ARTICLE
23 September 2010

Methods of Dispute Resolution Series – Arbitration

The complexity of commercial relationships and transactions in today’s market has led to an increase in the number of disputes parties become involved in.
United Arab Emirates Litigation, Mediation & Arbitration

The complexity of commercial relationships and transactions in today's market has led to an increase in the number of disputes parties become involved in. The onset of the global financial crisis (whilst perhaps somewhat in retreat now) has also contributed to the rising numbers of cases being filed with courts and arbitration centres across the globe.

Often, when acrimonious circumstances arise between parties, it is to the Courts and litigation the parties first turn. Of course, it is quite often the case that the most appropriate or practical dispute resolution forum is the national Courts. For example, the type of relief sought by a party may only be capable of granting by a Court.

Parties do, however, need to be aware that there are other forms of dispute resolution that may offer a faster, more cost-effective and flexible framework within which they can resolve their disputes. This article, the first in a series on the many forms of dispute resolution available, concerns the merits of arbitration, the history of arbitration and the difference between the various types of arbitration

What is arbitration?
Put simply, arbitration is a binding form of dispute resolution. By its very conduct outside the realm of the judiciary, it can be characterised as an express rejection of the national Court system. This is why, not only in the UAE but on global level, strict requirements exist before parties can validly be said to have agreed to arbitrate. These requirements, which are discussed below, are reflected in the national arbitration laws of many countries as well as international conventions applicable to arbitration.

There are a number of salient features of arbitration. The first has been mentioned above, in that the arbitration process presents an alternative to the national Courts. National courts are, more often than not, the preferred forum within which parties can determine their disputes. National courts exist and are maintained by the state. It is the state itself which controls the process and which has the responsibility to appoint suitably qualified judges. When parties validly agree to arbitrate, they remove their relationship and any disputes arising by virtue of that relationship (depending, of course, on how the arbitration agreement is drafted), from the jurisdiction of the national courts.

Of fundamental importance – perhaps more important in some cases than others – is the fact that arbitration is a private mechanism for dispute resolution. In theory, no-one outside of the proceedings (i.e. the parties, their representatives, the arbitrators, any appointed experts and, if applicable, the institution governing the proceedings) should know that the proceedings are being conducted. They should, as a matter of course, remain private. In commercially sensitive disputes it is this feature which serves to make the arbitration process quite attractive.

Unlike national Courts, which are generally quite strictly controlled by Court rules, time limits and principles of case-flow management, arbitration offers a more flexible process which is controlled by the parties. This is not to say that arbitration is not an advocate of cost and time-efficient resolution – it is. The difference lies in the fact that the process can be tailored to meet the needs of the parties, but still results in a final and binding determination of the rights and responsibilities of the parties. Arbitration is also more flexible than proceedings in Court. Courts give deadlines, they often have a huge backlog of cases and must be rigid in requiring parties to submit pleadings etc on time. For this reason, Courts cannot afford to give parties the flexibility they may want or need. Courts must also be consistent in their approach – they cannot be seen to be granting flexibility to one set of parties but not to others. They are governed by procedural rules which must be adhered to as far as is possible. Arbitration, on the other hand, can afford to be more flexible. There is no backlog of cases, because each set of proceedings is presided over by different arbitrators. Whilst there are time limits, there is a greater capacity to extend them. Parties can also seek to agree when they will file pleadings, witness statements and other submissions. It can be said that party autonomy is the ultimate power determining the form, structure and system and other details of the arbitration.

An additional crucial feature which distinguishes arbitration from litigation is the ability of the parties (at least in most cases) to nominate who will decide their dispute. This is a rather large benefit offered by the arbitration process. The subject matter of large disputes, such as construction or maritime disputes is often quite technical and complex. Judges of the national Courts cannot be expected to be experts in every facet of every subject matter. This is why it is of great benefits if the parties are able to nominate an arbitrator who has expertise in the subject field, and who will understand the intricacies of the dispute at hand.

History of Arbitration
With respect to the history of arbitration, with the expansion of world trade, such as shipping, insurance, commodities and finance came an increase in international disputes, and hence the need to create some sort of mechanism under which arbitration awards and arbitration agreements could be recognised and enforced. Two conventions, both called The Hague Convention for the Pacific Settlement of International Disputes were created in 1899 and 1907. These two Conventions created the Permanent Court of Arbitration, which still functions today.

Following on, the International Chamber of Commerce was established in 1919 and the Court of International Arbitration in 1923. The ICC Court of International Arbitration was developed to provide a neutral framework for an independent arbitration system.

The International Chamber of Commerce was heavily involved in the later development of the 1923 Geneva Protocol on Arbitration Clauses and the 1927 Geneva Convention on the Execution of Foreign Awards. The purpose of these two conventions was to facilitate enforcement and recognition of foreign awards. The two Geneva Conventions were replaced in 1958 by the New York Convention

Arbitration in the UAE
In the UAE, arbitration has always been reflected in the UAE Civil Code. However, until recently, arbitration was not a popular form of dispute resolution in this country. As a general rule, the Courts have been the preferred form of dispute resolution.
In the past, there were many issues of enforcement here in the UAE. However, until 2006 the UAE had not acceded to the New York Convention. There has been a recent case where a foreign arbitration award was successfully enforced under the New York convention in the UAE.

The current regime is contained in the civil procedure law, in articles 203-218. These articles are not particularly comprehensive. They do, however, respect the parties agreement to arbitrate and provide for the recognition of arbitration in the UAE. It is now common knowledge that a new Federal draft Arbitration Law, based on the UNCITRAL Model Law, is in progress. Once enacted, it will aim to provide a comprehensive regime which is reflective of international best practice.

Currently, in the UAE, a valid arbitration agreement in writing is required for parties to be able to submit to arbitration. There are several key ingredients of an arbitration agreement, all of equal importance.

It is important to define what exactly it is that is being referred to arbitration. Is it a specific existing dispute or is it all future disputes? Phrases such as "any and all disputes" or "arising out of or in connection with this agreement" can assist. This is very important as it is from the arbitration agreement that the arbitrator derives his or her jurisdiction. It is important that the arbitrator does not go beyond this mandate. If an arbitrator does this, there is a risk that the award will not be capable of enforcement, either under the UAE CPL or the New York Convention as the case may be.

The seat, or legal place of the arbitration is also important because the law of the seat of the arbitration governs the arbitral proceedings and also plays an important role for the purposes of enforcement.

Sensibly choosing the number of arbitrators is also key. It may not be sensible to choose three arbitrators for a 1 million AED breach of contract claim. On the other hand, a document heavy construction claim worth half a billion dirham probably warrants three arbitrators. Consideration of how arbitrator's fees are calculated under the various different rules may also play a part. Three arbitrators under the DIFC-LCIA Rules might be more expensive than three arbitrators under the DIAC Rules, because of the different ways the fees are calculated.

The governing law of the dispute should always be indicated. Unlike the national courts, who may simply choose to apply UAE law to the merits of a dispute, under the rules of most major institutions the arbitrators are obliged to apply the law chosen by the parties to the merits of the dispute. It is therefore worth giving serious consideration to this and there really is no reason not to make such a choice in an arbitration agreement. It is not difficult to draft an arbitration clause but care does need to be taken to ensure the parties' wishes are reflected, and to ensure that the parties understand what they have agreed to.

Institutional V. Ad Hoc Arbitration
Finally, a brief word on the differences between institutional and ad hoc arbitration. Institutional arbitration is conducted under the auspices of an institution, such as DIFC-LCIA, DIAC or the ICC. One of the advantages of institutional arbitration is that the rules of the various institutions have most likely been tried and tested and proven to be effective. The rules may have undergone review, such as the DIAC rules did in 2007. Another good advantage is that many rules contain default provisions for what is to happen when one party fails to participate in arbitration proceedings. For example, Article 21.2 of the ICC Rules provides that "if any of the parties, although duly summoned, fails to appear without valid excuse, the Arbitral Tribunal shall have the power to proceed with the hearing."

A disadvantage of institutional compared to ad hoc arbitration is cost. Under many institutional rules parties must pay a fixed fee in advance of the costs of the arbitration, generally known as the advance on costs. Sometimes the amount in dispute between the parties, which is generally calculated on the basis of the claim amount plus the counterclaim amount, can be so much that the advance on costs is prohibitive. In such a situation it is possible that ad hoc arbitration is preferable.

An example of an effective ad hoc arbitration clause could be "any dispute or difference arising out of or in connection with this agreement shall be referred to and determined by a sole arbitrator in Dubai."

It is then open to the parties to agree, at a later stage, upon any rules or an appointing authority for the arbitral tribunal. It is possible, and sometimes recommended, that ad hoc arbitration clauses make reference to and incorporate the UNCITRAL Arbitration Rules.

An advantage of ad hoc arbitration is that the process can really be tailored to meet the parties' needs. It may also be cheaper, because there is no need to pay an advance on costs to an institution. However, there are also disadvantages to ad hoc arbitration. Full cooperation between the parties and their lawyers is generally required, with back-up derived from the law of the place of the arbitration. Without specific rules and an institution to govern proceedings, it may be possible for a reluctant party to delay and disrupt proceedings. It really is only after a proper set of rules is agreed upon and a tribunal is constituted that ad hoc arbitration can really succeed.

In either case, a carefully drafted arbitration clause is required, and consultation with a lawyer familiar with the mechanics of arbitration is highly recommended.

It is hoped that this article provides its readers with a basic overview of what is involved in arbitration, how it has developed and what is required for a various agreement to arbitrate.

Next month, we will look at mediation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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