Arbitration: The Legal Framework

Arbitration: The Legal Framework

One of the first things a lawyer always considers when facing a new legal institution is the question of its legal status and regulation. In this post we are going to discuss the legal framework of arbitration.

In the previous post we anticipated that arbitration has a contractual nature because the arbitration agreement is a contract that, although usually inserted as a clause in a contract, it is construed by its own rules.

Unlike what happens with other legal institutions arbitration has a distinctive nature because there is not a single source of law which determines why arbitration is a legal institution and its content. There are a large number of sources with which arbitration is constructed, including national laws, international treaties, rules and best practices recommended by different institutions and the practice of the arbitral community.

Modern theories consider arbitration as having an autonomous status based on the autonomy of the parties and alien to any national legal order. It is true that the autonomy of the parties plays an important role in the existence of an arbitration agreement but we should also consider that that autonomy cannot be absolute because at certain point we need a national law to interpret the arbitration agreement and consider its validity, to appoint an arbitrator when the parties are unable to reach an agreement or if any party fails or refuses to do so and also recourse to local courts is necessary in order to enforce an award.

We can find different laws affecting arbitration:

Disputes to be resolved by arbitration usually derive from a contract and there is a law the parties have submitted to to govern the contract. That law -the substantive law or the law of the merits- regulates the rights and obligations of the parties under the contract and has to be applied to decide the controversy. The parties usually decide in the contract what will be the applicable law but if they fail to do so, then the tribunal will make that decision either choosing directly an applicable law or applying the conflicts of law rules.

An arbitration needs certain rules of procedure in order to regulate how to start an arbitration, how to make submissions and how to provide evidence. This procedural law can be different from the substantive law and it is usually called the ‘lex arbitri’. We can find it in the arbitration agreement or, if the agreement is silent, the arbitrator may choose which is the applicable rule. But the common approach is to consider the law of the seat of arbitration as the lex arbitri.

As it was anticipated the jurisdiction of the tribunal derives from the arbitration agreement and the applicable law to decide on its validity and scope may be different from the substantive law and the procedural law. It is therefore important to determine the law applicable to the arbitration agreement.

Once an award has been issued if the losing party refuses to voluntarily comply with it, it is necessary to enforce it and that is done in local courts which may be the courts of a different state from where the arbitral proceedings were conducted, depending on where you can find assets. The New York Convention plays an important role in enforcement of awards, but local laws must also be considered because local public policy considerations may make enforcement impossible.

As we see there are a number of different laws that apply to a controversy to be decided by arbitration. Every arbitration must be subject to some legal and regulatory system and the law of the place of the arbitration -the law of the seat- plays an important role in order to govern the arbitration.

The set of rules that regulate arbitration and their relationship has been called the Regulatory Web and it can be summarized as consisting of:

• The law applicable to the agreement of the parties

• The arbitration rules chosen by the parties

• The international arbitration practice

• The applicable arbitration law

Together with this we must also consider international conventions that assure enforcement and also mandatory rules regarding the types of issues that can be submitted to arbitration (arbitrability) and having in mind that party autonomy is the most relevant rule in arbitration.

Lex Arbitri

We will consider in more detail the ‘lex arbitri’ as it is the law that will govern how the arbitration will be conducted. The procedural law for conducting the arbitration is usually the law of the place of arbitration, the law of the seat. This is why the choice of a place for the arbitration is important because the procedures of the arbitration will be governed by the national law of that place.

If the chosen jurisdiction facilitates the arbitration, the parties usually enjoy certain freedom to change rules of procedure and local courts will have a residual role. The agreement of the parties on procedural matters prevails but special attention must be paid to mandatory laws of the place of arbitration, to the principles of due process and to the New York Convention and its requirements for enforcement of the award in a different jurisdiction.

As the parties usually choose a neutral place to conduct the arbitration, this choice only means that the law of that place will govern the proceedings but the law applicable to the merits of the dispute may be different, as the parties may agree.

A tribunal will usually look at the agreement of the parties regarding the procedural aspects of the arbitration which may be included in the arbitration agreement or in the rules of the institution which will manage the arbitration (ICC, LCIA, etc.). Absent such agreement the tribunal usually applies the law of the seat.

Arbitral institution’s rules take different approaches regarding the ‘lex arbitri’:

• Article 19 of International Chamber of Commerce (ICC) Rules gives the tribunal freedom to determine the applicable procedural rules absent an agreement of the parties.

• Article 16 of The London Court of International Arbitration (LCIA) Rules provides that, absent the agreement of the parties the law applicable to the arbitration agreement and to the arbitration ‘shall be the law applicable at the seat of the arbitration ‘.

• Same rule as in LCIA can be found in Article 20.3 of the Madrid International Arbitration Center (MIAC) Regulation.

• The Dubai International Arbitration Center (DIAC) Rules also provides for the law of the seat of the arbitration as the procedural law (Article 2.2).

And where can we find the law of the seat of arbitration?

That law is the national law applicable to arbitration which governs arbitration in that jurisdiction and its provisions must be completed by the agreement of the parties as the law does not cover all the specific issues that may arise during the proceedings. If the parties do not agree on those matters, then the tribunal will make the proper decisions.

Among other considerations the law of the seat is relevant to determine the validity of the arbitration agreement, arbitrability of the subject matter, constitution of the tribunal absent agreement of the parties, challenge to arbitrators, adoption of interim protective measures or court assistance in taking evidence.

The United Nations Commission on International Trade Law (UNCITRAL) adopted in 1985 (amended in 2006) a Model Law ‘to assist States in reforming and modernizing their laws on arbitral procedure so as to take into account the particular features and needs of international commercial arbitration’. More than 70 states have enacted they arbitration statutes following the Model Law.

UNCITRAL also adopted the UNCITRAL Arbitration Rules (last version in 2021) to ‘provide a comprehensive set of procedural rules upon which parties may agree for the conduct of arbitral proceedings’. These rules are generally used in ad hoc arbitrations which are arbitration proceedings that are not managed by any institution.

In the next post we will start discussing the arbitration agreement.