Arbitration - Part 1

Arbitration Agreement

The position that Sebastian is facing is a common position that contractors find themselves in. Disputes are bound to occur in the implementation and execution of any contract. The good position is that the contractors identify and point out the channels to resolve the dispute once they occur.  For Sebastian and Belle, they had identified arbitration as the preferred method of resolving disputes in their contracts. The insertion of the words that “any dispute arising from the contract shall be resolved by way of arbitration” was intended to constitute an arbitration agreement. The importance of the arbitration clause is that, in most legal systems, so long as an arbitration clause is valid, the courts are likely to enforce the arbitration agreement[1].

However, the existence of an arbitration clause does not necessarily means that a dispute arising from a contract will be solved smoothly. There are bound to be challenges in the employment of the arbitration clause to resolve dispute where the arbitration agreement missed the important points in its drafting[2]. In Sebastian and Belle’s case, the parties agreed that any dispute arising from the contract shall be resolved by way of arbitration “using the institutional rules to be agreed by the parties”. Such an agreement lacks the most crucial details that may make an arbitration agreement easier to enforce.

It follows that Sebastian will have to contend with the challenges that come with an uncertain arbitration clause. An uncertain arbitration clause like the one in hand lacks the express choice of laws to be applied in case of a dispute, the designation of the seat of arbitration and the location of hearings[3]. In this case, therefore, in the attempt to resolve the dispute, Sebastian will encounter four major issues: the choice of the institution rules, the law to be applied, the seat of the arbitration, and the place (venue) of arbitration[4]. Like it was said in Amin Rasheed Shipping Corporation v Kuwait insurance Co, contracts, or in this case arbitration agreement cannot exist in a legal vacuum. This means that any proceeding on the arbitration has to fill the vacuum created by the silent arbitration clause.

Procedural Rules

In the first place, Sebastian will have to sit down with Belle to identify the institution rules to be applied in the process of arbitration. In the arbitration clause, the parties agree that in case of a dispute arbitration will be conducted “using the institutional rules to be agreed by the parties”. The choice of the institution rules to be applied may look minor when drafting the arbitration agreement but may be a competitive task when a dispute has already arisen. Although the choice of an institution may not affect significantly the outcome of a resolution, the rules applied when “running” arbitration will definitely have an impact. For instance, the London Court of International Arbitrators (LCIA) Arbitration Rules and the International Chamber of Commerce (ICC) arbitration rules may differ in the appointment of arbitrators, the cost of arbitration and the timing of various submissions[5].

If this does not happen, under the English Law (Section 18 of the Arbitration Act 1996), Sebastian may apply to court to exercise its power to appoint an arbitrator. According to Section 18(2) of the Arbitration Act 1996, if there is no agreement to appoint an arbitrator, “any party to the arbitration agreement may (upon notice to the other parties) apply to the court to exercise its power” to make an appointment[6]. This power was exercised in Chalbury Mccouat international Limited v P.G. Foils Limited[7].  Hopefully, Sebastian and Belle may agree on the choice of arbitrator.

The Proper Law of the Arbitration Agreement

The proper law to govern an arbitration agreement has been haunting arbitral process for a long time. Sebastian case is no different. Perhaps Sebastian could have assumed that the choice of English Law as the laws governing the contract was enough to indicate the rules to be applied. It is a common pitfall that most of contracting parties expressly mention the law governing the underlying contract but remain silent on the law governing the arbitration agreement[8].  However, as it has turned out in many court rulings, the laws governing a contract are not necessarily the laws governing an arbitration agreement. In a recent court ruling, Sulamerica v Enesa Engenharia, the Court of appeal ruled that, “even if the agreement forms part of a substantive contract, its proper law may not be the same as that of the substantive contract”[9]. in Section 7, the Arbitration Act 1996, emphasise on the separability principle by stating that, “unless otherwise agreed by the parties, an arbitration agreement.....shall for that purpose be treated as a distinct agreement”.

The decision as to whether the law governing the substantive contract should be construed to be the same law governing the arbitration contract has received different court interpretation. Mustill J, in Black Clawson v PapierWerke noted that “where the laws diverge at all, one will find in most instances that the law governing the arbitration agreement is the same as the substantive law of the contract in which it is embodied and that the law of the reference is the same as the lex fori”[10]. In Fiona Trust & Holding Corp v Privolov, Lord Hoffman ruled that “the arbitration agreement must be treated as a distinct agreement”[11]. In XL insurance Ltd v Owens Corning and C v D, the court has emphasised the distinction of the arbitration agreement from the laws governing the substantive contract. According to Justice Neuberger, the differences in the interpretation of the law governing the arbitration clause have led to a state of “unsatisfactory tension”[12]. However, in most of rulings, the court seem to agree that where the parties have expressly stated the law governing the substantive contract, it is only fair to conclude that the party intended the stated law to govern even the agreement. This is the case in Sonatrach petroleum Corp v Ferell international Ltd, Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd, Sumitomo heavy Industries ltd v Oil & Gas Commission as well as in Leibinger v Stryker trauma GmbH. On this background, it is only fair to conclude that the English law is the governing law of the arbitration agreement.

Sulamerica Test

 In this case, Sebastian might be forced to rely the three test derived in the case of Sulamerica v Enesa Engenharia. In this case, the contestation was between which proper law should apply where the substantive contract had chosen Brazil law as the governing laws while the seat of arbitration was designated to London.  According to the Court Appeal, in determining the proper law to follow, three test have to be performed: i) express choice of law, ii) implied choice of the law, and iii) the law with which the arbitration agreement has its closest and most real connection[13]. This test was agreed by the parties in Arsanovia Ltd & Ors v Cruz City 1 Mauritius holding.

First of all, in Sulamerica v Enesa Engenharia case, the court observed that, unless there are other pointers, the law governing the substantive contract should be construed to be the law governing the arbitration agreement. But even if the English Court was to conduct the Sulamerica Test, it is most likely that it would come to the same conclusion. Although there is no express choice of law, it can be ascertained that by choosing the English law as the law governing the contract, the parties implied that the law also governed the arbitration agreement. More so, in this context, it is easier to satisfy the English law is the law having the “closest and most real connection”. It is therefore most likely that the English law will be the law governing the arbitration agreement.

Seat of arbitration

Even after agreeing on the procedural rules and the proper law of the arbitration agreement, Sebastian will have to overcome the challenge of settling on the choice of the seat of arbitration. In the arbitration agreement that Sebastian entered into, there is no express choice of the seat of agreement. In arbitration, the choice of the seat of arbitration is of utmost importance. The seat can influence the outcome of arbitration in many profound ways.

The seat is not necessarily the venue of arbitration or the residence of the arbitrators; it is a legal term denoting the courts that will have authority to supervise the arbitration process[14]. The seat further denotes how awards can be enforced or challenged, influences the appointments of arbitrators and the legal assistance accorded to the process of arbitration. Generally, the seat is decided based on the formal legal infrastructure and other consideration as being party to the New York Convention[15]. In this case, the parties can decide that the seat of arbitration is London or Glasgow. The significant influence of the seat means that Sebastian and Belle may have problem in making the decision.

 Lack of choice of a seat of arbitration is an invitation to legal challenges. In Shashoua v Sharma, the parties had decided that London would be the venue of arbitration and adopted the procedural rules of the ICC. The law governing the substantive contract was the Indian Law. The agreement was silent about the seat of arbitration. The arbitrators granted the claimant leave to enforce the awards in English court, but the defendant challenged the jurisdiction of English courts arguing that the award could only be enforced in an Indian Court. Following the ruling in C v D that any setting aside of an award can only be done in the courts of seat of arbitration, the seat had to be established. The court relied in Section 3 of the Arbitration Act 1996 which states that a dispute of the seat of arbitration can be determined by “having regard to the parties’ agreement and all the relevant circumstances”. On this ground, the judge ruled that the fact that London was the “venue” of arbitration qualified it as the seat of arbitration.

 Like in Sebastian case, the parties in Dubai Islamic bank PJSC v Paymentech had decided neither the venue nor the seat of arbitration. The seat had to be decided on the basis of Section 3 of the arbitration Act 1996. In Braes of Doune Wind Farm v Alfred McAlpine, the arbitration agreement had settled on the English law and Glasgow as the seat of arbitration. Further the agreement chosen the “courts of England and Wales” to pay the supervisory role. When the dispute on the seat of arbitration was brought before the court, the judge ruled that in reference to section 3 of the Arbitration Act 1996, England was indeed the seat. The reference of Glasgow as the seat merely referred to the place of arbitration. In C v D, Justice Cooke had observed that “...the seat of arbitration and the choice of procedural law will almost inevitably coincide”.

 Taking the consideration of the above determinations, and in complete emphasis of Section 3 of the Arbitration Act 1996, it is most likely that the seat of arbitration in Sebastian case might be in England. As observed earlier, the proper law to govern the arbitration agreement is likely to be English law.

Alternative to Arbitration

            Arbitration is not the only technique through which Sebastian can resolve their conflict. There are other forms of Alternative Dispute Resolution[16]. Before trying to engage in the formal technique, Sebastian can try negotiations. This is where both parties try to engage one another to resolve the conflict. Mediation is also another way where the parties appoint a third party to help them resolve the conflict. Although the negotiations in this case are non-binding, they can bind when a settlement is reached. Litigation is the last resort when all the other techniques fail. Enforcement of the arbitration agreement may lock out other ADR apart from the court process[17].

Q2: English and Scottish Arbitration Act

The coming into force of the Arbitration (Scotland) Act 2010 (the “Scottish Act”) has overhauled the ancient Scottish Arbitration regime and put it at the forefront of the international arbitration. The Scottish Act is so much comparable with the Arbitration Act 1996 (The English Act) but there are few subtle differences[18]. If the arbitration was seated in Scotland as being seated in England, the parties would submit that they would be “governed by Scottish procedural (the lex loci arbitri) rule and to be subject to the supervisory jurisdiction of the Scottish courts”[19].

Since the Scottish Act is analogous to the English Act, there will be no significant difference in the outcome or in the procedures. Both of the arbitration rules are modelled along the Model-Law principles and the respective countries are party to the New York Convention. More similarly, both arbitration rules are drafted in plain English meaning that they share a lot of commonalities. The separability principle is common in both jurisdictions. In close term, the Scottish Act is borrows a lot from the English Act making the two seats almost similar.

 

 

Supervisory Role of the Courts

Like in the English Act, the Scottish Act discourages the interference of the courts to the arbitral process. They believe in the autonomy of the parties[20]. Like Dignwall observes, the arbitration process can only be challenged on three grounds: legal error, substantive jurisdiction, or serious irregularity[21]. However, unlike in England, a discontented party has restricted grounds of appeal to the Inner House, which is the equivalent of the English appellate court. But this difference can be said to be levelled out by the inbuilt reluctance of the English courts to interfere with the arbitration process, more so to the international arbitration[22].

One of the key outstanding differences that can be pointed from the two Acts is the creation of the “arbitral-appointments referees’ who have a supervisory role on the arbitration process[23]. In England, this role is purely reserved for the courts. With this creation, the arbitration process will rarely seek the courts guidance making the process cheaper and faster. Such professional bodies as the Law Society of Scotland, the Chartered Institute of Arbitrators and the Royal Incorporation of Architects qualify to be referees.

            For the tribunal powers, apart from some few emphases here and there, the procedural rules will be just like those of England. Unlike in England where the confidentiality principle is implied in the English common law, in Scotland it is explicitly required in the Scottish Act. The immunity for the tribunal is broader. More importantly, unlike in England where proper law governing a contract can be subjected to rigorous court proceeding (like the Sulamerica Test), if the Sebastian and belle choose Scotland as the seat, the Scottish Act is clear that the Scot law will apply. Furthermore, the Scottish law has two sets of laws: mandatory and default rules. The default rules apply, like in the Sebastian case, where the parties have not expressly provided for the law governing the arbitration agreement.

What should be so clear in the choice of the seat is that the choice will have an overbearing in the enforcement of the award. Like the court ruled in C v D any setting aside of an award can only be done in the courts of seat of arbitration. This is why in Shashoua v Sharma, the court had to determine the seat of arbitration before allowing the enforcement of the award.

In this case, the provision of “arbitral-appointments referees” in Scottish law means arbitration, in Glasgow as the seat, would make the process faster and cheaper. However, since the Scottish is new and barely tested, choosing England as the seat would bring the assured advantages. The English law is mature and predictable. It is also supported by a rich precedent and predictable courts. Judges abhor the rule of law and are free from corruption. In addition, England has a huge pool of arbitration experts. These are the advantages that have made London to be the most preferred seat of arbitration all over the world. They are the same advantages that Sebastian and Belle would not like to miss[24].  

SECTION B: SCOTTISH ARBITRATION RULES

The coming into force of the Arbitration (Scotland) Act 2010 has thrust Scotland in the realm of the international arbitration regime. Before the enactment of the Scottish Act, Scotland was governed by patchy rules spanning in a number of legislation. The shortcoming of these rules is that they were uncertain and contained a lot of anomalies. The unveiling of the new Act has set “the scene for a renaissance of Scottish Arbitration”[25]. It might be too early to evaluate how a true renaissance it will be, but one thing that is for sure is that the new Act contains remarkable features that make it outstanding in the international arbitration regime.

As the “new boy” in the international scene, the Scottish rule has been drafted along the most well known arbitration rules, often incorporating their strengths and improving on their weaknesses. On the face value, it is so much comparable to the England’s Arbitration Act 1996. It is also drafted along the Model law and the New York convention but it contains some remarkable innovations that make it stand alone.

Looking at the objectives of the Act, there are a lot of expectations. In what is referred to as the “founding principles” in Section 1, the act states that: (a) the object of arbitration is to resolve disputes fairly, impartially and without unnecessary delays or expense; (b) parties should agree how to resolve disputes subject only to such safeguards as are necessary in the public interest; and (c) the court should not intervene in an arbitration except as provided by this Act. The Scottish Act is composed of rules of two types: Mandatory and default rules. The mandatory rules apply in cases while the default rules apply to arbitration agreements that are silent on the governing law and the seat of arbitration. This makes the Scottish law comprehensive enough to deal even with those agreements that have no express law.

 

In the first place, the Scottish Act is drafted in ‘plain English”[26]. So far as the international commerce is concerned, English is the widely spoken language. It is therefore not lost that most of the arbitration agreement will be drafted in English. Having a law that is drafted along the language that most of the players can understand is a big plus for the Scottish Act. This is a big debut from the previous Scottish arbitration rules that were drafted in a mixture of the old Scots, Latin and the English language.

When it comes to distinguishing the proper law governing an arbitration contract, the Scottish Act has set to clear the uncertainty that has characterised the international arbitration. The confusion that has marked the arbitration process where the arbitration clause is silent on the proper law governing arbitration agreement has been laid to rest in the Scottish rules. According to Section 6 of the Scottish Act, where Scotland is chosen as the seat of arbitration, unless the parties otherwise agree “the arbitration agreement is to be governed by Scots law”. This is a big improvement to the English Act that has been marked by confusion and contradictory rulings. In English courts for instance, like it was evidenced in Sonatrach petroleum v Ferrell and in C v D, different courts can give different interpretation of the law thereby creating uncertainty.