Arbitration – some

frequently asked questions

February 2006

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Arbitration – some frequently
asked questions
Why Arbitration?

What is arbitration?

If parties agree arbitration they agree to take their civil disputes out of the
court process to be determined by an arbitration tribunal (normally one or
three arbitrators) rather than the courts.

Why arbitration?

Because it is a contractual process about which the parties are able to agree
important aspects, for example, the number of arbitrators, the process for
appointing the arbitration tribunal (“the tribunal”) and the location (“the
seat”) of the arbitration. Many international agreements specify arbitration as
the contractual dispute resolution procedure as neither party wants to litigate
in the other’s home jurisdiction.

What about multiparty claims?

As arbitration is contractual, parties who are not parties to the arbitration

agreement cannot be joined to the process against their will. This requires
consideration at the drafting stage in multiparty projects as provisions can be
included in related contracts to allow for consolidated or multiparty
arbitrations. Some rules provide that arbitrations can be consolidated in some
cases.

Arbitration Institutions and Rules

What are arbitration institutions?

The major arbitration institutions (people are most familiar with the ICC, LCIA
and AAA) have their own sets of rules which provide a framework for the
arbitration and an administration to assist with the process, e.g. the
arbitration is commenced when a request for arbitration is lodged with the
institution. The institution will also assist with problems, e.g. a challenge that
an arbitrator is not independent. The institutions can also act as an
appointing authority where an arbitrator or arbitrators need to be appointed
by a third party.

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 What are arbitration rules?

Most institutions will have rules. There are also rules which are not
institutional, and parties sometimes provide for institutional (e.g. LCIA)
arbitration with, say, UNCITRAL Rules (a widely used set of non-
institutional rules).

The institutions’ rules, which are generally similar, provide a framework

for the arbitration, setting out how it should commence and giving
guidelines as to how it should proceed.

Are there any differences between the institutions?

Yes. The rules differ slightly. The ICC’s charging structure is different, as it
is based on the value of the claim rather than an hourly fee rate, and the
ICC also has a supervisory court which vets awards to ensure that all
issues have been dealt with (rather than to oversee any decision on the
merits).

How does one find out about the institutions?

Information about the institutions, their rules and standard clauses can be
found on their websites. For example, www.iccwbo.org, www.lcia-
arbitration.com and www.adr.org.

Is institutional arbitration preferable?

In an international arbitration it can make the process smoother because

the Rules set out a framework and the relevant institution’s administration
can assist with issues that arise. Institutional arbitration can also provide a
safety net in case of difficulties (for example where an arbitrator’s
independence is challenged).

Are the institutions tied to a particular location?

No. They are headquartered in different cities but generally arbitrations

pursuant to institutional rules can take place anywhere. For example, a
contract governed by English law could provide for ICC arbitration in
Zurich. It is preferable to check this if the seat of arbitration is not one of
the usual international seats.

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Arbitration Clauses

Do arbitration agreements need to be in a particular form?

It is generally required, and it is clearly preferable, that an arbitration

agreement should be in writing (the New York Convention applies to
agreements in writing). However, they do not need to be in a particular form.
Save where necessary, it is wise not to be too elaborate in drafting an
arbitration agreement.

Are there standard clauses?

The institutions recommend standard provisions. For example, a standard ICC

clause is:

“All disputes arising out of or in connection with the present contract shall
be finally settled under the Rules of Arbitration of the International
Chamber of Commerce by one or more arbitrators appointed in
accordance with the said Rules.”

The recommended LCIA provision is as follows and raises specific issues

relating to the number of arbitrators, place of arbitration and the
appropriate language:

“Any dispute arising out of or in connection with this contract, including

any question regarding its existence, validity or termination, shall be
referred to and finally resolved by arbitration under the LCIA Rules, which
Rules are deemed to be incorporated by reference into this clause.

The number of arbitrators shall be [one/three].

The seat, or legal place, of arbitration shall be [City and/or Country].

The language to be used in the arbitral proceedings shall be [ ].”

Parties can agree to have existing disputes settled by arbitration and a similar
clause could be used in these circumstances.

Will an arbitration clause cover all disputes between the parties?

Care needs to be taken in drafting the arbitration clause if one wants to

ensure that not just claims arising out of the particular contract but wider
claims, in tort, for example, are covered. The institutions propose standard
clauses aimed at covering all disputes.

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 What if it is argued that the contract containing the arbitration clause
is void?

There is a doctrine of separability whereby the arbitration clause is deemed to

be effective even if there are arguments as to the validity of the contract, for
example it is alleged that the underlying commercial contract is void.

But doesn’t this affect the jurisdiction of the arbitration tribunal?

The tribunal’s jurisdiction derives principally from the relevant contract.

However, most rules and many procedural laws provide that the tribunal may
determine its own jurisdiction in the first instance, including where the
validity of the contract is challenged. Nevertheless, jurisdiction may ultimately,
be a decision for the courts of the place of arbitration.

Choice of Arbitrators

How do you choose the arbitrator?

It is usual to agree one or three arbitrators. The parties can agree the
arbitrator and, where there is provision for three arbitrators, it is often
provided that each party nominates one, with the third to be appointed by
an agreed method. As the parties often cannot agree, a contract should
provide a means for appointing the tribunal (“an appointing authority”). This
is often one of the arbitration institutions, but can be a professional body or
other agreed third party.

Why have three arbitrators rather than one?

In an international arbitration the parties will often want the ability to

nominate one of the arbitrators (for example, somebody from their own
country.) However, a three man tribunal is more expensive and is more likely
to present logistical and availability issues.

Does an arbitrator need any qualification?

Not unless the agreement requires this (e.g. “an arbitrator who has worked
in the energy industry”). However, he must be independent/impartial. In a
three man tribunal, all arbitrators should be independent and impartial,
irrespective of how they were appointed.

Is the choice of arbitrator important?

Yes. The tribunal is not only the adjudicator but also controls the process.
Where the parties cannot agree procedural directions or one party is

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uncooperative, it rests on the tribunal to set the timetable, to give directions
for determination of the dispute and to ensure that the arbitration proceeds
efficiently.

Is it wise to specify the arbitrator’s qualifications?

Most provisions do not do so. Depending upon the required qualification, this
can delay or frustrate the appointment of a suitable tribunal, if no
independent person with the required qualification is readily available or is
prepared to accept the appointment.

Are arbitrators expensive?

Arbitrators are normally lawyers or other professionals (e.g. construction

professionals) and their fees reflect their professional rates and the time they
spend. Some institutions limit the hourly charge of arbitrators and some
(notably the ICC) take into consideration the amount in dispute when
determining the tribunal’s fees.

Are there restrictions on who can be an arbitrator and who can be an

advocate at arbitration hearings?

Generally, no (but it is worth checking this if an unusual seat is agreed).

Seat

Is the choice of seat important?

It is vital. The seat or place of arbitration determines the procedural law

which applies to the arbitration. Most arbitrations take place in well known
arbitration centres such as London, Paris, Geneva, Zurich or Stockholm in
Europe, New York and Singapore in the Far East. There are a number of
others.

How would you choose a seat?

There are a number of established arbitration seats. This is partly for historical
reasons and because of perceived neutrality, convenience of location, etc, but
the principal reason is that the local courts are supportive of arbitration and
are not considered to interfere in the process. The language of the local
courts can be relevant if there is a concern that the local court may become
involved, for what ever reason.

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 Do all the hearings take place in the seat?

No. Once the seat is chosen it is treated as the place of arbitration even if
hearings are, for convenience, held elsewhere.

Does the seat govern the substantive law?

No. Most contracts specify the governing law. If a contract does not do so,
then it is determined by the tribunal by reference to such matters as the place
of performance of the contract.

Does the seat affect the choice of arbitrator?

No, save that parties sometimes choose local arbitrators for convenience. Very
rarely do countries require local arbitrators to be involved in matters. So, for
example, an English law arbitration could take place in Geneva pursuant to
the Rules of the ICC (based in Paris) with three arbitrators from Asian
countries.

Procedure

Are arbitration procedures and court procedures similar?

Sometimes, because the underlying principles are similar. However, this is not
necessary and often not desirable. An advantage of arbitration is its flexibility,
allowing the procedures for any particular arbitration, which are determined
by the parties and/or the tribunal, to be tailored to the dispute. Accordingly,
they often differ greatly from court procedures.

How is arbitration arranged/organised?

If the arbitration is “institutional” (e.g. “arbitration pursuant to ICC Rules”)

the process is conducted according to the rules of that institution. These set
out how the arbitration is commenced and provide a framework for the
arbitration.

If the arbitration is not conducted pursuant to the rules of an institution then

it is termed ad hoc (e.g. “any dispute shall be resolved by arbitration in
England”). In these cases, the arbitration is conducted by the parties and the
arbitrator with the support, as necessary, of the court of the place of
arbitration. If the parties in an ad hoc arbitration cannot agree an arbitrator,
for example, they will need to make an application to court, unless they
specify an appointing authority, e.g. an institution or the local law society.

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Where an ad hoc clause is unclear, the court can be asked to establish
whether arbitration has been agreed and/or to appoint an arbitrator and/or
to establish, for example, that the arbitration should proceed in London. One
of the advantages of institutional arbitration is that the rules of the institution
can assist where difficulties are encountered.

Is commencement of the arbitration and service of the proceedings

straightforward?

It should be. Because the process is contractual, agreement can be made for
the service of the relevant notice or proceedings by post or fax. Where the
agreement provides for institutional arbitration, the rules will set out the
process for commencement of the arbitration.

What is the difference between substantive law and procedural law in

an arbitration?

The substantive law is the law the parties choose to govern the contract or
which the arbitrators determine to be the appropriate law, if the contract is
silent. Procedural law is determined by the place of the arbitration.
Accordingly, if the place or seat of the arbitration is London then the
procedural law will be England and, more specifically, the Arbitration Act
1996, which covers such matters as the right to challenge, or appeal,
decisions of the tribunal.

Must you have a national law to govern the parties contractual

obligations?

Most contracts will specify a law governing the parties’ obligations (as
opposed to a procedural law, which follows from the place of arbitration).
However, unlike court proceedings, arbitration proceedings can – subject to
the procedural law and the choice of the parties – proceed pursuant to rules
of law or equity – UNIDROIT or ex aequo et bono, for example. However, this
is unusual.

Can you appeal arbitration awards?

This depends on the procedural law. Most countries have very limited, if any,
right of appeal and institutional rules tend to exclude this.

What about misconduct or bias of the arbitrators?

Arbitrators can be challenged if they are not independent and, in England at

least, awards and decisions can be challenged for serious irregularity by the
tribunal.

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 How wide is disclosure?

This depends on the arbitrators, who are often influenced by the choice of
seat, the nationality of the parties etc. Disclosure can be very restrictive.

Can you provide for an expedited process?

Yes. This can be factored into the agreement. Some rules (for example the
LCIA Rules) provide for expedited formation of the tribunal. If this is likely to
be required it may be preferable not to specify the number of arbitrators or
not to provide for party appointed arbitrators – the institution can then
appoint the tribunal quickly, even where one of the parties is uncooperative.

What about small claims?

Some bodies have specific schemes for small scale consumer disputes. Many
international commercial arbitrations are not high value. There is no special
procedure – it is for the tribunal and the parties to approach them
appropriately.

Is there a limit to the relief that the tribunal can grant?

The tribunal is generally able to grant the relief that a court can grant, going
beyond damages to injunctive and declaratory relief, for example.

Can the parties limit the arbitral tribunal’s jurisdiction?

Yes. The jurisdiction of the tribunal derives from the agreement between the
parties.

What if you need an injunction or interim measures?

Most countries will allow applications to court for an injunction or interim

measures in support of arbitration proceedings. If this is likely to be an issue,
reference to this could be made in the arbitration agreement.

Is arbitration quicker and cheaper than litigation?

If it works well, yes, although one needs to pay for the arbitrator, the hearing
room etc. However, there is no guarantee of this and arbitrations can be long
and expensive. Much depends on the tribunal, which must manage the
process efficiently and take a firm line with recalcitrant parties.

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Confidentiality

Is arbitration confidential?

Arbitration is private. Its confidentiality has recently been called into question
in some jurisdictions and if confidentiality is important, there should be
specific agreement to that effect. However, enforcing confidentiality
provisions can prove difficult.

Treaty Arbitrations

There has been increasing reference lately to BITs and ICSID. What are
these?

BITs are Bilateral Investment Treaties, most of which provide that a party from
one country investing into the other can take the other state to arbitration if
it suffers loss because of unfair treatment. There has been a great increase in
the number of BITs over the last 10-15 years and some high profile
investment arbitrations. BITs sometimes provide that any arbitration should
take place pursuant to the Rules of the International Centre for the
Settlement of Investment Disputes (“ICSID”), an organisation of the World
Bank in Washington. Agreements between states and third parties often also
provide for ICSID arbitrations.

The websites of ICSID, UNCTAD and UNCITRAL contain lists of BITs (although
they are not up to date). See www.icsid.org, www.unctad.org and
www.uncitral.org. The Foreign and Commonwealth Office can provide
information in relation to the UK’s treaty obligations.

Enforcement

What about enforcement of arbitration agreements and awards?

Over 130 countries have signed and ratified the 1958 New York Convention
on the Recognition and Enforcement of Arbitration Agreements (“the New
York Convention”). This provides that signatory countries should uphold
arbitration agreements, and that arbitration awards should, save in limited
circumstances, be enforced as if judgments of the Contracting State courts.
Enforcement of an arbitration award internationally should, therefore, in most
cases, be more straightforward than enforcement of a judgment; there is no
similar convention in place providing for the enforcement of judgments

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 (although the Brussels Regulation is of similar effect in relation to the
enforcement of the judgments of EU courts in other EU states).

What if a party ignores the arbitration clause?

Application could be made to the relevant court for a stay of proceedings.

The enforceability of arbitration agreements, as well as the enforcement of
awards, is reinforced by the New York Convention. The signatory countries
agree to uphold the validity of arbitration agreements as well as resulting
awards.

Costs

What about allocation of costs?

Most arbitration rules, and the procedural laws in the principal places of
arbitration, provide that the tribunal should have discretion to award costs –
in relation to the parties’ legal costs, the tribunal’s costs and the
administrative costs.

If you have any questions on the subjects set out above, please
contact

Simon Morgan
Tel: +44 (0)20 7825 4209
Email: simon.morgan@simmons-simmons.com

David Sandy
Tel: +44 (0)20 7825 4363
Email: david.sandy@simmons-simmons.com

This document is for general guidance only.

It does not contain definitive advice.
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