International Commercial Arbitration: The Reasons for Success

Chapter 1
International Commercial Arbitration: The Reasons for Success

Historical Background

Arbitration has been characterized as the oldest form of dispute resolution. Its first written evidence comes from ancient Greece, where the process of private adjudication was traditionally endorsed by the recourse to deities and was frequently conducted in the sanctuaries.1 Its intensive development in the area of trade relations was a result of the expansion of maritime commerce in the region of the Mediterranean Sea. Egyptian, Phoenician and Greek trade customs served as an autonomous basis for decisions reached in commercial controversies. In the third century BCE the customs of the sea trade, applied in arbitration, were compiled in the first Maritime Code on the Greek island of Rhodes (re-implemented in medieval Italy in the city of Pisa).2

In the early Middle Ages, along with the decrease of international trade exchange, commercial arbitration became a practice of secondary importance. A revival of urban life in the tenth and eleventh centuries and an awakening of commerce in the age of crusades, as well as the growing exchange with Asia, stimulated the development of financial instruments and the recourse to specialized means of dispute resolution. In medieval France, Germany, Italy and England, arbitration became a regular way of settling controversies, adopted by the guilds of craftsmen in particular areas of trade.3 Arbitral tribunals were also regularly summoned during the fairs and it was generally recognized that the parties whose dispute had been resolved by arbitration did not have a further recourse to the courts. The development of arbitration as a method of amicable and expert dispute resolution was accompanied by the emergence of medieval lex mercatoria – a set of substantive, uniform customs of the international trade, applied in such cases.4

The consolidation of modern nation-States and State-administered justice in the seventeenth, eighteenth and nineteenth centuries to a large extent marginalized arbitration due to the lack of judicial support for enforcing arbitration agreements. In England, traditionally functioning as a significant centre of maritime trade and arbitration, this lack of autonomy of arbitration was expressed in the doctrine of revocability of an arbitrator. It was explicitly formulated for the first time probably in 1609 in Vynior’s Case by Lord Coke, who upheld that before issuing an award an arbitrator could be revoked by a party, as his powers are directly derivative from the will of the parties (which does not affect the binding force of the main obligation in question):

[a]lthough William Wilde, the defendant, was bound in a bond to stand to, abide, observe, etc., the rule, etc., of arbitration, etc., yet he might countermand it, for one cannot by his act make such authority, power, or warrant not countermandable which is by the law or of its own nature countermandable.5

As a consequence, in the cases where an arbitration agreement was concluded, there was no assurance that it would be executed if one of the parties rejected it. On the other side, not only arbitral awards but also pending arbitral proceedings were closely controlled by the domestic courts. This policy discouraged the parties to trade controversies from seeking a relief through arbitration. It also remained in contradiction with the vital interests of the participants to international commercial relations, who sought a neutral forum.

These difficulties were largely overcome in the late nineteenth and twentieth centuries by implementation of statutory law, granting actual effectiveness to arbitral agreements.6 The US Supreme Court recognized this turn, stating in the Marine Transit Corporation v Dreyfus decision that ‘[i]n the light of the clear intent of Congress it is our obligation to shake off the old judicial hostility to arbitration’.7

The change of approach, arising worldwide, HAD gradually led to a renaissance of arbitration as a method of resolving international commercial disputes in the twentieth century. As Arthur von Mehren and Eduardo Jiménez de Aréchaga observe:

arbitration – unlike national-court adjudication – is a dispute resolution process whose venue is contingent and transitory so that the place of arbitration neither represents nor establishes a permanent geographical or governmental relationship with a given national legal system. … The days when national legal systems intervened, as England did through the case-stated system, with on-going arbitrations are largely past.8

In recent decades arbitration, after regaining its anational status, has undergone an impressive revival. In the field of commercial disputes it turned out to be the most successful alternative to dispute resolution by national courts. As Gabrielle Kauffmann-Kohler remarks: ‘[t]he last decades of the twentieth century have seen a phenomenal boom in arbitration, with all the hazards and vagaries that come with sudden success.’9

This process has been accompanied by a growing institutionalization, described as a transition from an informal ‘merchant’s justice’ towards professionalism, legalism and proceduralization.10 As discussed in Chapter 5, this trend has also been criticized for a tendency towards excessive formalization, making ICA increasingly close to litigation.

Definitions of Arbitration

According to René David, arbitration can be defined as

a device whereby the settlement of a question, which is of interest for two or more persons, is entrusted to one or more other persons – the arbitrator or arbitrators – who derive their powers from a private agreement, not from the authorities of a State, and who are to proceed and decide the case on the basis of such agreement.11

Lew, Mistelis and Kröll distinguish the following four key features of this method of dispute resolution:

• an alternative to national court;

• a private mechanism for dispute resolution;

• selected and controlled by the parties;

• final and binding determination of parties’ rights and obligations.12

The parties’ intent is indeed decisive for the selection of arbitration as a method of dispute resolution, as well as for delimitation of its passage, including such vital issues as choice of law or the rules of law applicable to the merits of the dispute, and selecting and/or designing applicable procedural rules. However, while the powers of arbitrators are entirely derivative from the will of the parties, after the commencement of proceedings arbitrators are obligated to remain autonomous and neutral in order to provide an award independently from parties’ influence.

An instrument of control over this sphere, available to the parties when reasonable doubts are raised as to the neutrality of an arbitrator, is the challenging of an arbitrator (analogical to the challenging of a judge). Whereas traditionally the decisions on challenges have remained largely unpublished, there is a recent trend towards introducing more clarity in the process, observable in (among others) the Permanent Court of Arbitration’s occasional disclosure of such decisions.13 In this context, the practice of the LCIA Court to publish challenge decisions on a regular basis,14 introduced in 2006 and explained by transparency reasons, but also by a need to fill ‘the void in guidance’,15 is a remarkable step. The component of control can also be found in the right of the parties to seek, when applicable, for a further judicial review of the already rendered award, but it is usually not relevant to arbitral proceedings still pending (unless it concerns interim awards).

Arbitration and ADR Methods

Arbitration is often discussed in the context of other methods of extrajudicial dispute resolution, known as ADR. The acronym has been traditionally elaborated as alternative dispute resolution,16 although ICC uses it as an abbreviation for amicable dispute resolution.17

As the field of ADR is quickly evolving, the spectrum of techniques in use is also broadening. As a result, the lists of ADR methods proposed by different authors may vary. The following techniques can be indicated as the most common:

• conciliation (sometimes treated as a form of mediation);

• early neutral evaluation/expert determination;

• expertise-arbitrage;

• mediation;

• med-arb (mediation/arbitration);

• mini-trial;

• negotiation;

• neutral listener arrangements;

• non-binding arbitration;

• private judging/‘rent-a-judge’;

• settlement conference;

• summary jury trial.

Some authors adopt a broad definition of ADR, characterizing it as all legally permissible methods of dispute resolution besides litigation.18 According to this view, arbitration should be qualified as one of the ADR techniques. Tom Arnold describes this inclusive approach as specific to US jurisprudence, whereas the narrower concept of ADR as an ‘alternative to adjudicative processes and hence not including binding arbitration which is adjudicative’ is, in his opinion, rather European.19

This sensu stricto concept of ADR assumes that these methods serve as an alternative to adjudication (both litigation and arbitration) and not to litigation only. As a consequence, arbitration is treated as a separate category, not belonging to the ADR area. This view, also adopted in this book, seems to resonate with legal practice, where, in the field of international commercial disputes, arbitration has long become a regular (if not a default) method of dispute resolution. Moreover, as Fali S. Nariman observes, international commercial arbitration, perceived initially as a more expeditious and flexible alternative to domestic courts, has become significantly formalized and rigid – a phenomenon described as colonization of arbitration practices by litigation.20 The demarcation between two adjudicative methods of dispute resolution (litigation and arbitration) on one side and the ADR techniques on the other seems thus increasing, although hybrid services such as med-arb and arb-med are also offered by some arbitral institutions. Practical difficulties, related to their efficient application, might arise though in the context of skills required from an arbitrator who also has to be able to act as a mediator, as well as parties’ willingness to fully collaborate with arb-mediator or med-arbitrator and to disclose sensitive information while facing potential adjudicative procedure before the same person afterwards.

What appears to be disputable is thus the supposed status of arbitration as ‘the only ADR process that can produce binding results without a post-dispute contract’.21 This view, when considered after adopting the sensu stricto definition of ADR, would result in the assumption that an essential difference between arbitration (as well as litigation) and ADR is the lack of definitively resolving mechanisms of the latter. This notion seems to be expressed by the ICC, where arbitration is offered separately from ADR services. The clarification of the acronym as amicable dispute resolution also enhances the recognition of ADR as a set of methods based on processes leading to and supporting eventual resolution of the dispute by the parties themselves: ‘ADR is an amicable dispute resolution procedure based on the goodwill of the parties and the assistance of a neutral third party’.22

Identification of ADR as a set of non-definitive techniques, aimed at achieving settlement, might raise some reservations. Lew, Mistelis and Kröll indicate that in expert determination, expertise arbitrage and private judging, parties to a dispute may decide in advance on submitting their entire case or its selected aspects to the definitive decision by a third party.23 Use of these methods for resolving international business disputes is, however, still limited.

An alternative classification of methods of dispute resolution, based on the subject (delivering the solution) and on the adopted approach, addresses the doubts mentioned before. It does not accentuate the oppositions (ADR sensu largo versus litigation; or ADR sensu stricto versus litigation and arbitration) but focuses on mechanisms for concluding controversies. Having adopted this perspective, Varady, Barcelo and von Mehren24 recognize (after Thomas Franck) three approaches to dispute resolution:

• one-party approach – characterized by power and resulting in imposition of the will of one contestant upon the other;

• two-party approach – characterized by compromise, resulting in a settlement between the contestants;

• three-party approach – characterized by impartiality