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Home > Operations Management Best Practice > International Arbitration: Basic Principles and Characteristics

Operations Management Best Practice

International Arbitration: Basic Principles and Characteristics

by Stavros Brekoulakis

Executive Summary

  • International arbitration is a contractually based dispute resolution mechanism that offers an alternative to national courts.

  • International arbitration has experienced a remarkable growth in the last three decades, due to its unique advantages over litigation.

  • The advantages of arbitration include privacy and confidentiality of proceedings, procedural flexibility, and high rates of enforceability of arbitral awards.

  • Despite its many advantages, there is growing concern that arbitration is becoming increasingly expensive and time-consuming. This concern, although not unfounded, is often overplayed. Ultimately, it is down to the users of arbitration to draft effective arbitration agreements and to put an effective arbitration procedure in place.

  • To arrive at a successful resolution of disputes through arbitration, the parties involved should pay particular attention to the choice of arbitrators and the arbitration institution, and, most importantly, give due consideration to the drafting of the arbitration agreement.

Definition and Distinctive Features of Arbitration

International arbitration can be defined as a specially established mechanism for the final and binding determination of disputes concerning a contract between two or more parties that has an international element. The disputes are determined by independent arbitrators in accordance with standards and procedures chosen by the parties involved in the dispute.1

The distinctive feature of arbitration is that it is a private dispute resolution mechanism, which nevertheless provides arbitrators with judicial power. More specifically:

  • arbitration is a private dispute resolution method, in which the arbitrators’ mandate to resolve a dispute derives from a contract (i.e., an arbitration agreement or arbitration clause).

  • arbitrators have the power to deliver an award that finally resolves the dispute that is binding on the parties.

The above characteristics of arbitration distinguish it from the following.

Litigation proceedings before national courts. In litigation, national courts are an expression of state power and they are bound to apply the rules and procedures of the state they are attached to. National judges owe allegiance to their state and they have limited or no discretion to deviate from the procedural codes and rules of that state. By contrast, in arbitration parties are free to determine how the proceedings are to be conducted, subject only to minimum safeguards (due process). Party autonomy is a fundamental principle in arbitration, which gives the parties the opportunity to tailor the proceedings in accordance with their commercial needs and the special characteristics of the case. Arbitrators are private judges whose mandate is determined by the arbitration agreement concluded by the parties, and who owe allegiance to the parties that have appointed them rather than to a state.

Alternative dispute resolution (ADR) methods. Despite the fact that their authority derives from a contract, arbitrators have the power to grant an award, which is a final decision that is binding on the parties. Arbitral awards are enforceable in the same way that national judgments are. Therefore, arbitration must be distinguished from other forms of ADR, such as mediation. Here, as in arbitration, a third party (mediator) is involved in the resolution of the dispute between the two commercial parties. However, the mediator has no power to impose a decision on the parties. Mediators work with the parties to resolve their dispute by an agreement; they cannot issue a binding decision. Thus, the outcome of a successful mediation is a settlement rather than an enforceable award.

Different Forms of Arbitration

There are two basic types of arbitration: ad hoc and institutional. Parties are free to choose between these two types in their arbitration agreement. If the parties fail to specify in their agreement which type of arbitration they prefer, the arbitration will be presumed to be ad hoc.

Ad hoc arbitration is an arbitration that is specifically designed by the parties for a particular dispute. Here there are predetermined rules for the arbitrators to rely on when conducting the proceedings (although sometimes the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules are used). Thus, it is up to the parties to determine the proceedings and to the arbitrators to fill any gaps. Ad hoc arbitration is more flexible than institutional, as the parties are completely free to adapt the proceedings to the particulars of the case. It can also be less expensive than institutional arbitration, as the parties avoid the fees of the institution and they can negotiate the fees of the arbitrators. However, for an ad hoc arbitration to work, the parties must have provided for a clear set of proceedings in advance, as there are no institutional rules to fall back on if they disagree on the arbitration process after the dispute arises.

Institutional arbitration is an arbitration that is conducted under the auspices of a particular arbitration institution and in accordance with the rules of that institution. Institutional arbitration is more popular among international parties.2 This is because the parties feel more comfortable with experienced institutional administrators (known as “case managers”) who are willing to take care of any issue that might arise during the proceedings. Parties are also attracted by the reputation and the strong brand name of many established arbitration institutions, which, as many parties believe, increases the enforceability of an arbitration award. The most popular institutions are the International Chambers of Commerce (ICC), the London Court of International Arbitration (LCIA), the American Arbitration Association (AAA), and the Stockholm Chamber of Commerce.3

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Further reading

Books:

  • Born, Gary. International Arbitration and Forum Selection Agreements: Planning Drafting and Enforcing. 2nd ed. The Hague: Kluwer Law International, 2006.
  • Lew, Julian D. M., Loukas A. Mistelis, and Stefan Kröll. Comparative International Commercial Arbitration. The Hague: Kluwer Law International, 2003.
  • Redfern, Alan, and Martin Hunter, with Nigel Blackaby and Constantine Partasides. Law and Practice of International Commercial Arbitration. 4th ed. London: Sweet & Maxwell, 2004.

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