Many construction and engineering professionals will go through a whole career without being involved in a dispute which eventuates in full-blown international arbitration proceedings. Anyone who has will know what a bruising process it can be and will not be keen to be involved in a second. However, the drafting of an agreement for dispute resolution is sometimes known as a ‘midnight clause’, that is, it is something which is left right to the end of contract negotiations, perhaps even at midnight on the final day. So, whilst this article describes some of the processes and considerations for those unlucky enough to actually become involved in an arbitration it also gives an insight into matters for those involved at the front end, drafting contracts.

An arbitration agreement

Without an arbitration agreement parties to any contract will have default recourse to the courts in the country which governs the contract. By entering into an arbitration agreement the parties are agreeing not to take the matter to court but to have the matter in dispute resolved in private by a neutral third party. Aside from the noted element of privacy, choosing arbitration over litigation has the advantages that there is generally more party control over the proceedings; one has the option of choosing a subject matter specialist arbitrator and, of particular importance in the international arena, any arbitration award will be enforceable in other jurisdictions.

This latter point was dealt with in a previous article, but shortly, there is no point in having a judgment or arbitration award in one’s favour if it cannot be enforced. Taking a judgment from one jurisdiction into another is problematic as it is unlikely that the judgment will be enforced in the second country. However, the New York Convention On The Recognition and Enforcement Of Foreign Arbitral Awards 1958 says that signatory countries will enforce arbitral awards made in other signatory countries. The 1958 Convention has been widely adopted around the world so there is a better than even chance of enforceability of an arbitral award in another jurisdiction.

Likewise, most jurisdictions in the world will respect a party agreement to have disputes settled by arbitration rather than litigation, meaning if one of the parties to the arbitration agreement does start court proceedings then the other can approach the court to have those litigation proceedings ‘stayed’ by presentation of no more than the fact that there is an arbitration agreement.

What arbitration is not generally good at is multi-party disputes, where court proceedings will normally readily allow the ‘joining’ of other parties as joint defendants, with the court’s inherent jurisdiction to back such moves. Arbitration on the other hand must be played by the rules set out in the arbitration agreement. If there is a series of parties on a project, for example consulting engineer, main contractor, sub-contractor and suppliers, then in order to have the advantage of all disputes in the chain, which are probably reliant on the same basic facts, being joined in the same proceedings then each of the contracts in that chain will have to contain back-to-back arbitration agreements. Achieving such a co-ordinated approach is not easy and takes careful forethought in procurement planning.

Terminology

The terminology of arbitration agreement as opposed to arbitration clause is useful when one considers that an arbitration agreement can be inserted into a contract at the outset, but equally a separate agreement can be reached at the time when a dispute arises, even if the original contract did not call for arbitration. Any separate agreement would be recognised and enforced in the same way as any included in the original contract.

Reference to an arbitration agreement is also conceptually useful when considering another feature of an arbitration agreement, which is the doctrine of ‘seperability’. This doctrine, again recognised in many jurisdictions in the world, says that in the event that a contract is terminated, either by agreement or by default of one of the parties, then the arbitration clause will survive such termination, such that disputes arising before the termination, and in many case the validity of the termination itself, can still be referred to arbitration under the arbitration agreement.

Layers of control

The conduct of an arbitration can be characterised as having four layers of control, some will be mandatory, some optional, the degree of control will depend on the arbitration agreement. The four layers are:

1) The arbitration agreement itself.

2) Any standard rules incorporated into the arbitration agreement by reference.

3) The control exercised by an arbitration body in what is know as an ‘institutional’ arbitration.

4) The arbitration law of the jurisdiction which governs the arbitration agreement.

Considering each of these in turn:

1) The Arbitration Agreement

Aside from the clear mention that the parties agree to arbitrate there is no special form that an arbitration agreement should take. And so there is scope for the parties to finesse the drafting of the clause in any way they wish in terms of the choice and composition of the arbitral tribunal and any special limitations the parties wish to place on the conduct of the arbitration, for instance but perhaps unusually, the parties might agree that each side bears its own costs in conducting the arbitration regardless of the outcome on matters of principle.

2) Standard Rules

One matter in particular that the parties can choose in their arbitration agreement is to incorporate by reference standard rules for the conduct of the arbitration. There are many different forms of standard rules, normally issued by trade or industry bodies. Often one may get standard rules as part of the ‘package deal’ of using a standard form contract, for example the ICE standard forms will incorporate the ICE’s own standard set of arbitration rules.

Standard arbitration rules will typically be quite detailed and deal with those matters that are most likely to arise during the course of the arbitration, such as selection and appointment of an arbitrator, exchanges of pleadings, disclosure of documents and the procedures for dealing with witness evidence.

3) Control By Arbitration Body

Here there is normally drawn a distinction between what are known as ‘ad hoc’ and ‘institutional’ arbitrations. ‘Institutional’ arbitrations are where the arbitration agreement calls for the arbitration to be conducted in accordance with the rules of an arbitral institute which exercises a high degree of control of the whole arbitral process. The best known, and probably most controlling, of these in international construction and engineering is the International Chamber of Commerce, International of Court Arbitration, Rules of Arbitration (ICC). Others such institutions include the London Court of International Arbitration (LCIA) and Stockholm Chamber of Commerce. The use of the word ‘court’ in these titles is somewhat misleading in that they are not in any sense national courts.

An institutional arbitration will mean that appointment of the arbitrator; the terms of reference and even scrutiny of the award drafted by the arbitrator before issue to the parties will be conducted through the conduit of the institution. Whilst this may give any eventual award a high degree of robustness in terms of it being more readily presented to a national court for enforcement, it comes at the expense of an additional layer of cost for the institution’s fairly close monitoring and administration of the arbitral proceedings. The levying of these costs varies from institution to institution with for example the ICC charging a fee based on the amount in dispute and LCIA charging fees on an hourly rate for the involvement of their administrators and officials.

For clarity, a distinction should be drawn between a full ‘institutional’ arbitration and the involvement of either certain trade or industry institutions or one of the many arbitration institutions around the world that do not undertake the ‘full service’ monitoring of proceedings. These other trade bodies or arbitral institutes may have standard arbitration rules and in some cases even appoint an arbitrator when requested, but take no further part in the proceedings. These are not considered as ‘institutional’ arbitrations.

Ad hoc arbitrations is a catch-all term for everything which is not ‘institutional’ and itself can range from arbitration with standard arbitration rules to one where the rules for the conduct of the arbitration are a ‘blank page’ and the parties make up their own procedural rules, either at the outset or as matters proceed.

4) Arbitration Law of the Jurisdiction

Firstly it should be pointed out that the law which governs the underlying contract does not necessarily have to be the law which governs the arbitration agreement, remembering that the arbitration is in effect a separate, ‘separable’ contract. The reason for this distinction is that some jurisdictions have a reputation for being more ‘arbitration friendly’ than others in terms of the hands-on or hands-off approach of the local judiciary. Indeed many jurisdictions have gone to great efforts to attract the ‘business’ of international arbitration, this is not just creating a market for already well-healed lawyers but is more to do with creating what is perceived as a commerce-friendly environment.

So it is that drafters of an arbitration agreement may go ‘forum shopping’, that is to state that the arbitration agreement is governed by the laws of a country which may not necessarily be the same as the law governing the underlying contract. The jurisdiction of the law governing the arbitration agreement is known as the ‘seat’ of the arbitration, giving a sense of that is where the arbitration is to be ‘held’. However that need not necessarily mean that the arbitration hearing will be ‘held’ geographically on that place. So one could have an arbitration where the ‘seat’ is France but for some reason, perhaps of convenience of the parties or their representatives, the actual hearing is held in New York. There are even instances of ‘roving arbitrations’ where some stages are held in one geographic location and some stages in another, however the ‘seat’ will always remain constant.

Each country will have its own arbitration law, for example the English Arbitration Act 1996, each national law will set out the degree to which a particular country will allow arbitration to, in effect, replace the inherent jurisdiction of the national courts. There is wide variation, hence certain jurisdictions having reputations for being more ‘arbitration friendly’ than others.

International attempts have been made to smooth out these differences between jurisdictions, principally by UNCITRAL, the United Nations Commission on International Trade Law. UNCITRAL drafted what it called a Model Arbitration Law, the intention of which was that countries would adopt, preferably without amendment, into their own national law. There has been considerable success in this endeavour with around 60 jurisdictions, from Armenia to Zimbabwe, having enacted laws which either cut and paste directly or follow closely the Model Law into their own national law.

There is obvious advantage in being immediately familiar with the principles, if not the detail, of another jurisdiction’s national law on a matter of considerable importance to a contracting party, when weighing the risks of doing overseas business.

Again some clarification is needed between the UNCITRAL Model Law and the ‘UNCITRAL Arbitration Rules’, the latter are more akin to standard arbitration rules as described above, which have been drafted to be incorporated by reference into an arbitration agreement.

Conclusions

From the above it can be seen that there are many matters that should be considered before one has even taken the first step in an arbitration in the international arena. Having at least a working understanding of these principles should assist either when a move to arbitration is becoming inevitable, or else when it is close to midnight on the last day of contract negotiation and the lawyers are bamboozling everyone trying to close the deal.


Introduction to international arbitration