Is Delocalised Arbitration a Viable Option in International Commercial Arbitration?
Introduction
The law governing the international commercial arbitration involves a complex interaction of various systems of law and legal rules. One of these systems, the lex arbitri or curial law, concerns the existence and proceedings of the tribunal. This body of law is very important as it sets out a standard external to the arbitration agreement for the conduct of the arbitration. It is this body of law which empowers the exercise by the court of interim measures, supportive measures and controlling measures to assist arbitrations which have run into difficulties. Delocalised arbitrations concern arbitrations that are detached from the lex arbitri.
In domestic commercial arbitration as opposed to international commercial arbitration the body of law that governs the supportive and supervisory powers of the courts is contained to the law of one state. There is therefore a level playing field in so far as there is one lex arbitri to deal with. In contrast, in the international commercial arbitration arena, where there is a dispute between two parties of differing nationalities, there could involve multiple bodies of lex arbitri in both the proceeding stage and the enforcement stage thus changing the dynamics of the arbitral process. The parties potentially could be subjected to a myriad of foreign law that was never intended in the first place by the parties. For example some states have law that prevents certain matters being referred to arbitration and parties could find themselves in a dispute over the arbitrability over the subject matter of the dispute. A state may determine other limitations upon the arbitral process; whether, for instance the arbitral tribunal has the power to compel the attendance of witnesses or the disclosure of documents and crucially whether or not any appeal to the national court is possible and if so how and when and upon what terms.
Traditionally there is a concept that an arbitration is governed by the law of the place in which it is held, which is the "seat" of the arbitration. This theory is well established and has influenced the wording of international conventions from the Geneva Protocol of 1923 to the New York Convention of 1958. The Geneva Protocol states "The arbitral procedure, including the constitution of the arbitral tribunal, shall be governed by the will of the parties and by the law of the country in whose territory the arbitration takes place". This is an example of the concept of dualism in international commercial arbitration practise. On one hand the parties have a considerable degree of autonomy in respect of the way in which the arbitration is conducted, with the parties being free to decide on the procedural rules they wish to adopt, expressed by their will. On the other hand the law of the country in the territory where the arbitration takes place, the lex arbitri, possessing the powers to support the arbitral process and to intervene where required.
The New York Convention refers to the law of the country where the arbitration took place and synonymously to the law where the award was made which continues the theme of the link between the territory of the place of arbitration and the law governing the arbitration. The Model Law continues this theme and states that it's provisions, apart from some exceptions, only apply if the place of the arbitration is the territory of this state. The relatively modern laws of England and Switzerland are also clear with this dualistic approach. Therefore it can be seen that the seat of the arbitration is not merely a matter of geography, it is a territorial link between the place in which the arbitration is legally situated and the arbitration itself. The strength of the seat theory is that it gives an established legal framework to an international commercial arbitration so the arbitration is firmly rooted in a given legal system.
The fact that different states have different lex arbitri which will govern an international commercial arbitration held in its jurisdiction, means that the site for the arbitration seat is of great importance. This is true because there may be some mandatory laws that will have to be complied with which may not suit the objectives of the parties in an arbitration and therefore not every country would be suitable.
In so far as international commercial arbitration is concerned, it would save considerable time, trouble and expense if there was a universal lex arbitri and thus level the playing field in this particular area. This particular ideal however is near impossible as each state has it?s own objectives and national characteristics to protect as well as it?s own philosophies of how arbitrations should be carried out.
This conundrum has given birth to the delocalization theory which attempts to overcome the difficulties faced by international parties in an international commercial arbitration. The theory argues that to solve the problem an international arbitration proceeding should take place in a legal vacuum totally detached from the national law of the place in which it is held. The only point of court control should be at the place of enforcement. In this way international commercial arbitrations could take place in just about any state and the international commercial arbitration itself would be transnational or delocalised. This concept is contrary to the dualistic system of control by the lex arbitri whereby the courts of the place have considerable supervisory and controlling powers over the proceedings and at the enforcement of the award.
The issues considered
To comprehend and weigh up the competing points of the debate whether international commercial arbitration should exist in a transnational universe or conversely to be rooted in a defined seat and be subjected to national law of the state a general understanding is required as to why parties choose arbitration in the first place.
The principle binding forms of dispute resolution are national courts or alternatively arbitration. When parties of different nationalities decide between these two forms they will consider neutrality of the forum and enforceability of the award in not only the place where it is made but also internationally. Arbitration is the only forum that can provide both of these requirements. This statement is made with reservation however as other factors will obviously play a part and not all arbitrations will fulfil these requirements.
National courts on the other hand do not meet the criteria as their awards will not be internationally enforceable. International commercial arbitration awards where countries are contracting states to the New York Convention will have the benefit of being able to enforce their awards at an international level. Parties will want to have control to some degree over the costs and agree on processes that are adequate and suitable for the particular dispute. Some parties may consider that confidentiality is an important criteria and for this reason will not choose a national court as their award would then be made public. Another factor which may or may not be foreseeable at the time of decision might be that third party involvement in the dealings between the parties could mean that third parties might have to be compelled to preserve or give evidence. This could be a crucial deciding point between a delocalised arbitration and an arbitration with a seat.
One of the main requirements parties would have would be that the eventual award must be enforceable. In international commercial arbitration there will have to be some kind of applicable treaty or convention in the state where the parties have assets sufficient to satisfy the possible award. The treaty or convention must also be capable of recognising the award as enforceable. When parties have the opportunity to choose between a delocalised arbitration or an arbitration with a seat they will have to ensure that the award will be enforceable. The New York Convention 1958 which most international commercial arbitrations rely on for enforcing foreign awards sets out accepted minimum standards for the recognition and enforcement of arbitral awards agreements in territories of the contracting states (states that have acceded to the convention). Under article 5 of the New York Convention enforcement may be refused by the country where enforcement is sought for certain reasons however the question to be asked is whether any national law could cure the risk that another nation will not enforce the award.
The Singapore Arbitration Act excludes delocalised awards and therefore if the assets of a party that where being relied on were in Singapore they would be protected from delocalised arbitration. In Belgium the reformed law gives the parties the opportunity to decide between delocalised arbitration or an arbitration with a seat. The English Arbitration Act 1996 section 66 (2) empowers the court to give a judgement in the terms of the award, thereby allowing the judgement rather than the award to be enforced. It is not certain that a judgement entered under this provision in the same way as any other English judgement and the principle would appear to undermine the whole basis of enforcement of arbitral awards. The UNITRAL Model Law Article 35 suggests that an arbitral award shall be recognised as binding irrespective of the country in which it was made. So it seems that if parties contemplating between delocalised arbitration and arbitration with a seat should first and foremost be sure that it would be possible to have an enforceable award in the intended country.
Further issues that need consideration when weighing up the choice between delocalised arbitration and an arbitration with a seat would be supportive provisions including conservatory measures and interim relief measures.
Where intervention is needed to preserve evidence in possession of third parties or to compel witnesses to provide evidence the arbitral tribunal will have no jurisdiction and therefore the national courts are essential to provide the support necessary to ensure natural justice is achieved.
Circumstances may arise where a party may feel that the tribunal has breached a duty. In these circumstances they may seek to have the tribunal removed. For example in the case of an arbitral tribunal with its seat in England and Wales the lex arbitri requires the arbitral tribunal to act impartially and there is a mechanism by which the arbitral tribunal can be challenged in a court action.
If the arbitration was delocalised, a party would have no recourse to the courts should they feel there had been a breach of a duty or that the proceeding was being carried out unfairly. If however the arbitration was under the administration of an institution the institution could have the power to remove the arbitrator. This institution could also place some kind of sanction on the arbitrator excluding him or her from being appointed from their panel in the future.
Conclusion
It is therefore questionable whether the involvement by the court is really necessary or perhaps more appropriately it could be said that it would be beneficial to define the point where the reliance of arbitration on the courts should begin and end.
The debate whether arbitration should have a seat and be exposed to national law or alternatively be delocalised is fuelled by factions with many different interests therefore the debate will continue to be vicious so long as objects differ. For sure the authors of articles to have their own objectives and therefore for parties deciding between delocalised arbitration or arbitration with a seat should carefully weigh up the pros and cons as well as consider their own objectives, without being influenced by motives that do not matter to them.
In theory one could look at the hierarchy of governance starting with the national court at the pinnacle, then the institution (if applicable) and then the arbitral tribunal. The ultimate sanction will always lie with the national court and therefore it could be said that it is impossible for the courts to be totally excluded from the equation. However in practise this is not always the ultimate deciding factor. The pro delocalised side would argue that the court is not being totally excluded as it would govern the second phase of the process i.e the enforcement. This concept does have its merits however first the arbitration proceedings will have survive with out the courts support maybe being subjected too sabotage tactics by a party who is un co-operative and manage to actually successfully reach an enforceable award in accordance with the New York Convention 1958 or another mechanism which provides for cross border awards
There are thus strong arguments from both sides. However it seems as there could be a place for both systems. For a party wanting to play it safe generally recent trends have favoured the seat theory and this is highlighted by the outcome of the Belgium's courts decision to make delocalisation compulsory. For a party up against an opponent with strong state ties perhaps a transnational forum could be more important to them as it may seem more neutral than one linked with a state.
In reality the delocalisation of arbitrations is only viable if the local law permits and for example in bilateral investment treaties etc. It also says a lot that when Belgium changed it laws to make delocalised arbitration compulsory it actually discouraged parties from choosing Belgium as the seat of the arbitration and now the law has been changed.
The law governing the international commercial arbitration involves a complex interaction of various systems of law and legal rules. One of these systems, the lex arbitri or curial law, concerns the existence and proceedings of the tribunal. This body of law is very important as it sets out a standard external to the arbitration agreement for the conduct of the arbitration. It is this body of law which empowers the exercise by the court of interim measures, supportive measures and controlling measures to assist arbitrations which have run into difficulties. Delocalised arbitrations concern arbitrations that are detached from the lex arbitri.
In domestic commercial arbitration as opposed to international commercial arbitration the body of law that governs the supportive and supervisory powers of the courts is contained to the law of one state. There is therefore a level playing field in so far as there is one lex arbitri to deal with. In contrast, in the international commercial arbitration arena, where there is a dispute between two parties of differing nationalities, there could involve multiple bodies of lex arbitri in both the proceeding stage and the enforcement stage thus changing the dynamics of the arbitral process. The parties potentially could be subjected to a myriad of foreign law that was never intended in the first place by the parties. For example some states have law that prevents certain matters being referred to arbitration and parties could find themselves in a dispute over the arbitrability over the subject matter of the dispute. A state may determine other limitations upon the arbitral process; whether, for instance the arbitral tribunal has the power to compel the attendance of witnesses or the disclosure of documents and crucially whether or not any appeal to the national court is possible and if so how and when and upon what terms.
Traditionally there is a concept that an arbitration is governed by the law of the place in which it is held, which is the "seat" of the arbitration. This theory is well established and has influenced the wording of international conventions from the Geneva Protocol of 1923 to the New York Convention of 1958. The Geneva Protocol states "The arbitral procedure, including the constitution of the arbitral tribunal, shall be governed by the will of the parties and by the law of the country in whose territory the arbitration takes place". This is an example of the concept of dualism in international commercial arbitration practise. On one hand the parties have a considerable degree of autonomy in respect of the way in which the arbitration is conducted, with the parties being free to decide on the procedural rules they wish to adopt, expressed by their will. On the other hand the law of the country in the territory where the arbitration takes place, the lex arbitri, possessing the powers to support the arbitral process and to intervene where required.
The New York Convention refers to the law of the country where the arbitration took place and synonymously to the law where the award was made which continues the theme of the link between the territory of the place of arbitration and the law governing the arbitration. The Model Law continues this theme and states that it's provisions, apart from some exceptions, only apply if the place of the arbitration is the territory of this state. The relatively modern laws of England and Switzerland are also clear with this dualistic approach. Therefore it can be seen that the seat of the arbitration is not merely a matter of geography, it is a territorial link between the place in which the arbitration is legally situated and the arbitration itself. The strength of the seat theory is that it gives an established legal framework to an international commercial arbitration so the arbitration is firmly rooted in a given legal system.
The fact that different states have different lex arbitri which will govern an international commercial arbitration held in its jurisdiction, means that the site for the arbitration seat is of great importance. This is true because there may be some mandatory laws that will have to be complied with which may not suit the objectives of the parties in an arbitration and therefore not every country would be suitable.
In so far as international commercial arbitration is concerned, it would save considerable time, trouble and expense if there was a universal lex arbitri and thus level the playing field in this particular area. This particular ideal however is near impossible as each state has it?s own objectives and national characteristics to protect as well as it?s own philosophies of how arbitrations should be carried out.
This conundrum has given birth to the delocalization theory which attempts to overcome the difficulties faced by international parties in an international commercial arbitration. The theory argues that to solve the problem an international arbitration proceeding should take place in a legal vacuum totally detached from the national law of the place in which it is held. The only point of court control should be at the place of enforcement. In this way international commercial arbitrations could take place in just about any state and the international commercial arbitration itself would be transnational or delocalised. This concept is contrary to the dualistic system of control by the lex arbitri whereby the courts of the place have considerable supervisory and controlling powers over the proceedings and at the enforcement of the award.
The issues considered
To comprehend and weigh up the competing points of the debate whether international commercial arbitration should exist in a transnational universe or conversely to be rooted in a defined seat and be subjected to national law of the state a general understanding is required as to why parties choose arbitration in the first place.
The principle binding forms of dispute resolution are national courts or alternatively arbitration. When parties of different nationalities decide between these two forms they will consider neutrality of the forum and enforceability of the award in not only the place where it is made but also internationally. Arbitration is the only forum that can provide both of these requirements. This statement is made with reservation however as other factors will obviously play a part and not all arbitrations will fulfil these requirements.
National courts on the other hand do not meet the criteria as their awards will not be internationally enforceable. International commercial arbitration awards where countries are contracting states to the New York Convention will have the benefit of being able to enforce their awards at an international level. Parties will want to have control to some degree over the costs and agree on processes that are adequate and suitable for the particular dispute. Some parties may consider that confidentiality is an important criteria and for this reason will not choose a national court as their award would then be made public. Another factor which may or may not be foreseeable at the time of decision might be that third party involvement in the dealings between the parties could mean that third parties might have to be compelled to preserve or give evidence. This could be a crucial deciding point between a delocalised arbitration and an arbitration with a seat.
One of the main requirements parties would have would be that the eventual award must be enforceable. In international commercial arbitration there will have to be some kind of applicable treaty or convention in the state where the parties have assets sufficient to satisfy the possible award. The treaty or convention must also be capable of recognising the award as enforceable. When parties have the opportunity to choose between a delocalised arbitration or an arbitration with a seat they will have to ensure that the award will be enforceable. The New York Convention 1958 which most international commercial arbitrations rely on for enforcing foreign awards sets out accepted minimum standards for the recognition and enforcement of arbitral awards agreements in territories of the contracting states (states that have acceded to the convention). Under article 5 of the New York Convention enforcement may be refused by the country where enforcement is sought for certain reasons however the question to be asked is whether any national law could cure the risk that another nation will not enforce the award.
The Singapore Arbitration Act excludes delocalised awards and therefore if the assets of a party that where being relied on were in Singapore they would be protected from delocalised arbitration. In Belgium the reformed law gives the parties the opportunity to decide between delocalised arbitration or an arbitration with a seat. The English Arbitration Act 1996 section 66 (2) empowers the court to give a judgement in the terms of the award, thereby allowing the judgement rather than the award to be enforced. It is not certain that a judgement entered under this provision in the same way as any other English judgement and the principle would appear to undermine the whole basis of enforcement of arbitral awards. The UNITRAL Model Law Article 35 suggests that an arbitral award shall be recognised as binding irrespective of the country in which it was made. So it seems that if parties contemplating between delocalised arbitration and arbitration with a seat should first and foremost be sure that it would be possible to have an enforceable award in the intended country.
Further issues that need consideration when weighing up the choice between delocalised arbitration and an arbitration with a seat would be supportive provisions including conservatory measures and interim relief measures.
Where intervention is needed to preserve evidence in possession of third parties or to compel witnesses to provide evidence the arbitral tribunal will have no jurisdiction and therefore the national courts are essential to provide the support necessary to ensure natural justice is achieved.
Circumstances may arise where a party may feel that the tribunal has breached a duty. In these circumstances they may seek to have the tribunal removed. For example in the case of an arbitral tribunal with its seat in England and Wales the lex arbitri requires the arbitral tribunal to act impartially and there is a mechanism by which the arbitral tribunal can be challenged in a court action.
If the arbitration was delocalised, a party would have no recourse to the courts should they feel there had been a breach of a duty or that the proceeding was being carried out unfairly. If however the arbitration was under the administration of an institution the institution could have the power to remove the arbitrator. This institution could also place some kind of sanction on the arbitrator excluding him or her from being appointed from their panel in the future.
Conclusion
It is therefore questionable whether the involvement by the court is really necessary or perhaps more appropriately it could be said that it would be beneficial to define the point where the reliance of arbitration on the courts should begin and end.
The debate whether arbitration should have a seat and be exposed to national law or alternatively be delocalised is fuelled by factions with many different interests therefore the debate will continue to be vicious so long as objects differ. For sure the authors of articles to have their own objectives and therefore for parties deciding between delocalised arbitration or arbitration with a seat should carefully weigh up the pros and cons as well as consider their own objectives, without being influenced by motives that do not matter to them.
In theory one could look at the hierarchy of governance starting with the national court at the pinnacle, then the institution (if applicable) and then the arbitral tribunal. The ultimate sanction will always lie with the national court and therefore it could be said that it is impossible for the courts to be totally excluded from the equation. However in practise this is not always the ultimate deciding factor. The pro delocalised side would argue that the court is not being totally excluded as it would govern the second phase of the process i.e the enforcement. This concept does have its merits however first the arbitration proceedings will have survive with out the courts support maybe being subjected too sabotage tactics by a party who is un co-operative and manage to actually successfully reach an enforceable award in accordance with the New York Convention 1958 or another mechanism which provides for cross border awards
There are thus strong arguments from both sides. However it seems as there could be a place for both systems. For a party wanting to play it safe generally recent trends have favoured the seat theory and this is highlighted by the outcome of the Belgium's courts decision to make delocalisation compulsory. For a party up against an opponent with strong state ties perhaps a transnational forum could be more important to them as it may seem more neutral than one linked with a state.
In reality the delocalisation of arbitrations is only viable if the local law permits and for example in bilateral investment treaties etc. It also says a lot that when Belgium changed it laws to make delocalised arbitration compulsory it actually discouraged parties from choosing Belgium as the seat of the arbitration and now the law has been changed.
posted by Will at 7.1.06
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