International Commercial Arbitration is defined under section 2(f) of the Arbitration and Conciliation Act, 1996, means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and as defined in this section. International arbitration allows the parties to avoid local court procedures. International arbitration has different rules than domestic arbitration.
Arbitration is a form of dispute resolution that is widely-used alternative to traditional court litigation. For reasons that will be explained, it is particularly useful for the management of disputes arising in connection with commercial agreements and transactions involving parties from more than one country. Arbitration is based entirely on the consent of the parties, meaning that before a party can initiate arbitral proceedings, the disputing parties must have agreed to take their dispute to arbitration. Such agreement is usually found in the form of a dispute resolution clause in a commercial contract between the parties, but it may take the form of an agreement to arbitrate a dispute that has already arisen.
By entering into an arbitration clause or agreement, the parties agree that any disputes within the scope of that agreement that arise will not be heard by state courts, but rather will by an arbitral tribunal of private individuals, usually one or three in number, who act as arbitrators. The arbitration process leads to an award being issued by the arbitral tribunal. The award, which is similar to a court judgment, is final and binding on the parties and can only be set aside on certain exceptional grounds. The arbitral award typically includes findings of fact and conclusions of law and, under the arbitration laws of most jurisdictions, may order any form of remedy or relief that could have been ordered by a court. The arbitral process itself is governed by the law of the place chosen as the situs or seat of arbitration, which need not be the law governing the contract in dispute, and by arbitral rules chosen by the parties. It is usually administered by an arbitral institution. Arbitrators appointed in accordance with the arbitral rules chosen by the parties will hear the dispute in much the same way a judge would in court proceedings but in a more informal and private setting.
Institutional arbitration involves incorporating the rules of the selected institution into the arbitration clause by reference. That institution will then administer the arbitration. Institutional rules are designed to set out a framework for the proceedings comprehensively from beginning to end, so are better suited to cater for contingencies that might arise. This is particularly useful where a counterpart is refusing to co-operate in the arbitral process.
There are many institutions to choose from. The best known arbitral institutions include:
the International Court of Arbitration at the International Chamber of Commerce (the ICC);
the London Court of International Arbitration (the LCIA);
the Singapore International Arbitration Centre (the SIAC);
the Hong Kong International Arbitration Centre (HKIAC);
the Arbitration Institute of the Stockholm Chamber of Commerce (the SCC); and
the American Arbitration Association's International Centre for Dispute Resolution (the AAA/ICDR).
Key characteristics of international arbitration
Arbitration is a voluntary and consensual process. Unlike national courts, an arbitral tribunal will not have inherent jurisdiction to decide a dispute. An arbitral tribunal will only have jurisdiction if all parties to the dispute have agreed to submit their disputes to arbitration. Parties will usually provide for this by inserting an appropriately drafted arbitration clause into their agreement.
One important consequence of the consensual nature of arbitration is that, unlike court judges, arbitrators are often unable to join additional parties to the dispute resolution procedure or consolidate related arbitral proceedings. Arbitral institutions have revised their rules to address this, but it can still be more difficult to join a third party or consolidate two disputes in arbitration than court litigation - in appropriate circumstances third party defendants can be joined to court litigation without their consent if they fall within the jurisdiction of the court.
Arbitration can offer dispute resolution in a neutral forum. Although the courts of the seat where the arbitration is situated may have some role to play in supporting and policing the arbitration, it is generally left to the arbitrators to determine the process to be followed and the merits of the dispute. Often, tribunals will comprise arbitrators of different nationalities, which adds to the neutrality of the process and the decision.
The parties to an arbitration have considerable choice in determining how, where, by whom, and in what language their dispute is resolved. Of particular importance to the parties is the choice of decision-maker. Unlike commercial litigation where disputes are resolved by state-appointed judges, parties to an arbitration may select their arbitrator. This is especially advantageous in the context of a technical matter that requires particular expertise, or where parties are from different jurisdictions and each wants to appoint an arbitrator from their own jurisdiction.
Privacy and confidentiality
Arbitration is particularly advantageous for commercial parties because of the privacy and confidentiality that it can offer. Hearings generally take place in private. Parties can agree that the hearing and evidence, and any other material created or disclosed in the proceedings, be kept confidential, and that they (and the arbitrators) will not disclose any information about the arbitration. In comparison, court documents and hearings are generally public.
Most arbitral laws do not allow for the award to be challenged except in very limited circumstances. In addition, choice of certain institutional rules can further limit the parties' scope to challenge the award. This means that parties avoid the cost of protracted appeal processes.
The ease of enforcement of arbitral awards is viewed as a key advantage of arbitration. Enforcement is facilitated by the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 1958 (the New York Convention). A contracting state is obliged to recognise arbitration awards as binding and to enforce them in accordance with its procedural rules. Over 160 countries have ratified the Convention, including most of the world's leading trading nations.
A contracting state may only refuse to enforce an award if:
a party to the arbitration agreement was under some incapacity;
the arbitration agreement was not valid;
a party was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case;
the award goes beyond the scope of the submission to arbitration;
the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties;
the award is not final and binding or has been set aside;
the subject matter of the award is not capable of settlement by arbitration under the law of the contracting state; or
it would be contrary to public policy to enforce the award.
These provisions are incorporated into the national law of contracting states.
Analysis shows that arbitral awards are usually complied with voluntarily. Where enforcement proceedings are necessary, the New York Convention greatly assists award creditors, although it should be noted that not all states have a good track record of compliance with their obligations under the Convention.
Agreement to arbitrate
As arbitration is a consensual dispute resolution mechanism, a necessary pre-cursor to any arbitration is a valid agreement to arbitrate. This is commonly dealt with by inserting a clause into the principal contract between the parties obliging them to resolve any dispute arising "out of or in connection with" that contract in arbitration. There are a number of key aspects of the arbitral process that may be agreed in the arbitration provision itself including:
the place (i.e. seat) and language of the arbitration;
the number of arbitrators; and
the procedural rules that will govern the arbitration.
Drafting an effective arbitration clause is key. If the dispute falls outside the scope of the clause, or if the clause is invalid for uncertainty, parties could find themselves before the very national court they hoped to avoid. For more information on drafting arbitration agreements see the Ashurst Quickguide on International Arbitration Clauses.
An arbitration clause in a contract operates as a self-contained contract. This means that, even if the main contract is invalid, the clause will still stand and bind the parties, unless it is itself invalid for some reason.
Appointment of the arbitrators
The appointments will be made in accordance with the terms of the arbitration agreement or, if silent, the rules of the relevant institution or national law. It is standard for disputes to be referred to one or three arbitrators. Where three arbitrators are to be appointed, it is common for each party to nominate one and for the relevant institution or the two chosen arbitrators to nominate the third arbitrator who will act as chairman. If a sole arbitrator is appointed, absent party agreement, it is usual for that appointment to be made by the institution or, if ad hoc, a designated appointing authority.
Fees will usually be paid, at least in part, up-front upon appointment of the tribunal. If the arbitration is being administered by an institution, a fee will also be payable to that institution. The rate of fees varies but they are usually calculated either by reference to the time spent by the tribunal members or the value of the dispute.
The powers and duties of the tribunal
The principal duties of the tribunal are to determine the dispute fairly and efficiently, adopt suitable procedures for the particular case and ensure that time and costs are not expended unnecessarily. In order to discharge these duties the arbitrators have a range of powers deriving from:
the arbitration agreement;
the procedural rules; and
the applicable national law.
The procedural rules of the different arbitral institutions vary. In general terms, they provide the procedural framework for the arbitration from start to finish and, in particular, cover: commencement of the arbitration, constitution of the tribunal, conduct of the proceedings, rendering of decisions, and determination of costs.
The institutions revise their rules to keep pace with the perceived needs and desires of the users of arbitration. Certain institutions provide a fast-track mechanism for disputes under a certain value. And increasingly institutions are revising their rules to provide for early determination/summary disposal.
The procedures adopted, although different, typically provide the parties with an opportunity to put forward their case via written submissions together with any documentary, factual and expert evidence. Certain institutions, for example the ICC, favour a Memorial approach which requires a party to provide legal submissions and evidence at the same time. Others, for example the LCIA, prefer a staged approach which requires exchange of submissions, followed by exchange of documentary evidence and then factual and expert evidence.
Where appropriate, there will be interim hearings to agree timetables, and other interlocutory hearings. The arbitration will usually conclude in a hearing in the seat chosen or at a different venue if agreed by the parties. The award itself should ideally be delivered within six months, although often takes longer. Here the institution can add value by encouraging the tribunal to deliver the award promptly.
Awards and challenging awards
The award in an arbitration is equivalent to the judgment in litigation. It is "final and binding" subject to limited rights of challenge. Generally the award must be in writing, be signed by all the arbitrators, contain reasons, and state the seat of the arbitration and the date the award was handed down. Once the tribunal has issued its award it is functus officio and has no further authority to act.
Unlike court judgments, awards cannot generally be challenged except in very limited circumstances. These include where there has been a serious irregularity affecting the tribunal, the proceedings, or the award which has caused injustice to one or more of the parties. So, for example, where the tribunal exceeded its powers, failed to conduct proceedings in accordance with the agreed procedure, or where the award is ambiguous or was obtained by fraud.