As the globalization of trade increases so has international arbitration. Among states, it is the preferred method of resolving commercial disputes.[1] To what extent states and societal interest are fueling this trend is the topic of this essay. In this analysis, I will discuss these interests, from the origins of arbitration until the present day at the international level. I will examine state laws that exemplify these interests and how they affect current international arbitration.
Commercial Arbitration has been historically characterized by its flexible and informal methods of solving disputes as opposed to applying rig substantive and procedural law, but the original reasoning of these preferred characteristics of adjudication have been the subject of speculation by scholars.[2] Some form of commercial arbitration can be traced back historically to domestic disputes within geographical boundaries of merchants and how many were resolved informally through their own law.[3] During medieval times, merchants across states that sold their products in great fairs solved their disputes following universal customs as fair law (lex mercatoria).[4] These laws were unenforceable under courts of law but were used between traders from country to country and applied by consular courts, guilds, constables, and even municipal officials who protected them and promoted speedy results.[5] With the decline in fairs, so did the use of the informal adjudicating arbitral structure. [6] In England, traditional courts of law remained but they were too cumbersome for merchants. Civil courts were unfamiliar with the trade. Adjudication of commercial disputes channeled through these formal structures were received with unfavorable results Business minded parties sought elsewhere to avoid structure, technicalities, and a protracted process in favor of a speedy resolve.[7] Without any available commercial courts, the resorted to their own arbitration process more akin to equity and reason.[8]
Informal courts coexisted with formal courts albeit with hostility from the later.[9] Courts eventually began recognizing their validity and enforcement.[10] States began to specifically regulate commercial arbitration because commercial activities in society were “too important to be left to private provision.” [11] The discussion of England is important because its where commercial arbitration evolved. [12] While they pioneered commercial arbitration, state court intervention was disruptive and disfavored contractual agreements to arbitrate disputes up until 1855 when it began recognizing arbitration and enforcing its awards.[13] The use of arbitration increased enormously with the emergence of complex international commercial issues being fueled by the industrial revolution.[14] By that time, most trade associations had their own form of dispute resolution.[15] Other than England, arbitration varied with, formal or informal processes and composition depending on the particular geographic location of the state.[16]
Despite setbacks, the strength and widespread use of arbitration as an agreement between merchants to solve disputes evolved over time. However, individual procedural and substantive law of states was detrimental for international commerce. Cross-border commercial transactions, by definition, involve laws of multiple states, none which at the time were uniform. Despite tailored and flexible mechanism of dispute, merchants were still vulnerable to foreign interests that when breached, could directly or indirectly affect commercial interests of the state of origin subject to protection; each favoring the home team which I consider a reasonable assumption.[17]
Attempts of merchants to enforce arbitral decisions of one state in another jurisdiction continued through the begin of the twentieth century. Parties in international commercial arbitration[18] encountered two main challenges. First, the questionable validity of the award by the seat of the state[19] and second, the enforcement by another state. These obstacles began to dismantle with the Geneva Protocol on Arbitration Clauses in 1923[20] and the Convention on the Execution of Foreign Arbitral Awards adopted by the League of Nations in 1927[21]. Contracting states were to facilitate the enforcement of arbitral awards made in territories other than the one where recognition of enforcement was sought. [22] The Protocol had its drawbacks and was not widely accepted.[23] For example, it provided no guidance as to when an agreement was considered valid or inoperative. Another hurdle to enforce arbitration was the condition that enforcement elsewhere required validation from courts of the state where the award was issued.[24] The New York Convention treaty of 1958[25] addressed many of these issues[26]. The fundamental change that the Convention brought to international commercial arbitration was that if the award complied in the form required, it had to be considered prima facie worthy of credit. Some 150 states have ratified the Convention and to this day has stood as the pillar from which international commercial arbitration has developed. [27] It is considered by states as a legal system structured to solve intentional commercial disputes[28] that is beneficial to the interests of their merchants.[29] Hence, member states of the Convention have incorporated its agreements into their own law applicable to international arbitration.
Further attempts to institutionalize international commercial arbitration were agreed to by the signatories of 31 nations in the European Convention on International Commercial Arbitration in 1961.[30] With limited scope and modest number of signatories, it did not obtain significant traction on the world stage.[31] In 1979, the United Nations Commission on International Trade Law (UNCITRAL) adopted uniform rules for procedural arbitration (UNCITRAL Arbitration Rules) designed for “use in ad hoc common law/civil law arbitrations.” [32] The Commission took further steps and in 1985 adopted the Model Law on International Commercial Arbitration.[33] The Model Law intended to provide international arbitration laws for countries that did not have modern laws of arbitration. Most states enacted laws like the Model Law to apply the effects of the NY Convention.[34] Today arbitration is the ordinary and preferred methods of settling international trade disputes.[35] State actively participates by enacting domestic laws that support this process including those governing the dispute[36], the contractual and arbitration agreement[37], its procedures[38] and cross-border enforcement following the NY Convention. [39]
Since recorded history, arbitration has been the interest of states. It has filled gaps of justice that traditional legal structures did not supply. It was and still is used as a private less formal and more effective mechanism to solve dispute amongst states and merchants with the presentation of claims through counsel to an independent and impartial adjudicator.[40] It is a voluntary procedure that supports itself on the agreement of the parties and the willingness to resolve dispute on their own terms through final and binding decisions without referring to a court of law. [41] At the national level, states have enacted arbitration laws that assist their adjudication and validity. At the international level, these laws have limited or no reach. Their validity largely depends on treaties, conventions and laws developed by states for international commercial arbitration.[42]
International Commercial arbitration began and evolved following parallel objectives, structures, and mechanisms of traditional arbitration with similarly ancient roots.[43] Emerging from conflicting coexistence with private procedural processes,[44] states now actively participate by ultimately accepting, supporting[45], policing,[46] and enforcing agreements through legislation enacted to specifically address international commercial arbitration.[47] States also set limits as to the ultimate arbitrability of a dispute by providing boundaries as to what type of law can be settled through arbitration.[48] In the United States for example, antirust and bankruptcy issues can only be resolved through courts. These rights are recognized by the New York Convention. [49]
States have acknowledged that international trade is central to the economic development and the sustainability of a state. They have a vested interest in having a robust arbitration process that supports the needed flow of commerce that allows merchants to trade amongst states minimizing commercial risk. Law governing international arbitration promote integration and uniformity of cross border arbitral disputes.[50] These oversee that trade conflict is managed properly and not used as a tool to grab “the law into their own hands.” [51] At the same time states protect their own interest by supervising what disputes can be arbitrated and what procedures must be followed while retaining arbitration’s unique characteristics.
States that integrate more to world trade contribute to drive economic growth of their society and reduce poverty. [52] By trading, countries get access to a wider consumer and labor market, more affordable goods, and increased technology. It has become more relevant with globalization. International Arbitration has also affected how states conduct diplomacy. Now, multinationals and investors rely less on home state diplomats to intervene on their behalf, as they now have arbitration as a direct recourse to dispute settlement.[53] States interests on international commerce and investors go beyond the protection of merchants and investors whose benefits may cascade towards the overall benefit of society.[54] They follow the aspiring vision of promoting peace and prosperity across borders in a conflicted world. [55]
[1] Alan Redfern, J. Martin Hunter et al., Redfern and Hunter on International Arbitration (6th edn, Oxford University Press 2015) Sec. 1.0.
[2] Earl S. Wolaver, “The Historical Background of Commercial Arbitration” (1934) 83 U. Pa. L. Rev. 132, 144.
[3] United Nations Conference on Trade and Development, Dispute Settlement, International Commercial Arbitration (2005), pg. 19; Lynden Macassey, International Commercial Arbitration, Its Origin, Development and Importance, American Bar Association Journal, July 1938, Vol 24, No. 7, pg. 518.
[4] Wolaver, (n 2) pg.136.
[5] In England, guild and fair courts participated as arbitrators to disputes of some part of the English judicial system that was not justiciable under common law. See, Wolaver (n 2) pg. 144.
[6] Macassey (n 3).
[7] Wolaver, (n 2) pg. 144.
[8] Macassey (n 3) 518.
[9] Macassey (n 3) 520.
[10] Ibid., pg. 520.
[11] Redfern (n 1) Sec. 1.15.
[12] Redfern (n 11).
[13] Macassey (n 3) pg. 520.
[14] Henry S. Fraser, ‘Sketch of History of International Arbitration” (1926) 11Cornell L. Rev. 179, 199.
[15] Macassey (n 8) pg. 521.
[16] Gary B. Born, International Commercial Arbitration (3rd edn, Kluwer Law International 2021) pg. 27.
[17] Merchants doing business in different states could fear bias and discrimination as a foreigner and the application of preferential treatment to residents under their local principles of law. See, Leonard V. Quigley, “Accession by the United States to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards” (1961) 70 Yale L.J. 1049, 1055.
[18] The term “international” distinguishes local or national commercial arbitration from cross-border boundaries.
[19] The law of the seat provides the framework for arbitral proceedings, its recognition corrections or annulment. Born (n 16) §2.04.
[20] League of Nations, Protocol on Arbitration Clauses, Treaty Series, 1923 (vol.27, pg.157).
[21] League of Nations, Convention on the Execution of Foreign Arbitral Awards, 1927, Treaty Series (vol.92, pg.301).
[22] League of Nations, Protocol (n. 20) 27 L.N.T.S. 158.
[23] Leonard V. Quigley, “Accession by the United States to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards” (1961) 70 Yale L.J. 1049, 1055.
[24] Chamber of Commerce of the United states of America, Brief as Amicus Curiae, pg. 7, September 24, 2019, GE Energy Power Conversion v Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020).
[25] United Nations, Conference on International Commercial Arbitration, Convention on the Recognition and Enforcement of Foreign Awards, 1958 (New York Convention).
[26] Id. Articles I- VI.
[27] Id. pg. 29.
[28] Born (n 16) pg. 306.
[29] In the case of the United States for example Congress, acknowledged that the NY Convention would serve the best interest of Americans by submitting their commercial disputes to impartial arbitration that could be enforced in multiple jurisdictions. Born, (n 28) pg. 55, footnote 988.
[30] United Nations, European Convention on International Commercial Arbitration, April 21, 1961, Treaty Series, vol. 484, pg. 349.
[31] The Convention is of little use. Only 31 countries signed. Its application depended on the arbitration be subject to signatories of both- countries of origin and enforcement. See, Redfern (n 1) Sec. 1.29, 2.39.
[32] The UNCITRAL Arbitration Rules were initially adopted in 1976 and revised in 2010, for settling of private disputes, including those where there was no arbitral institution. See, United Nations Commission on International Trade Law, https://uncitral.un.org/en/texts/arbitration/contractualtexts/arbitration, accessed October 17, 2022.
[33] UNCITRAL Model Law on International Commercial Arbitration was adopted in 1985 and subsequently revised in 2006. See, Redfern (N. 1) 1.18.
[34] Born (n16), pg. 46.
[35] Born (n 16) pg. 39.
[36] States have a vested interest in supporting local economies, businesspeople, and ordinary residents as they gain financial opportunities from having structured arbitral seats in their jurisdictions. See, Born (n 28) pg. 53.
[37] Since most disputes are contractual, contract law governs the commercial agreement, depending on the chosen substantive law. There may be other laws to consider and that refers to the arbitration agreement embedded within the contractual agreement which might differ from the law of the contract.
[38] The law that governs how arbitration is conducted and known as the lex arbitri, which is considered the seat of the arbitration. See, Redfern (n 1) Secs. 3.39-3.43. Because, arbitrations are often conducted in neutral grounds, it is common for the seat of arbitration to differ from the law governing the substantive dispute.
[39] States have enhanced their international arbitration laws to make their regimes support to the fullest extent the international process and its enforcement. Born (n 28) pg. 55.
[40] Born (n 16) §2.02[C][1].
[41] Redfern (n 1) Sec. 1.04.
[42] Born (n 16) § 2.
[43] Born (n 16) pgs. 5, 11.
[44] At different times throughout history arbitration had been the subject of mistrust, hatred, hostility, disdain from courts and even considered a threat to justice. Born (n 16) pg. 18. How attitudes changed over time is beyond the scope of this paper.
[45] For example, the Federal Arbitration Act codified the provisions of the NY Convention limiting reasons to vacate an award. These are (1) award procured by corruption, fraud, or undue means; (2) evident partiality or corruption by the arbitrators; (3) misconduct by arbitrators including refusal to postpone hearings for sufficient cause, refusing to hear pertinent and material evidence, or other conduct jeopardizing prejudiced the rights of the parties; or (4) when arbitrators exceeded and exercise their powers in such a manner that it prevents the issuance of a mutual and final award. FAA, ch. 2, 9 U.S.C. §§ 201, et seq.
[46] For example, U.S. and other states give courts the authority to decide the scope and validity of an agreement that is being questioned by the parties. George A. Bermann, “The Gateway Problem in International Commercial Arbitration” (2012) Yale Journal of International Law, Vo. 37:1, pg. 16.
[47] Many states have adopted similar laws to the Model Law. See note 39.
[48] This “nonarbitrability doctrine” has deep historical roots among states. Born (n 16) §6.01. For Example, Article 34(2)(b)(i) of the Model Rule provides for courts to set aside an arbitral award if it finds that the subject matter of the dispute is not capable of settlement by the arbitrator under the law of such state. Article 34(2)(b)(ii) Allows for an award to be set aside if the arbitrator finds that it is in conflict with the public policy of the state.
[49] Article V(2)(b) of the Convention provides that an awards “may also be refused” if “recognition and enforcement of the award would be contrary to public policy”.
[50] Redfern (n 1) Sec. 7.01.
[51] Redfern (n 1) Sec. 7.63.
[52] “[T]here is no doubt that the integration of global markets through trade openness has made a critical contribution to poverty reduction”. See, World Bank Group, World Trade Organization. 2015. The Role of Trade in Ending Poverty. Geneva: World Trade Organization.
[53] Geoffrey Gertz, “Commercial Diplomacy and Political Risk, Global Economic and Development Working Paper,” Brookings Institution, 106, August 2017, pg. 4.
[54] A side note on the role of societal interests that is beyond the scope of this article but that merits further consideration is that private commercial interests have exercised certain degree of influence in the development and enforcement of international commercial laws but not necessarily in the best interest of society and public policy. See, Cutler AC, Private Power and Global Authority: Transnational Merchant Law in the Global Political Economy (Cambridge University Press 2003) pgs. 5, 29.
[55] Mikaël Schinazi, “The Three Ages of International Commercial Arbitration and the Development of the ICC Arbitration System,” ICC Digital Library (2020).
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