiction must be filed early in the arbitral proceedings, as failure to make a timely objection to jurisdiction waives the objection (Section 73). Although more complex, the United States system has some similarities to this in terms of issues regarding the waiver of jurisdictional objections (Bennett, 2012; Reisberg, 2010).
Conduct of the Arbitral Proceedings
The parties and the arbitrators must conduct the proceedings in accordance with the applicable legal framework. While disputes proceed under many different legal frameworks, the objective of arbitration is for parties to present their arguments, relevant facts, and applicable law so the tribunal can neutrally adjudicate claims and defenses given the applicable law and render a valid and enforceable award. This process consists of various phases.
Legal Framework for the Proceedings
The legal framework for arbitration proceedings is a function of the parties’ arbitration agreement, the institutional or other rules for resolving the dispute, and the law of the seat of arbitration.
The “Arbitration Agreement” contains the fundamental elements of an agreement that parties’ must include, as well as optional considerations. The parties’ agreement provides the contours under which both parties agree to abide, which constrain and guide the conduct of the arbitrators. The power of parties’ capacity to craft specific procedures to which arbitrators must adhere means that if parties agree to “baseball” or “final offer” arbitration (or variations including “bounded arbitration”), arbitrators can be limited to selecting—without necessarily providing reasons—one of the two outcomes parties provide. One court observed that parties can even craft procedures requiring arbitrators to resolve disputes by “flipping a coin, or, for that matter, arm wrestling” (Team Design v. Gottleib, 2002) overruled on other grounds (Tuetken v. Tuetken, 2010). More typically, when parties’ arbitration agreements have specific arrangements—like designating the language of the arbitration—those requirements must be followed. Likewise, if the parties agree to use preexisting guidelines for managing core aspects of the arbitration—like the IBA “Rules on the Taking of Evidence in International Arbitration” (2010a)—those rules will govern.
Institutional or Ad Hoc Arbitration Rules
Most arbitrations have formal procedures that share similarities with, but do not directly mimic, national court litigation. Rather, the arbitration rules the parties select (if any) determine the legal framework for the arbitration. The American Arbitration Association (AAA) has unique rules for commercial, consumer, employment, labor, and international arbitration (AAA, 2009, 2014, 2013a, 2013b; ICDR, 2014); and those rules contain default obligations for the mechanics of the arbitration. Other major institutions, including Judicial and Arbitration Mediation Services, or JAMS (2014); the Financial Industry Regulatory Authority, or FINRA (2019); the International Chamber of Commerce, or ICC (2017); the London Court of International Arbitration, or LCIA (2014, 2020); the Stockholm Chamber of Commerce or SCC (2017); and default rules for ad hoc arbitrations created by the UNCITRAL (2010) Arbitration Rules, likewise offer procedural defaults to guide the proceedings.
Generally, these rules offer clear guidance about the process, how the arbitration begins (i.e., a request for arbitration), how to raise defenses and counterclaims, how to appoint the tribunal, the tribunal’s specific powers over the proceedings, and other matters including how to establish the facts of the case, the role of hearings, the power to order interim relief, consolidation and/or joinder of disputes, and obligations for making the award.
Law of the Seat of Arbitration
The law of the seat also provides part of the legal framework for the arbitration proceedings. Typically, the law of the seat of arbitration (i.e., the legal place of arbitration or situs, sometimes called “locale” in US domestic arbitration; AAA, 2013c; Gonzalo, 2017; Iwalski, 1986) plays two important roles (Moses, 2017; Paulsson, 2013).
First, where party agreement or applicable rules are silent (or where local law may be deemed a mandatory part of the procedure), the law of the seat may provide default rules for the proceedings. For example, the law of a seat might clarify or identify the powers of arbitrators, including the power to issue subpoenas (see Federal Arbitration Act, or FAA, Section 7), require depositions (see Virginia Code, Section 8.01-581.06), or to issue interim and preliminary measures including the preservation of assets and evidence (see Florida Statutes, Title XXXIX, Chapter 684, Section 0018 ). Likewise, the law may mandate some obligations, including arbitrator oaths and party notice (see New York Civil Practice Law & Rules, CPLR, 2012a, Section 7506), or a requirement for hearings to be transcribed (see Maryland Code, Title 3, Subtitle 2, Section 3-220, 2010). The England and Wales Arbitration Act, 1996 (Schedule 1) articulates a clear and specific list of mandatory arbitration rules, including the duties of parties and arbitrators (Sections 33, 40), which means parties cannot abridge those rules through contract.
Second, the law of the seat identifies the role that local courts can play in aid of the arbitration. This role might involve, for example, courts rendering orders to stay or compel an arbitration, aiding the appointment of arbitrators, or enforcing a decision rendered by an emergency arbitrator (see, e.g., FAA Sections 4–5; Virginia Code 8.01-581.02; Yahoo! Inc. v. Microsoft Corp., 2013) England and Wales Arbitration Act (1996) likewise permits the aid of courts in removing arbitrators and has additional provisions to aid enforcing a tribunal’s peremptory orders, securing witness attendance, preservation of evidence, and determination of preliminary points of law (Sections 24, 42–45). For those jurisdictions adopting the UNCITRAL Model Law, local courts can both aid in the taking of evidence (Article 27) and possibly issue interim measures (Article 17J).
There are two important points, however, about the law of the seat. First, the creation of a legal seat is distinct from where hearings must occur. The legal seat’s core function is to identify the procedural law applicable to the arbitration and the powers of the local court in connection with the dispute. Second, the dispute’s applicable substantive law is not the law of the seat. Generally, the substantive law governs the interpretation and application of the underlying contract (Blackaby, Partasides, Redfern, & Hunter, 2015; Born, 2014; Lew, Mistelis, & Kröll, 2003). It is possible, for example, for a dispute to involve a contract where the parties agreed that New York will be the place of arbitration (i.e., the seat) but the law governing the contract is the law of Singapore. In that hypothetical situation, the arbitral tribunal would conduct the arbitration procedures using New York law, and the courts of New York would be available to lend support to the arbitration process and provide the grounds for vacatur of the award (see the section “Setting Aside the Award”), but the tribunal would determine a parties’ substantive liability based on the laws of Singapore.
Phases of the Arbitration
Each arbitration functionally has three phases: the beginning, the middle, and the end. The phases typically require tribunals to address four types of dispositive issues, namely: (a) the tribunal’s jurisdiction; (b) the merits of parties’ respective claims and defenses; (c) the damages (or quantum) associated with any breach, including interest; and (d) allocation of the proceeding’s costs. “Making the Award” addresses different types of awards tribunals can make to handle these issues during the course of the arbitration.
During the beginning of an arbitration, the focus typically is upon submitting the case to arbitration and establishing the tribunal. The process will vary depending upon the applicable legal framework (discussed in the section “Legal Framework for the Proceedings”). As “Composition of the Arbitral Tribunal” addressed the tribunal’s establishment, this subsection focuses on case initiation.
The rules of major arbitration institutions require parties to substantiate their claims and defenses initially, usually by way of documents like a request (or notice) for arbitration, or the Answer (and any counterclaims and/or replies). Once the tribunal has been established, depending upon whether they are permitted or required by the applicable rules, the tribunal may have an initial case management conference to set the procedural timetable, the mechanics of the case, and other matters.
During the middle of the process, in many arbitrations, parties file formal submissions on the particulars of their claims and defenses, together with any witness statements (from either fact or expert witnesses) and applicable legal authority and exhibits to substantiate their arguments. Parties may also have the opportunity for disclosure of documents.
Notably, while US domestic litigation has extensive rules for discovery (US Federal Rules of Civil Procedure, 2018), those standards generally do not apply in arbitration, particularly transnationally, as most countries have narrower expectations about what parties should or must disclose during national court litigation. In civil law countries like Germany, there is no pre-trial discovery, and parties only disclose documents upon which they rely to substantiate their case (Kreindler, Kopp, & Schmidt, 2017). Some countries may even prohibit the taking of depositions. As such, particularly international arbitration has developed a more streamlined practice of disclosure as compared to US litigation.
In international arbitration, parties first engage in disclosure among themselves, with the tribunal typically retaining the power to sua sponte request other disclosure and also resolve objections to disclosure requests. Parties often use a “Redfern Schedule” to track document requests (and the potential basis of such requests), party objections and replies to disclosure requests, and any accompanying tribunal decisions regarding whether disclosure will be required (Luttrell & Harris, 2016). Because arbitral rules and the laws of the seat are often limited on the mechanics related to disclosure, international tribunals have a tendency to adopt the IBA (2010a) Rules on Taking of Evidence in International Arbitration. These rules provide guidelines that tribunals consider when considering requests for document production, such as relevance, undue burden, and privilege (Franck, 2019b).
Tribunals may decide the case based on the record without a need for a hearing. This exclusive reliance on party submissions is most common in cases that involve either a clear legal dispute (rather than a contested factual dispute or when witness credibility is at issue) or where one party has defaulted and failed to defend. It is more common for tribunals to hold a hearing on dispositive issues. The parties and the tribunal must prepare for the hearing, which can typically include agreeing to a list of witnesses, a statement of agreed facts or chronology, an agreed set of core documents, and a list of legal authorities. During the hearing, counsel argue their clients’ case by reference to written submissions, documents provided to the tribunal, legal authority from the applicable law, presenting their own witnesses and testing witness credibility during cross-examination, and summing up their positions. After the hearing, parties may make post-hearing submissions. The tribunal will deliberate, formally close the proceedings, and then draft the award (Blackaby, Partasides, Redfern, & Hunter, 2015; Born, 2014; Lew, Mistelis, & Kröll, 2003).
Confidentiality and Ethics
As a final matter, there are issues involving the conduct of the proceedings that touch upon duties of confidentiality and ethics. These areas, in particular, are in transition in both domestic and international arbitration.
One of the most lauded (or loathed) aspects of arbitration has historically been its confidentiality (Fiss, 1984). The arbitral institution, and the arbitrator(s), are typically under a duty to keep the proceedings private, although in the last decade, presumptions against confidentiality have been reversing (Hope, 2016; Rogers, 2006), particularly with the rise of online websites offering free access to awards and documents involving ITA. Some arbitral rules, however, do not have a default rule requiring the parties to keep the existence and nature of the proceedings confidential. Meanwhile, some jurisdictions have a default law that arbitration is confidential. In France, domestic (but not necessarily international) arbitrations are generally confidential (Gaillard, 2011). In England and Wales, courts imply a duty of confidentiality (John Forster Emmott v. Michael Wilson & Partners Limited, 2008), yet recent discussions suggest eliminating this duty (Partasides & Maynard, 2017). By contrast, other countries like Australia (Esso Australia Resources Ltd. v. Plowman, 1995) and Sweden (Bulgarian Foreign Trade Bank Ltd v. A.I. Trade Finance, Inc., 2000) seem to disagree, with courts sometimes favoring a lack of confidentiality in arbitration. For this reason, should parties desire confidentiality, they are well served by expressly agreeing to its scope and recognizing the potential limitations.
Professionalism and the ethical duties of arbitrators and counsel are fundamental, yet challenging, as lawyers involved in the same arbitration may come from different jurisdictions, with different expectations about the ethical standards applicable to their conduct and the proceeding (Lu, 2016; Rogers, 2014). As a classic example, US qualified attorneys may be ethically obligated to prepare a witness for cross-examination, while this same conduct might be prohibited in other countries. The International Bar Association (IBA, 2013) created Guidelines on Party Representation in International Arbitration to address some of these problems. Meanwhile, there are ethical considerations for arbitrators, the ABA and AAA (2004) Code of Ethics for Arbitrators in Commercial Disputes and the IBA (2014) Guidelines on Conflicts of Interest in International Arbitration, to guide and regulate arbitrators’ conduct. Although lacking in many international arbitration institutions, United States–based institutions such as Judicial and Arbitration Mediation Services (JAMS, 2019) and the American Arbitration Association (AAA, 2004) can also have ethical rules directly applicable to the conduct of the proceedings.
Making the Award
One of the most fundamental duties of an arbitration tribunal is to render an award based upon the parties’ agreement, relevant facts, selected institutional rules, and applicable law. There are various issues relating to how the tribunal renders awards, including the award type, the form and content, relief provided, and the financial implications.
Types of Arbitration Awards
Arbitration awards must resolve dispositive issues that the parties submitted to the tribunal for resolution. Many jurisdictions, including the United States under the Federal Arbitration Act (FAA, Chapter 1) and some state laws (i.e., New York’s Civil Practice Law and Rules; CPLR, 2012b, Section 7511), require that arbitration awards be final, disposing of at least one fundamental issue. See also UNCITRAL Model Law (UNCITRAL, 2006; Articles 31–32).
While the nomenclature can vary, it is generally possible to have different types of awards that resolve dispositive issues. A “partial” award can finally resolve a preliminary but dispositive issue, such as jurisdiction (i.e., is the tribunal competent to hear the dispute) or the merits of an underlying claim. Such a partial award would be a natural byproduct of a bifurcated proceeding, where tribunals separate out the case into distinct phases. Other partial awards might address nearly everything submitted to the tribunal, including the merits and damages, but reserve cost allocation for a separate award.
In some instances, tribunals might render an “interim” award or a decision for “provisional measures.” While there is some debate about whether a provisional measure is a formal award (Hill, 2018), interim decisions usually provide provisional relief until the tribunal issues the final award. The UNCITRAL Model Law (2006; Articles 9, 17, 17A-J) offer various procedures for addressing interim decisions in arbitration.
A “final” award completely resolves all dispositive issues submitted to the tribunal, whether related to jurisdiction, merits, damages, and/or costs. This is, theoretically, the most common type of award as there are efficiencies in creating one decision to resolve all matters requiring resolution. In some instances, the tribunal’s final award may be a consent award (Marchisio, 2016), which reflects the parties’ settlement agreement and any appropriate arbitrator decisions, such as consent awards permitted by the AAA (2013a) Commercial Rules (R-48) or ICC (2017) Rules (Article 33).
All types of awards must be clear and indicate unequivocally what the result is and, where appropriate, what each party must do in connection with that result. In many awards, the final section separately provides the dispositive ruling (i.e., the holding or ruling, sometimes called the ispositive) that fully and precisely articulates what the tribunal has decided (IBA, 2016).
Form and Content
The law of the place of arbitration will prescribe the format and content of the award. In the United States, although the FAA does not offer any guidance (see, e.g., Section 9), state law can provide specific obligations. New York (Civil Practice Law and Rules, Section 7507) and Virginia (Section 8.01-581.07) require that the award must be in writing, signed by the arbitrator(s) making or joining in the award, and they also require delivery to the parties by registered or certified mail. The England and Wales Arbitration Act (1996; Section 52) has somewhat similar obligations but clarifies that an award must include the date and place of arbitration. French law articulates specific elements for inclusion, such as parties’ names, counsel’s identity, arbitrators’ names, place of arbitration, and date (France Arbitration Law, 2011; Articles 1480, 1481, 1506).
In international arbitration, many awards contain the underlying reasoning behind a tribunal’s decision. The inclusion of these rationales is sometimes compelled either by the parties’ agreement that the tribunal provide reasoning for its decisions, institutional rules that offer a default requiring tribunals to provide reasoning (see, e.g., the ICC, 2017; Article 32), or the applicable national law—particularly for states following the UNCITRAL Model Law (UNCITRAL, 2006; Article 31), the England and Wales Arbitration Act 1996 (Section 52), and France Arbitration Law (2011; Articles 1482, 1506)—which may require tribunals to explain their decisions. In the United States, the FAA (Section 9) does not expressly require that tribunals explain their underlying analysis. Some domestic institutions, like FINRA (2019; Customer Code Rules 12608 and 12904 and Industry Code Rules 13608, 13904), do not normally require that tribunals explain their decisions, but parties may ask a tribunal to provide its reasoning.
Depending upon the parties’ agreement, institutional rules and applicable laws, arbitrators may have broad discretion to make awards that order legal (i.e., monetary amounts) and equitable relief.
In the United States, the FAA is silent on the remedies that arbitrators may order. Institutional rules often fill the gap about arbitrators’ powers to order relief. For example, the Commercial Rules of the AAA (2013a) (R-47) provide authority to “grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract.” JAMS (2014) likewise authorizes arbitrators to “grant any remedy or relief that is just and equitable and within the scope of the Parties’ agreement, including, but not limited to, specific performance of a contract or any other equitable or legal remedy.” By contrast, as noted in the section “The Arbitration Agreement,” in the absence of party agreement or mandatory law, the Rules of the ICDR (2014; Article 31) generally prohibit the use of punitive damages.
Although countries adopting the Model Law proposed by UNCITRAL (2006) will not expressly identify what relief tribunals are empowered to award, some countries are clearer than others. For example, the England and Wales Arbitration Act (1996; Section 48) is more express than the United States. Namely, subject to party agreement, tribunals have express authority to make decisions including declarations, specific performance, and rectification or cancelation of documents. While the rules of the LCIA (2014; Article 22; 2020; Article 22) grant tribunals authority to “order compliance with any legal obligation, payment of compensation for breach of any legal obligation and specific performance of any agreement,” other institutional rules, like both the ICC (2017) and SCC (2017) do not expressly regulate the relief tribunals are authorized to provide, presumably requiring arbitrators to comply with the limits and authority of otherwise applicable law.
There are ongoing debates about the economic and social utility of arbitration, particularly as compared to national court litigation and other forms of nonadjudicative dispute settlement (Fiss, 1984; Goldberg, Sander, Rogers, & Cole, 2020; Menkel-Meadow, Schneider, & Love, 2014). Having more complete and transparent information about the economics of arbitration—particularly if they are already being incorporated into arbitration awards—could yield a net benefit to understanding the economic value of arbitration and begin to permit comparisons with other forms of dispute settlement (Franck, 2019a). As arbitration is an adjudicative form of dispute settlement that applies facts to the applicable law, nothing prevents the complementary use of other dispute resolution mechanisms (including negotiation or mediation) to minimize aspects of the dispute or resolve conflicts using nonlegal principles. Such nonadjudicative methods can generate value either in sequence or in tandem with arbitration (Coe, 2005; Menkel-Meadow, Love, Schneider, & Moffit, 2018; Stipanowich & Fraser, 2017). To aid understanding of the economic realities of pursuing arbitration, this subsection explores fiscal elements that tribunals can include in awards, which the parties may reasonably expect to see in a final decision.
Although variations may derive from the parties’ agreement and applicable law, many arbitration awards detail the financial implications of the tribunal’s decision. These implications roughly fall into three categories: namely, actual damages, interest, and costs.
Tribunals award fiscal damages deriving from a tribunal’s assessment of a legal violation. There are, however, complex procedural, legal, and valuation issues that must be assessed when articulating damages (ICCA-ASIL, 2019), whether in the original claim or potential counterclaims. Domestic arbitration tribunals in the United States will typically denominate fiscal damages in the award in US dollars, whereas transnational arbitrations may use different (sometimes multiple) currencies (Franck, 2019a).
When identifying the fiscal implications of the legal violation, tribunals often consider interest (Secomb, 2019). Although a function of party agreement and applicable law, tribunals must make decisions about whether to award both pre-award and post-award interest, the date from which interest is calculated, whether the interest is simple or compound, the interest rate, and the basis of that rate (Gotanda, 2003; International Commercial Disputes Committee of the New York City Bar Association, 2017). Depending upon the nature of the claim and the time required to resolve the dispute, accumulated interest can be a large fiscal risk, possibly even equivalent to a substantial portion of substantive damages.
Arbitration tribunals, unlike US litigation but like mandatory cost allocations required by other national courts, must also assess and apportion the costs of the arbitration. There are two general categories of costs that tribunals must allocate: (a) the parties’ own legal costs, including their lawyers’ fees and related internal expenses, and (b) tribunal and institutional administrative expenses for conducting the arbitration (Franck, 2019a; Gotanda, 1999).
How tribunals assess costs is a function of party agreement, institutional rules, and applicable law. Domestically in the United States, the Commercial Rules of the AAA (2013a) (R-54) have a default that the tribunal and other administrative expenses “shall be borne equally” by the parties unless the tribunal determines otherwise. The “American Rule”—whereby parties pay their own legal costs as in US domestic litigation, irrespective of the legal outcome—is a theoretical default in US domestic arbitration (Donohue, 1991; Minnerop & Johns, 2006). For example, the Commercial Rules of the AAA (2013a) (R-47) only permit the shifting of “attorneys’ fees if all parties have requested such an award or it is authorized by law or their arbitration agreement.” Yet, empirical evidence suggests that even domestically, tribunals have been willing to shift attorney costs (Drahozal, 2008).
By contrast, as many national legal systems have cost shifting in litigation (Franck, 2011), international arbitration has a tradition of shifting arbitration-related costs (Franck, 2019a). Following what some call the “English Rule” where “costs follow the event” (i.e., the loser pays the costs of the proceedings; Eisenberg & Miller, 2013), tribunals in commercial disputes have been willing to engage in cost shifting and to consider case outcomes, along with other factors (ICC, 2015). In Investment Treaty Arbitration (ITA), however, while tribunals are willing to shift both types of costs (i.e., party legal costs and tribunal and administrative costs), the empirical evidence (Franck, 2011, 2019a) suggests that tribunals have been more focused on parties’ relative success, considerations of equity, and tribunal discretion.
Once an arbitration tribunal has rendered an award, the tribunal’s mandate has finished; and it is generally functus officio, meaning the tribunal no longer has the authority to reopen the case and make new decisions. There are, however, various things that parties can do after a tribunal has rendered a final award.
A standard post-award activity involves party compliance with the award. Although it is difficult to obtain reliable data given the confidentiality of awards and private nature of payments, various commentators who are actively involved in international arbitration have observed that parties voluntarily comply with 90% of arbitration awards (Born, 2014; Schwebel, 2009). There is likewise some empirical evidence suggesting that parties will negotiate after an award, discounting the total owed in favor of immediate payment to avoid the legal fees and time required for court-based enforcement (Naimark & Keer, 2005; see also Franck, 2019a).
Although it is a less common post-award activity which is often quite limited, some institutional rules or applicable laws permit parties to request a correction of an award, usually for a typographical or computational error (see, e.g.; England and Wales Arbitration Act, 1996 [Section 57]; ICC, 2017 [Article 36]; UNCITRAL Model Law, 2006 [Article 33]).
The two other primary post-award activities involve legal efforts to set aside the arbitration award and/or to enforce the award. As an award from an arbitration tribunal is not a decision from a trial court, neither of these options is an “appeal.” Rather, it is an effort by either the winning party to enforce the arbitrator’s decision in a court of law or an effort by the losing party to resist enforcement of the arbitrator’s decision in a court of law.
Setting Aside the Award
After an award has been rendered, a party may petition a court to vacate or “set aside” the award. These proceedings are generally called “vacatur” or “set-aside” proceedings (Ware, 2014). They are usually used by parties dissatisfied with the award to transform the award (in whole or in part) into a legal nullity. Usually only one court has the power to “set aside” or vacate that award. Typically, that is the legal seat of the arbitration. See the section “Law of the Seat of Arbitration.”
Vacating an award can be difficult. First, the timeline for seeking vacatur of an award is potentially limited. For example, the FAA (Section 12) requires that motions to vacate be served within 90 days after delivery of the award. That limitation is similar to the three-month period for set-aside applications under the UNCITRAL Model Law (UNCITRAL, 2006, Article 34). By contrast, other jurisdictions require quicker action. England and Wales Arbitration Act (1996) (Section 70) requires a set-aside application to be made within 28 days of the award, and the France Arbitration Law (2011; Articles 1494, 1519) requires set-aside proceedings to be initiated within one month.
Second, the grounds for vacatur are narrow and tend to involve a procedural error rather than the substance of an award. Courts at the seat of arbitration typically have the power to vacate arbitration awards that lack enumerated hallmarks of procedural integrity. For example, the UNCITRAL Model Law (UNCITRAL, 2006), which has been adopted by several countries, provides specific grounds for set aside. Under Article 45, these include: (a) a party to the arbitration agreement was under an incapacity or the agreement is otherwise not binding; (b) a party was not given proper opportunity to appoint an arbitrator or the proceedings, or was otherwise unable to present their case; (c) the award addresses matters beyond the submission to arbitrate; (d) the tribunal’s composition was not in accordance with the parties’ agreement or applicable law; (e) the subject matter was not capable of being arbitrated; or (f) there was a public policy conflict.
Similarly, the France Arbitration Law (2011; Article 1520), provides international arbitration awards rendered France can be set aside where tribunals wrongly upheld or declined jurisdiction, the tribunal was improperly constituted, the tribunal ruled without a mandate, due process was violated, or recognition is contrary to international public policy. The French focus on “international public policy” is distinctive. French domestic arbitration has similar grounds for set aside, but it omits the reference to “international” policy and includes that the award failed to state its reasons, the date of making, the arbitrators’ signatures, or the award was not made by majority (Article 1492).
The United States’s approach is both similar and different to that of UNCITRAL. It is similar in that the express grounds for vacatur under the FAA (Section 1) are: (a) the award was procured by fraud, corruption, or undue means; (b) an arbitrator’s evident partiality or corruption; (c) arbitrators engaged in misconduct related to a refusal to postpone a hearing (where there was sufficient cause for delay), arbitrators refused to hear evidence pertinent to the dispute, or arbitrators exhibited misbehavior that prejudiced a party’s rights; and (d) arbitrators exceeded their powers during the proceedings, typically making an award that was beyond their jurisdiction.
It is different in that there is some confusion about reviewing arbitration awards for legal error under a standard called “manifest disregard” of law. In Hall Street Associates LLC v. Mattel Inc. (2008), the US Supreme Court held that the express grounds in the FAA are the exclusive bases for vacating awards, and the congressionally articulated grounds cannot be enlarged (or decreased) by party agreement or judicial decision. The Court thus confirmed there is no “manifest disregard” of law ground for vacating an arbitration award. Nevertheless, even after Hall Street, lower courts have used the “manifest disregard” of the law standard for assessing vacatur requests, often as a “judicial gloss,” although these courts have typically left the award intact, while noting the ground is severely limited and confined to those rare instances of egregious impropriety where arbitrators knew the applicable law and yet refused to apply it (see Sutherland Global Services v. Adam Technologies, S.A. de C.V., 2016; Weiss v. Sallie Mae, Inc., 2d Cir., 2019; but see Wachovia Securities, LLC v. Brand, 2012).
Transnationally, with the notable exception of the England and Wales Arbitration Act (1996; Section 69), the trend in national law is that courts at the seat of arbitration are not authorized to assess, modify, or vacate the legal determinations of tribunals in arbitration awards.
Enforcement Grounds and Bases for Refusing Recognition or Enforcement
Generally, a prevailing party can petition the courts at the seat of arbitration to confirm the award, thereby converting the award into an enforceable court judgment (Bermann, 2017). Under the FAA, for example, parties can apply to a federal court to confirm the arbitration award, and Section 9 requires the court “must grant” an order that confirms the award. The only exceptions that prevent the court’s obligation to enforce under the FAA involve cases where, as described earlier, there is a basis for either modifying the award due to errors like a miscalculation (Section 11), or for vacating the award (Section 10).
It is also possible to enforce arbitration awards in locations beyond the seat of arbitration, usually where a losing party’s assets are physically present. When this occurs, enforcement actions generally occur pursuant to an international treaty. The most important treaty is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention (1958). There are, however, other treaties. The Inter-American Convention on International Commercial Arbitration (1975) is textually similar to the New York Convention but has a slightly different geographical scope. By contrast, the ICSID Convention (1965) is a self-contained treaty with an entirely different approach to review and enforcement, and primarily operates in the specialist ITA (Investment Treaty Arbitration) context. As International Commercial Arbitration (ICA) is arguably the dominant form of arbitration (and can also be used to enforce some ITA awards), this entry focuses upon the New York Convention enforcement process.
It is typical for countries to enact legislation that incorporates New York Convention obligations into domestic law. Many countries adopted the UNCITRAL Model Law (2006), which details the recognition and enforcement process (including grounds for denying such enforcement) that mirrors New York Convention standards (UNCITRAL, 2006; Articles 35, 36). England and Wales likewise articulate the express grounds for granting (and denying) enforcement, but limit New York Convention enforcement to awards rendered outside of England and Wales (English Arbitration Act, 1996; Sections 100–103). By contrast, in the United States, while the FAA (Chapter 2) makes the New York Convention part of US law and provides some procedural information (including venue and limitations periods), it neither rearticulates the New York Convention grounds for granting or rejecting enforcement nor prevents awards rendered inside the United States from benefitting from New York Convention enforcement where the arbitration was both international and commercial.
To recognize and enforce an award under the New York Convention, the Convention requires certain prerequisites be met. Beyond having an arbitration agreement and a derivative arbitration award, first, the country of place of arbitration (i.e., the seat) must be a signatory to the New York Convention. Second, the country in which recognition and enforcement is sought must be a signatory to the Convention. As of 2020, roughly 160 countries have ratified the New York Convention (UNCITRAL, 2019). This makes it relatively straightforward to meet these two criteria. Various countries, including the United States, have made a reservation that means the Convention only applies to “commercial” matters, inevitably excluding the enforcement of arbitration awards deriving from noncommercial family matters (i.e., marriage, custody, or will disputes), labor disputes, and crimes.
When making an application for recognition and enforcement, the New York Convention (Article IV) requires parties to provide a copy of the arbitration agreement, the arbitration award, and any appropriate translation. Once that application is made, Article III of the New York Convention states that a national court “shall recognize arbitral awards as binding and enforce them” using the court’s local rules. Although this obligation imposes a default to aid relatively straightforward recognition of the award and the enforcement of the award’s decision within the jurisdiction, the New York Convention has exceptions that grants the court at the place of enforcement the discretion to refuse to recognize the award and/or deny enforcement.
Specifically, Article V of the New York Convention identifies two categories of grounds that a court “may” use to deny recognition and enforcement of an arbitration award. Losing parties, or those who are contesting enforcement, can use only these two sets of grounds to resist enforcement and to protect their assets within the jurisdiction where enforcement is sought.
The first category of grounds involves procedural due process grounds, which are reminiscent of grounds that may form the basis for vacatur at the seat of arbitration. Namely, Article V(1) permits (but does not require) courts to refuse recognition of enforcement when: (a) the underlying arbitration agreement is invalid under the applicable law; (b) the losing party was not provided with proper notice about the appointment of the arbitrator or the proceedings, or “was otherwise unable” to present their case; (c) the award addresses matters that were beyond the scope of the arbitral agreement (i.e., the tribunal had no jurisdiction to render the award that it made); (d) the arbitrators were improperly appointed; or (e) the award was vacated (i.e., set aside) at the seat of arbitration.
The second category of grounds involves considerations that may be unique to the policy concerns of the jurisdiction in which enforcement is sought. Namely, Article V(2) permits (but does not require) courts to refuse recognition or enforcement in one of two circumstances. First, if the subject matter of arbitration is not arbitrable under the law of that country’s courts, recognition and enforcement may be denied. In other words, if a category of claims (i.e., intellectual property rights) may have been arbitrable at the place of arbitration, but such claims would not be arbitrable at the place of enforcement, the enforcing court may deny enforcement under Article V(2)(a). Second, under Article V(2)(b), local courts can refuse to enforce arbitration awards if they are “contrary to the public policy” of the enforcing country. While the concept of “public policy” is not defined and subject to interpretation, in practice, various courts have construed the exception in a relatively narrow way. France’s Arbitration Act (2011) focuses on concepts of “international public policy” when analyzing the recognition and enforcement of international arbitration awards (Articles 1514, 1520, 1525). By slight contrast, the United States arguably has a narrower focus. Some federal courts have recognized that an arbitral award obtained through fraud would be contrary to US public policy under Article V(2)(b) of the New York Convention (see, e.g., Stati v. Republic of Kazakhstan, 2018). So, rather than an open-ended basis for refusal, courts may instead use the public policy exception to focus upon the enforcing country’s basic notions of due process and adjudicative integrity.
The Future of Arbitration
Arbitration has been around for hundreds of years and will likely be around for several hundred more. As arbitration’s primary virtue is its flexibility and adaptability to unique situations, it is inevitable that arbitration will continue to evolve to address new economic, political, and commercial realities. As suggested in the section “Domestic Arbitration,” some countries may wish to change their domestic arbitration regimes to account for the changing local political and social concerns. Likewise, in the international context, for both International Commercial Arbitration (ICA) and (Investment Treaty Arbitration) ITA, there are ongoing reform efforts to improve the procedures for dispute resolution and to accommodate new concerns. Arbitral institutions continue to innovate and evolve their rules to fill gaps, countries revise their national laws and treaties, entities like the International Bar Association (IBA) and International Council on Commercial Arbitration (ICCA) build soft-law guidance to provide baselines for managing stakeholder expectations on specific issues, and international organizations like UNCITRAL have Working Groups to address the improvement of international dispute settlement.
With evolving technology, greater attention on diversity and inclusion, and ongoing concerns about the economic utility of dispute resolution, future researchers will have many opportunities to inform policy debates and stakeholder choices about arbitration. As regards technology, there will be continued evolution of Online Dispute Resolution (ODR) and lessons for a post-pandemic world about the creative use of technology in order to facilitate the traditional functions of arbitration while balancing cybersecurity needs.
As regards diversity and inclusion, researchers should continue to explore the demographics of the arbitration bench and bar, including information about those in leadership or prestigious positions. In international arbitration, where defining race and ethnicity across different countries can be complex, metrics might usefully explore factors including (but not limited to) gender, race, ethnicity, nationality, age, legal training (i.e., common, civil, or Islamic law training), and development status.
As regards the economic utility, stakeholders will need to consider how to balance the relative value of other forms of dispute settlement (like negotiation and mediation) that may permit them to resolve disputes more quickly, more efficiently, and on terms more closely aligned with their commercial and personal interests (rather than legal rights). Yet, without some form of adjudication to understand the applied meaning of legal rights negotiated in contracts or offered by the applicable law, the nonadjudicative forms of dispute settlement will lose value. Without having some adjudicative backstop that offers a baseline for assessing the relative value of options, it becomes difficult to compare and contrast other negotiated options such the Best Alternative to a Negotiated Agreement (BATNA), the Worst Alternative to a Negotiated Agreement (WATNA), or the Most Likely Alternative to a Negotiated Agreement (MLATNA; Fisher, Ury, & Patton, 1991; Menkel-Meadow, Love, & Schneider, 2013; Menkel-Meadow, Schneider, & Love, 2014; Ury, 1993). Unfortunately, the only treaty for enforcing national court judgments is limited in scope and application (Convention on the Choice of Court Agreement, 2005), which creates some uncertainty about the economic utility of investing resources to secure court judgments in the transnational context. Arbitration will therefore continue to be a fundamental adjudication option, given the scope and strength of the worldwide enforcement regime through the New York Convention and its ongoing adaptability to new contexts and parties’ unique needs.
A Note on General Legal Authorities
Those generally interested in the topic of arbitration should be conscious of the distinction between domestic and international arbitration.
Domestic arbitration, for example, should be considered in the context of which nation’s domestic arbitration law is applicable. If one were focussing on domestic arbitration in the United States, for example, the source Domke on Commercial Arbitration (Domke, Edmonson, & Wilner, 2019) would be fundamental. If one, however, were interested in domestic arbitration within England and Wales, Russell on Arbitration (St. John Sutton, Gill, & Gearing, 2015) would be the key source. This article, written by a US author with UK legal training who has practiced law in both countries, has often focused upon the arbitration law from those jurisdictions. Nevertheless, one must be conscious that if one wishes to focus upon the national arbitration law and practice of a specific country, a detailed enquiry in that jurisdiction would be prudent. A treatise analyzing the over-180 different jurisdictions on the planet would be beyond the space limitations and scope of this article. Instead, the article offers a broad context, with some specific examples, to aid understanding. Those wishing for more detail in order to become both competent and aware of the more recent evolutions must inevitably seek other jurisdiction-specific in-depth analyses. One might observe, for example, that France has a special approach to arbitration that is often contrasted with that of the Anglo-American world, and that Switzerland has a uniquely influential approach to arbitration.
By contrast, if one is focussed on international arbitration and its transnational practice, core treatises come from Born (2014), Fouchard, Gaillard, and Goldman (1999), Lew, Mistelis, and Kröll (2003), and Blackaby, Partasides, Redfern, and Hunter (2015; commonly referred to as “Redfern and Hunter”). All of these publications were written by individuals who are scholars, practitioners, and arbitrators, with different national origins and legal training. For those interested in individual country reports and discussions of core doctrinal issues of international arbitration—including the arbitration agreement, arbitrators, arbitral procedure, arbitration awards, and recourse against awards—consider the International Handbook on Commercial Arbitration: National Reports and Basic Legal Texts, which was published in a loose-leaf format, edited by Jan Paulsson, in 1996, and which is supplemented on an annual basis, including in 2019, by the International Council for Commercial Arbitration (see ICCA, 2019). For those interested in obtaining copies of arbitration awards and arbitration jurisprudence domestically, please consult databases that permit searching the dockets and decisions of the individual national judiciary; for example, this would be PACER.gov (Public Access to Court Electronic Records) for the US federal judiciary. Transnationally, in the international commercial context, ICCA has compiled the Yearbook on Commercial Arbitration, published annually, which compiles arbitration awards and major court decisions involving arbitration. In the investment treaty context, multiple free websites—including ITALaw.com and the UNCTAD Investment Policy Hub—offer online access to Investment Treaty Arbitration awards.
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