What is Arbitration?

Fourteen months ago I started writing this blog. The purpose was two-fold: to write about construction and about arbitration in order to introduce these matters to those not already involved in these fields and willing to learn and perhaps start practicing them. The title of the blog is self-explanatory: Construction Law and Arbitration made easy.

In this first year I have written only about construction. It is time now to start explaining the basics of arbitration. As I said in my first post after 33 years of practicing law in the construction industry I firmly believe that arbitration is the best way to solve complex construction disputes specially in large projects. This is because the most valuable advantage of arbitration (among others that will be discussed in further posts) is the possibility of having the dispute decided by persons who really know the industry and the challenges involving a complex infrastructure contract.

With due respect to judges and courts I found in my practice that they do not always understand the problems involved and the reality of how these contracts are performed.

In this blog I will focus on International Arbitration, its regulation and relevant questions about the proceedings: the arbitration agreement, the appointment of arbitrators, the conducting of the proceedings and the award.

Let’s start.

What is Arbitration?

There is not a commonly accepted definition of arbitration and different scholars have provided several definitions highlighting its main features.

It can be said that arbitration is a mechanism where two parties agree to have their dispute decided by a third impartial person (arbitrator) whose decision is final an binding upon them.

Since early times merchants decided to settle their disputes by asking a reliable neutral third party to decide on their dispute. This alternative method to settle disputes became more and more common over the time and in the nineteenth and twentieth century it was generally accepted.

The main characteristics of arbitration are:

• It is a private means to solve a dispute. This implies that the parties try to resolve their dispute out of the public mechanism of states -the court system- and they intend to keep it private by not accepting other parties in the proceedings and keeping the discussions confidential. This is possible because submissions, hearings and awards are not open to the public as it is the case in the court system.

• Consent is the basis of arbitration. The parties must consent to arbitrate their dispute. Normally the parties enter into an arbitration agreement which is usually a clause in a contract. In rare occasions, once a dispute has arisen, the parties may enter into an agreement to arbitrate. In any case, consent to arbitrate is absolutely necessary because the jurisdiction of the arbitral tribunal stems from a valid arbitration agreement.

• The award issued by the arbitral tribunal decides the dispute between the parties. The tribunal makes a decision on the rights and obligations of the parties in the dispute. The award is issued after an arbitration process is conducted which is intended to be fair to both parties, efficient and expedient and it is based on respect of due process (equal treatment of the parties).

• The award is binding and final. It is binding because the parties decide so when entering into the arbitration agreement. The consent and the agreement to arbitrate are the basis for the arbitral decision being binding to the parties. And it is final because there is no right to appeal against the tribunal’s decision. If a party refuses to comply with the award the prevailing party may obtain the help of a court to enforce the decision. Enforcement is based on International Treaties and the most important one is the New York Convention.

Advantages of arbitration

Traditionally arbitration is meant to have some advantages against the court system:

• Speed. This is the most frequently alleged advantage of arbitration as opposed to court proceedings although this is not always the case: there are jurisdictions where court proceedings develop faster than in others, and sometimes the complexity of the case implies a longer duration of the arbitral proceedings. But considering that there is no appeal in arbitration a final decision is generally reached faster in arbitration.

• Confidentiality. In general, arbitration involves confidentiality because submissions, hearings and awards are not public. But confidentiality very much depends on the applicable law to the arbitration: In the UK arbitration proceedings are presumed to be confidential and in France they are not. If the parties wish their proceedings being confidential they should provide for that in the arbitration agreement. In investment arbitration there is no such a rule of confidentiality as transparency is required when a state is involved in arbitration.

• Neutrality. This characteristic is more appreciated in international arbitration as neither party would like to submit to the other party’s courts and arbitration provides for a neutral forum.

• Flexibility. The parties are free to regulate how the proceedings will develop: procedure, submissions, evidence, witnesses and experts as opposed to rigid procedures in court.

• Selection of arbitrators. The parties can select the person or persons who will decide over the dispute and they can be sure that arbitrators are experts in the subject matter under discussion.

• Cost. Although it is said that arbitration is less expensive than court procedures the reality is that cost depends on the duration of the proceedings and arbitrators must be paid (contrary to judges). But considering again that there is no appeal, substantial money can be saved.

In the next post we will discuss the legal framework of arbitration, the so-called Regulatory Web.