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.