April 06, 2013

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Making Arbitration Mischief-proof

- Steven Cannon, Registered Foreign Lawyer [ Eversheds LLP, Singapore ]
- Oomen Mathew, Director [ Eversheds LLP, Singapore ]

Steven Cannon & Oomen Mathew

To be an effective form of dispute resolution, arbitration must result in proper enforceability of awards while discouraging all kinds of mischief from the other party.

Lawyers love to arbitrate. Many disputes that end up in arbitration lend themselves to an array of lawyers' strategies to gain advantage, frequently involving a multitude of opportunities to delay, disrupt and frustrate the process. The beauty of these strategies is that they can be applied over the whole life cycle of the dispute, whether before or simultaneously with the launch of the arbitration proceedings, during the process itself, immediately after receipt of the award, or upon attempts by the successful party to enforce the award. Strategies can be employed both within and outside of the arbitration process, possibly involving courts of multiple jurisdictions.

The sole intention of applying many of these strategies is to cause mischief, whether this amounts to delay, increasing costs or creating uncertainty. More often than not these strategies have absolutely nothing to do with the substantive merits of the case. The beneficiary of such mischief is, almost invariably, the natural defendant i.e. the one who faces the heaviest risk of being ordered to pay.

Once a dispute has arisen, there is no doubt that the creation of such mischief can be within the legitimate interests of the client who employs them upon the advice of their lawyers. Equally, there can be no doubt of the cost to all parties to the dispute, in terms of a substantial increase in costs, exposure, management time and dis-ruption of day-to-day business.

Most parties signing up a commercial contract have a genuine intention to fulfil their obligations in return for taking the benefit of their bargain. If asked at the time of contract formation, most parties would say that the real risk of dispute was the other party failing to perform. Accordingly, at the time of negotiating the contract and the dispute resolution provisions, most parties would envisage themselves as the natural claimant rather than the natural defendant.

In those circumstances, it must be the case that a party should act in its own selfish interest to ensure that, should a dispute arise, the dispute resolution provisions create a smooth process towards a properly enforceable award while limiting the opportunities for the other party to create mischief. This normally means that the parties try to ensure that the arbitration will be conducted, and the award enforced, with minimal interference from the Courts of any concerned jurisdictions. If Arbitration is just a game, why agree to arbitrate?

Unfortunately, litigation in many countries around the world is not a credible way of achieving a fair, timely, affordable and (perhaps most importantly) enforceable outcome. The issues with the Indian justice system are well documented; experience shows that other key locations share problems which are similar if not worse.

The usual disadvantages of using certain courts (namely delay, cost, publicity, incompetence, bias, corruption etc) apart, the primary issue remains that courts of many nations are simply not prepared to recognise or enforce the judgment of the courts of other nations. Experience shows that outside certain 'blocs' (for instance the European Union or the Commonwealth), enforcement is the exception rather than the rule. Your hard-earned judgment may ultimately be worthless in the jurisdiction where the defendant holds its assets.

By comparison, an effective arbitration award obtained in a state which is a signatory to the New York Convention should (in theory at least) be easily enforceable in any other signatory state. As there are over 140 contracting states (including most that you would want to do business with) this easily explains the popularity of arbitration in international contracts.

So how can we minimise the mischief?

Adequate investigation and planning before you execute the contract is the key. There is no 'one size fits all' in international arbitration. The issues that you should look at are:

The Seat of the Arbitration. This does not necessarily mean the location of hearings; indeed in many instances, the hearings can physically take place outside the official seat. The importance of identifying the 'seat' is that the seat of the arbitration will gen-erally determine the court which maintains supervisory jurisdiction over the arbitration and also the law which ap-plies to the arbitration process.

Some courts and laws are arbitration friendly; for instance Singapore has in the recent past, demonstrated a readiness to change legislation to ensure that the parties' choice to submit to inter-national arbitration is fully supported by the courts. In contrast, other courts and legal systems (e.g. India) have in the past shown a willingness to intervene heavily in the arbitration process on various grounds, often leading to costs, delays and uncertainty.

The Location of the Assets.

The seat of arbitration will also be the location of the award for the purposes of the New York Convention and therefore will govern enforceability. Even if the arbitration is to be seated in one convention state, and the defendant's assets held in another, the question of enforceability may still arise. For instance, although India is a convention state, its domestic legislation provides that its Courts will only enforce awards made in those other convention states which the Indian government has named in the Gazette of India.

Only 47 of the 140 plus states have been so named. Accordingly, arbitral awards produced in, for example, Hong Kong (states which have not been gazetted) will not be enforceable against assets held in India. In contrast arbitral awards made in, say, Singapore or London will be enforceable.

Institutional Arbitration

Parties often prefer institutional arbitration (where the arbitration is controlled by, and supervised in accordance with, the rules of a particular arbitral institute) as the alternative is frequently the time consuming, expensive and blunt administration of the arbitration by the legal system of the seat of the arbitration. In addition, if an institution is not identified, there may be unwanted Court interference from outside the seat of arbitration; for instance, Indian Courts have in certain circumstances, seized jurisdiction in respect of the conduct of an arbitration seated outside of India. The risk of such interference and delay can be mitigated by careful drafting of the arbitration clause.

The Institution

If you choose an institutional arbitration, which arbitral institution do you nominate? There are many issues to consider, including the cost of the tribunal, the location of the parties, the powers available under the rules (in particular, the joining of other parties and the power to make effective interim orders), the familiarity of the local system and acceptability of any particular regime for political or commercial reasons. Some institutions may mean that you are seated in a particular jurisdiction by default and you may want to consider this carefully to ensure that the location is sufficiently 'arbitration friendly' for your needs.

There is perhaps a more important point; for the reasons explained above, if there is a prospect of a party wishing to enforce an award in India, then that party must be very careful to ensure that the choice of a particular institution does not inadvertently mean that the award is not made in a state which has not been "gazetted", and therefore is unenforceable (for instance Hong Kong). As above, in choosing any institution, parties should be careful to specify the seat of arbitration to avoid any unwanted surprises.

The drafting of the clause

Most institutions provide model arbitration clauses. However, before adopting them wholesale, it is worth giving careful consideration as to whether the law of any of the states that the contract, or arbitration clause, touches upon require amendments to such clause. Again, the position in India is a good example of this; the Supreme Court has found that an Indian court may have the power to set aside a foreign arbitral award on wider grounds than those set out in the New York Convention unless those specific powers under the Indian Arbitration and Conciliation Act 1996 are excluded.

conclusion, if you plan to perform your contractual obligations, it is in your interests toDirectorensure a clean route to recovery. Often, although not perfect, a well thought out and tailored arbitration clause will be the best option.


Disclaimer - "The views expressed in this article are the personal views of the author and are purely informative in nature. The author does not guarantee the accuracy or currency of the data included in this article and accepts no responsibility for any consequence of their use." Judgement appears as Judgment in the article as per the advice of authors.

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