Party Autonomy and the Role of National Courts/Domestic Laws in Arbitration

Arbitration is the practice of resolution of international disputes involving states, individuals and corporations.

“Disputants agree to submit their disputes to an individual whose judgment they are prepared to trust. Each puts its case to this decision maker, this private individual—in a word, this ‘arbitrator’. He or she listens to the parties, considers the facts and the arguments, and makes a decision. That decision is final and binding on the parties—and it is final and binding because the parties have agreed that it should be, rather than because of the coercive powers of any state.”

Increasing world trade, globalization and investment have resulted in a coordinated practice of international arbitration by specialized practitioners who speak a uniform procedural language. This practice rests on institutional rules directed by institutions ranging from the International Chamber of Commerce (ICC), to the London Court of International Arbitration (LCIA) and the American Arbitration Association (AAA), etc. These rules are assisted by domestic arbitration laws inspired by the United Nations Commission on International Trade Law Model Law (UNCITRAL Model Law). The very purpose of these laws is to increase the effectiveness of the arbitral process whilst reducing judicial/court intervention.

‘International’ in the context of this essay on international commercial arbitration denotes a distinction from national systems and those that in some way surpass domestic boundaries and are thus international, or in the words of Judge Jessup, “transnational”. The term ‘commercial’ embraces matters arising from all relationships that are of a commercial character, whether contractual or not. International commercial arbitration has numerous pros as compared to litigation. Effective international enforcement, privacy, confidentiality, lower costs, less delays and the availability of a neutral forum are all pretext to why parties favour international arbitration over litigation.

Parties entering into an agreement voluntarily to submit any dispute arising between them to arbitration is the bedrock of contemporary international commercial arbitration. The first part of this article will expound on the doctrine of party autonomy, discuss the extent of autonomy available to the parties and limits to that autonomy, if any. The second part will employ a discussion on the role of national courts/domestic laws in the context of arbitration.

PART I

Party autonomy is a key principle in international commercial arbitration. The doctrine of party autonomy – initially formulated by academics before application by domestic law – has acquired large-scale acceptability. Parties to an international commercial agreement decide legal rules applicable to that agreement, and in the application of these rules an arbitration tribunal simply carries out their agreement. The scope of autonomy and limits to party autonomy will be discussed later in detail.

“Despite their differences, common law, civil law and socialist countries have all equally been effected by the movement towards the rule allowing the parties to choose the law to govern their contractual relations. This development has come about independently in every country and without any concerted effort by the nations of the world; it is the result of separate, contemporaneous and pragmatic evolutions within the various national systems of conflict of laws.”

The principle of party autonomy is rooted in international conventions and model rules. Article 35(1) of UNCITRAL Rules, Article 21(1) of ICC Rules and Article 42 of ICSID are a few examples of the relevant sections that provide for party autonomy.

Article 35 (1) UNCITRAL Rules:

“1. The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate.”

Article 21 (1) ICC Rules:

“The parties shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute. In the absence of any such agreement, the arbitral tribunal shall apply the rules of law which it determines to be appropriate.”

However, once the dispute has already arisen, allowing parties to choose a different set of law from what they had previously chosen has less science of reasoning, although, it is still expressly provided for in Rome I Regulation, Art. 3(2), REGULATION (EC) No 593/2008 of the European Parliament and of the Council, which states that at any point in time the parties may accept to subject the contract to a different law than that which previously regulated it.

Fundamentally, arbitration is based on party autonomy, however, autonomy is not outright in character and hence is subject to certain curbs. Amongst these exceptions are public policy and mandatory rules. This means if the autonomy of parties is restricted by rules, the authority generated by party autonomy will also be restricted. Pragmatically, this means that arbitrators are also inescapable to limitations. As a result, arbitrators must adhere to party equality and a party’s right to be heard. These principals also consist of an arbitrator’s duty to retain independence and fairness. Owing to this, arbitrators become indirect implementers of public policy and mandatory rules.

Giuditta Cordero associates party autonomy with a closed circuit. She is of the opinion that when a closed circuit cannot be presumed, party autonomy will be limited. A closed circuit meets expectations in situations where a party’s will is adhered to and the award is complied with by the party upon which the award has been imposed by the tribunal, whereas when a losing party does not voluntarily adhere to the award, it becomes invalid or unenforceable and as a result the closed circuit fails. Courts will subsequently intervene and it is in these cases that limitations to party autonomy become relevant.

Although international commercial arbitration is a process detached from the national/domestic system of law, both UNCITRAL Model Law and New York Convention make references to domestic legislation in their limitations. Where public policy conflicts with an award, national law may define what may be subject to arbitration, what rules would apply as to procedure and whether the award shall be valid.

Hovrätt is a case where party autonomy was restricted. A contract between Norwegian and Swedish parties was being arbitrated and the Swedish party contended that they were not contractually restricted as they did not have to meet the formalities of Ukrainian law. An arbitration tribunal viewed the contract properly signed under Swedish law, however, domestic courts set aside the award and as a result, party autonomy was restricted. In another case, Eco Swiss China Time Ltd, the European Court of Justice (ECJ) held an award to be invalid for prospective violation of public policy as the contract violated competition law. Another ruling on the area of public policy is a Russian case, [2006] Ruling of the Western-Siberian District Commercial Court (Russia). For failure of agreement of shareholders to comply with Russian company law, the court held that the enforcement of award would not be in line with public policy.

The principle of natural justice is a double-edged sword that shields parties during an arbitral procedure. Nonetheless, it also obstructs the efficacy of party autonomy by hindering parties’ liberty to contract. Two limbs of the doctrine of natural justice have been incorporated in UNCITRAL Model Law Article 18:

“…the parties shall be treated with equality and each party shall be given a full opportunity of presenting his case.”

Contravention of the principle of natural justice will consequently result in the annulment of an award. Expressions of natural justice formulated out of English legal customs are contained in the Latin maxims nemo judex in causa sua and audi alteram partem. The first Latin expression means that the adjudicator must be unbiased and the latter means that parties shall be given adequate notice to be heard. In Methanex Motunui Ltd v. Spellman, Fisher J held that when contracting parties chose arbitration but desired not to employ the principle of natural justice, inconsistency was created. Thus, arbitration is a mechanism whereby the principle of natural justice should be adhered to.

In Petroships Pte Ltd of Singapore, the court evaluated whether a technical contravention of the requirement of due process served as grounds for refusal of an award. The court voiced that a technical contravention of the due process requirement was not mandatory. Substantial injustice should exist for court to intervene. Jakob Boss Sohne KG held that parties could eliminate the right to hearing in public but did not permit them to exclude their right to a fair hearing. The court dictated that it was not permissible for the parties to withdraw limbs that constituted the principle of natural justice.

The principle of natural justice – being a double-edged sword – on one hand safeguards the parties by making certain that they are not being discriminated against and are afforded the chance to put forward their case. On the contrary, it limits the liberty of parties by formulating its limbs into the integral characteristics of the arbitral process.

Party autonomy persists, despite the limitations noted above. The absence of curbs to autonomy might holistically harm the process of arbitration and may result in arbitration not being a feasible alternative to court litigation anymore.

PART II

The article will now evolve into a discussion pertaining to the role and authority of national courts over arbitration. As noted earlier, arbitration is an autonomous mechanism and operates in a domain free of domestic and national legislation and jurisdiction. By exercising their options, parties have deliberately and expressly turned down the dominion of domestic courts and their unsuitable circumstances. Nonetheless, the parties have accepted that national courts do take a backseat in matters of arbitration. The question is, how far back should the courts lay in matters pertaining to arbitration and when should they intercede? No mechanism of dispute resolution can survive in a vacuum. International arbitration interconnects with national jurisdictions regularly for aid, assistance, efficacy and the legitimacy of its existence. Both New York Convention and UNCITRAL 1985 Model Law ‘authorize national courts to assist rather than intervene’ in arbitration. Therefore, it will be the notion of assisting the arbitral process rather than intervention that we will expand upon.

Courts can get engaged in the international arbitral process at different stages. As per the New York Convention, judicial intervention is restricted to the recognition and enforceability of tribunal awards, and courts which get involved should only be those at the seat of arbitration or enforcement. The UNCITRAL Model Law consists of identical provisions but is more wide-ranging in terms of the character of courts. UNCITRAL Article 6 explicitly states three areas for court involvement: assistance in arbitral tribunal appointment where the appointment procedure fails, review of issues pertaining to arbitral tribunals’ jurisdiction considering terms of an arbitration agreement, and lastly, permission to challenge the awards by parties. Broadly speaking, the involvement of domestic courts can be classified into four periods: prior to establishment of a tribunal, when arbitration commences, during arbitration, and at the stage of enforcement. Domestic courts have a vital policing role in this regard. All domestic courts do in some jurisdictions is ensure the initiation of arbitral proceedings and their continue in an effective and timely fashion.

Prior to tribunal establishment, courts tend to intervene where parties to an arbitration agreement start proceedings challenging the authenticity of the agreement to arbitrate. Because they are parties to an arbitration agreement, respondents want matters to be decided before the tribunal rather than a court. A court’s utmost duty here is to uphold the agreement to arbitrate and it should do this in accordance with the New York Convention and UNCITRAL Model Law. Domestic legislation in different countries varies to the degree the court can review the actuality of an agreement.

When arbitration commences, court involvement exists in the form of help for the appointment of and challenges to arbitrators. Where parties fail at forming requisite provisions for setting up the arbitral tribunal, and where rules for the formation of a tribunal do not exist, domestic courts may need to get involved for assistance regarding the chairing of the tribunal. Moreover, issues relating to the jurisdiction of a tribunal are generally raised at the commencement of arbitration; a successful challenge would lead to the outcome of termination of arbitration. The UNCITRAL Model Law acknowledges that although the tribunal may deal with such a challenge itself, the final determination is for the national courts to make. This could either be the court where the seat of arbitration lies or the court where enforcement is requested.

During the course of arbitration, court involvement arises in different ways, including assisting with evidence, making procedural orders that arbitrators cannot generally make or enforce, or passing interim protection measures. Such involvement is unobjectionable and suitable when tribunals cannot take requisite measures. It is vital, however, to contemplate why the assistance of national courts becomes inevitable.

• Firstly, a tribunal may not possess the requisite capacity. It will not be wrong to judge it as a product of old national laws originating from a time when the ability to provide such measures was considered to fall within the ambit of national courts for logic of public policy.
• Secondly, till the time a tribunal is formulated, it cannot provide for interim measures. The formation of an arbitral tribunal requires time and in the course of that time necessary assets and evidence may dissipate. Recently, institutions have tried to address this cavity by engaging emergency arbitrators who can provide interim aid prior to the formation of a tribunal. However, when no provisions have been provided for in arbitral rules and national legislation, parties may have to resort to the assistance of national courts.
• Thirdly, the support of national courts may be required because a tribunal’s discretion to award interim measures is restricted to the parties to an arbitration agreement. Article 17(2), UNCITRAL Model Law provides that the tribunal can make interim orders only in opposition to the parties. Thus, where a third-party order is sought, help by the national court will be mandated.
• Fourthly, the interim orders made by tribunals miss out on the requirement of finality under the New York Convention, which makes them unenforceable globally. Thus, when an international application of interim measures is needed, parties prefer to apply before domestic courts where execution of the measures is intended. An example of this is the case of Société Sardisud v Société Technip where the Supreme Court refused to enforce an interlocutory injunction on the grounds that it did not constitute an arbitral award within the definition provided by the New York Convention.
• Lastly, where an order is sought ex parte or regardless of intimation to the party against which it is sought, courts are the only resort because rules and regulations governing international commercial arbitration offer a lesser likelihood for such applications.

Post-award involvement of domestic courts is generally bound to happen in two places. When an award is challenged, domestic courts become involved at the place of arbitration, and when a party goes after the recognition and enforcement of an award, courts at the place of enforcement tend to intervene.

Courts also tend to intervene by virtue of ‘injunctions’, which is often a cause for concern. Injunctions have been labeled the gravest troubles in international commercial arbitration. Anti-suit injunctions are not intended for foreign courts but are aimed at defendants who have promised by way of the arbitration clause to not initiate foreign proceedings. Anti-suit injunctions play a significant part in the supervisory role of domestic courts over international arbitration.

Anti-suit injunctions are also deemed to assist the arbitration process. No regulatory provision i.e. the New York Convention or UNCITRAL Model Law, states that courts have a duty to force parties into arbitration. The duty of courts, however, does not expand beyond merely referring the parties to arbitration. The same is reflected in New York Convention, art II, s 3 and UNCITRAL Model Law, art 8, s 1. The bars in enforcing such injunctions vary in different countries. US courts have a higher degree of power when it comes to imposing arbitration upon parties. They may go as far as holding a party in contempt for the non-compliance of an award.

Academics do, however, raise questions as to how far such an injunctions may reach. It is questionable whether the courts’ approach is rational, extending as far as forcing parties that are not named parties in an arbitral contract into arbitration. Many support the narrative that it should be an arbitrator’s jurisdiction to determine, rather than it falling under the ambit of domestic courts. Courts employ varied approaches when considering the issue at hand. Two British cases have observed contrasting verdicts. In UK Film Finance Inc. v. Royal Bank of Scotland, the arbitral agreement consisted of two parties and the court went on to expand the reach of the agreement to cover a third one as well. Contrary to this, in Starlight Shipping Co. v. Tai Ping Insurance Co. the court ruled that it did not have jurisdiction to provide for an order in favour of the manager of the ship.

Anti-arbitration injunctions, however, tend to obstruct the mechanism of arbitration that parties chose. They are used either pre-arbitration commencement or post proceedings initiation. The degree of power granted to anti-arbitral injunctions differ between common law and civil law jurisdictions. Countries adhering to common law mechanisms are non-restrictive and liberal in approach, while civil law adhering jurisdictions are more reluctant. Such injunctions can be allowed not only against the parties but also versus arbitrators if they fall within the ambit of the court’s jurisdiction. Countries that grant anti-arbitration injunctions, such as the UK, keep it for the grave abuse of court procedure.

In the case of Compagnie Nouvelle France Navigation and S.A. v. Compagnie Navale Afrique du Nord, the court provided guidance for allowing anti-arbitration injunctions. The Court of Appeal held that an injunction must not have resulted in injustice to the claimant in the arbitral process. Secondly, an applicant for the order should have satisfied that the carrying on of arbitral procedure would have been oppressive, vexatious, unconscionable and abusive of court power. Canada and US adhere to similar tests to ascertain if arbitration would be oppressive. Switzerland, however, has ruled that injunctions do not go in line with the principle of competence and found it contrary to Swiss law. Swiss courts are consistent in their approach to anti-arbitration injunctions. In another Swiss case, the courts held that where there had been parallel proceedings in question, Swiss national courts must have ensured the use of the principles of is pendens and res judicata to evade conflicting awards.

At any given time, there would barely be a justification for domestic courts to grant anti-arbitration injunctions. At this point, this essay would like to make a few observations:

• Firstly, the principles of competence, separability and party autonomy, all postulate that it should be for the arbitration tribunal to decide whether or not arbitration should proceed.
• Secondly, Article 5 of UNCITRAL Model Law seems to suggest the prohibition of an injunction of this nature in the following words:“No court shall intervene except where so provided in this law.”
• Thirdly, only courts that do not constitute the seat of the arbitration have no jurisdiction to impede the process, and shall do so only in limited events.
• Fourthly, although this kind of injunction may prove to be just in restricted scenarios, it will lead to parallel legal action which will cost time and money.

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Bibliography

• Nigel Blackaby, Redfern and Hunter on international arbitration (6^th Edn, OUP 2015) 2

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• Rev Arb 391 Société Sardisud v Société Technip, [1994], CA Paris

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• C/1043/2005-15SP, Air (PTY) Ltd. V International Air Transport Ass’n, [2005],Court of First Instance (Switzerland)

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The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any other organization with which he might be associated.