“An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process” Explain

Introduction

The purpose of a contract is to establish the agreement that the parties have made and to fix their rights and duties in accordance with that agreement. The courts must enforce a valid contract as it is made, unless there are grounds that bar its enforcement[1]. An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside of the courts, and is therefore considered a kind of forum selection clause[2]. The courts may not create a contract for the parties. When the parties have no express or implied agreement on the essential terms of a contract, there is no contract. Courts are only empowered to enforce contracts, not to write them, for the parties. A contract, in order to be enforceable, must be a valid. The function of the court is to enforce agreements only if they exist and not to create them through the imposition of such terms as the court considers reasonable.

International arbitral rules generally allow parties to an agreement containing an arbitration clause to choose the substantive law that will govern disputes[3]. Although the parties may choose the law of a particular jurisdiction, they often specify that “general principles of law” apply. Sometimes an inability to agree on any other law motivates the choice of general principles; sometimes the parties believe the choice will ensure neutral outcomes. In either case, however, the benefits of choosing a neutral forum are reduced because of substantial uncertainty about the content of these general principles.

 Law of contract:

A contract is an agreement entered into voluntarily by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be “damages” or compensation of money. In equity, the remedy can be specific performance of the contract or an injunction. Both of these remedies award the party at loss the “benefit of the bargain” or expectation damages, which are greater than mere reliance damages, as in promissory estoppel. The parties may be natural persons or juristic persons. A contract is a legally enforceable promise or undertaking that something will or will not occur. The word promise can be used as a legal synonym for contract[4], although care is required as a promise may not have the full standing of a contract, as when it is an agreement without consideration.

Contract law varies greatly from one jurisdiction to another, including differences in common law compared to civil law, the impact of received law, particularly from England in common law countries, and of law codified in regional legislation. Regarding Australian Contract Law for example, there are 40 relevant acts which impact on the interpretation of contract at the Commonwealth (Federal / national) level, and an additional 26 acts at the level of the state of NSW. In addition there are 6 international instruments or conventions which are applicable for international dealings, such as the United Nations Convention on Contracts for the International Sale of Goods (Vienna Sales Convention)[5].

The most important feature of a contract is that one party makes an offer for an arrangement that another accepts. This can be called a concurrence of wills or consensus ad idem (meeting of the minds) of two or more parties. The concept is somewhat contested. The obvious objection is that a court cannot read minds and the existence or otherwise of agreement is judged objectively, with only limited room for questioning subjective intention: see Smith v. Hughes.[6] Richard Austen-Baker has suggested that the perpetuation of the idea of ‘meeting of minds’ may come from a misunderstanding of the Latin term ‘consensus ad idem’, which actually means ‘agreement to the [same] thing’.[7] There must be evidence that the parties had each, from an objective perspective, engaged in conduct manifesting their assent, and a contract will be formed when the parties have met such a requirement. An objective perspective means that it is only necessary that somebody gives the impression of offering or accepting contractual terms in the eyes of a reasonable person, not that they actually did want to form a contract.

 Arbitration:

What is arbitration?  It is a less formal proceeding whereby a neutral party, usually a lawyer, is retained by the parties to the dispute and he or she makes the decision as opposed to a judge or jury.  It is frequently touted as being a less expensive, more efficient method of resolving disputes.  However, most arbitrators charge in the range of thousands of dollars per day, the rules of evidence are “relaxed” and there is no or limited discovery to allow you access to the opposing parties documents and witnesses.  In short, although the idea is great in theory, it can be just as expensive as court in the long run.[8]

If you are about to sign a construction contract, it is worth a few hundred dollars to have an experienced construction attorney review and comment on the contract before you sign it.  If you have a construction dispute, the sooner you involve an experienced lawyer, the better off you will be.

Arbitration can be either voluntary or mandatory (although mandatory arbitration can only come from a statute or from a contract that is voluntarily entered into, where the parties agree to hold all disputes to arbitration, without knowing, specifically, what disputes will ever occur) and can be either binding ornon-binding. Non-binding arbitration is, on the surface, similar to mediation. However, the principal distinction is that whereas a mediator will try to help the parties find a middle ground on which to compromise, the (non-binding) arbitrator remains totally removed from the settlement process and will only give a determination of liability and, if appropriate, an indication of the quantum of damages payable.

 Termination of contract:

Termination occurs during the running of a contract and the contract just stops so that rights and liabilities in the future no longer apply. Accrued rights and liabilites (those that have already fallen due before the terminating event) are perfectly enforceable.

This is to be contrasted with rescission where the contract is treated as if it had never been. It is a pre-requisite of rescission that it must be possible to go back to the situation before the contract was made. It is logically impossible to sue for breach of a contract that is successfully rescinded.

Remember, rescission is the remedy available when something has gone wrong during the negotiations for the contract, such as misrepresentation or misleading conduct, unconscionable dealing, undue influence, duress or mistake. Termination is the remedy available where either the contract has been frustrated or one party has committed a breach which is so serious that it justifies the other party putting an end to the contract by terminating it.

Having said all this, it must be pointed out that the usage of these two terms (termination and rescission) is often muddled. Judges quite frequently talk of rescission when they mean termination.

The doctrine of frustration – which is effectively a court order that the contract is no longer binding on either party (the contract just stops in its tracks) – is very rarely considered by the courts. The usual way in which the doctrine is raised is where some disaster has overtaken the contract and one party then fails to perform. The other party then complains that the first party is in breach. The answer to this may be that failure to perform is not a breach because the contract has been frustrated as a result of the disaster. In short, frustration, if successfully argued, is an excuse for failure to perform.

The doctrine, as I have said, is rarely argued successfully. This is because the courts have taken the view that one function of contract is to allocate risk and that, if something does go badly wrong, then this is just a risk which the contract ought to have contemplated. See the passage on p 724 last para from the case of Paradine v Jane in 1647 which reflects the idea that contract promises should be kept, whatever the circumstances. In other words, at the very moment that one party finds it very hard to perform, the other party wants an assurance of performance, or at least damages in lieu, because this is what contract is all about. People are paid to take the risk of difficult performance. The law nevertheless did allow some softening of this absolute principle and developed a doctrine of frustration.

This treatment of frustration will not be as detailed as most of the other areas of the law of contract which we have examined. This is partly because, as already noted, it is a rare in practice and also because we are limited in the time left to deal with the remaining topics in the course.[9]

 Legal principles of arbitration:

Arbitration in the international context involves numerous difficulties, one of the most troublesome of which is the choice of substantive law to be applied in a given dispute.[10] The substantive law of the arbitration may be specified by the parties in their original agreement.[11] In general, parties to an agreement containing an arbitration clause have virtually complete autonomy in selecting the substantive governing law;[12] almost any choice of substantive law by the parties is enforceable, so long as the arbitral award itself is enforceable.[13] Absent an express or implied choice by the parties, the governing law may be chosen by the arbitrator.

Although parties frequently specify the law of a particular jurisdiction as the background law governing the merits of any dispute, they often supplement such a choice, or avoid it altogether, by referring to lex mercatoria, customs of the trade, or general principles of law.[14] Of these three substantive schemes, the last is especially vague because of its broad scope and lack of explication in the literature. Particularly because there is no delineated set of general principles, results become unpredictable, and parties to agreements have little ground on which to base their expectations. Moreover, because general principles of law are an especially popular choice of substantive law when sovereign governments are involved in an agreement, and because such agreements are likely to proliferate as developing nations make long-term economic development contracts with companies from industrial nations,[15] the application of this term will become an even more important issue.[16]

 In many cases the parties simply are unable to agree on a particular national or non-national law and are willing to put off any conflict over the applicable law until the need arises.[17] Arbitrators in such situations have more discretion than in any other case, as they may apply any substantive law that their arbitral rules and other procedural provisions allow. Traditionally, scholars believed that the arbitrator was bound to apply the conflict-of-laws system where the arbitral tribunal had its seat, but recently this view has been challenged; instead, arbitral tribunals now frequently apply the conflict of-laws system they view most appropriate.

Alternatively, arbitrators may apply a variety of other conflict-of-laws standards that have only an indirect foundation in national law. The least significant departure from a national conflict-of-laws system is the cumulative application of the conflict-of-laws systems connected with the dispute. A more substantial departure is the application of the conflict-of-laws system the arbitrator views as most appropriate and most responsive to international commerce. A third, still greater departure is the application of a basic conflict-of-laws rule derived from a comparison of competing systems.[18] The last step before attaining a fully denationalized arbitral procedure is the application of a substantive national law without reference to any conflict-of-laws system.[19]

 The traditional approach in the secondary literature to the problem of general principles of law has been to discuss the choice-of-law issue and to suggest possible justifications for applying such a general substantive standard.[20] However, if these justifications are legitimate, a more important task involves defining the general principles that make up such a standard. In the arbitration context, the best indication of the acceptance of a proposition as a general principle is its frequent invocation by arbitral tribunals and its recognition by scholars.

The International Court of Arbitration (the “Court”) of the International Chamber of Commerce (the “ICC”) is the independent arbitration body of the ICC. The Court does not itself resolve disputes. It administers the resolution of disputes by arbitral tribunals, in accordance with the Rules of Arbitration of the ICC (the “Rules”). The Court is the only body authorized to administer arbitrations under the Rules, including the scrutiny and approval of awards rendered in accordance with the Rules. The President of the Court (the “President”) or, in the President’s absence or otherwise at the President’s request, one of its Vice-Presidents shall have the power to take urgent decisions on behalf of the Court, provided that any such decision is reported to the Court at its next session. As provided for in the Internal Rules, the Court may delegate to one or more committees composed of its members the power to take certain decisions, provided that any such decision is reported to the Court at its next session. The Court is assisted in its work by the Secretariat of the Court (the “Secretariat”) under the direction of its Secretary General (the “Secretary General”).

 Conduct of the arbitration:

1. The arbitral tribunal and the parties shall make every effort to conduct the arbitration in an expeditious and cost-effective manner, having regard to the complexity and value of the dispute.
2. In order to ensure effective case management, the arbitral tribunal, after consulting the parties, may adopt such procedural measures as it considers appropriate, provided that they are not contrary to any agreement of the parties.
3. Upon the request of any party, the arbitral tribunal may make orders concerning the confidentiality of the arbitration proceedings or of any other matters in connection with the arbitration and may take measures for protecting trade secrets and confidential information.
4. In all cases, the arbitral tribunal shall act fairly and impartially and ensure that each party has a reasonable opportunity to present its case.
5. The parties undertake to comply with any order made by the arbitral tribunal.

 Breach of contract and remedies:

Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party’s performance. If the party does not fulfill his contractual promise, or has given information to the other party that he will not perform his duty as mentioned in the contract or if by his action and conduct he seems to be unable to perform the contract, he is said to breach the contract.[21] Breach of contract is a type of civil wrong.[22]

There are three crucial remedies in American law. One is from the traditional law courts of England, and is seen in the form of a payment of money to the victim. This payment is commonly referred to as damages. Compensatory damages compensate an injured victim or plaintiff, and punitive damages punish someone who because of fraud or intentional conduct, is deemed to deserve punishment. Punitive damages serve the function in civil law that fines do in criminal law.

The second category of remedy comes from the Chancellor of England, commonly called the Chancery Court, or, more commonly, equity. The injunction is a type of equitable remedy,[23] as is specific performance, in which someone who enters into a contract is forced to perform whatever promise has been reneged upon. Two additional equitable remedies are the equitable lien and the constructive trust.

The third broad group is declaratory remedies. Common examples are the declaratory judgment and the action to quiet title, and these remedies usually involve a court’s determination of how the law applies to particular facts without any command to the parties.[24] Courts give declaratory remedies about many different kinds of questions, including whether a person has a legal status, which the owner of a property is, whether a statute has a particular meaning, or what the rights are under a contract.

While those are the three basic categories of remedies in American law, there are also a handful of others (such as reformation and recession, both dealing with contracts whose terms need to be rewritten or undone).

 Conclusion:

To date, contracting parties of different nationalities who refer to general principles of law in their agreements have ensured themselves a theoretically neutral, non-national law to govern their agreements. Unfortunately, the use of this vague standard also produces uncertainty and unpredictability because these principles have been inadequately articulated and documented. Both parties and the tribunals arbitrating their disputes therefore need a coherent list of such principles to ease the application of this non-national substantive law. Although this compilation is by definition general and broad, any list is bound to heighten the certainty of those contracting parties who choose general principles as the governing law. Thus, even in its rudimentary form, this list may serve as a source for arbitral tribunals and contracting parties in deriving such general principles. Although much work remains to be done, the list may facilitate the use of general principles of law as the governing substantive law by providing a delineated set of such principles. If so, this may encourage parties to enter into international commercial agreements despite the substantial cultural and legal differences among their countries. In the end, this may prove to be the best way to foster economic development agreements in particular and international trade generally.

 References

http://legal-dictionary.thefreedictionary.com/contracts

http://en.wikipedia.org/wiki/Forum_selection_clause

A. REDFERN & M. HUNTER, LAW AND PRACTICE OF INTERNATIONAL     COMMERCIAL ARBITRATION 72-75 (1986).

http://legal-dictionary.thefreedictionary.com/promise

Willmott, L, Christensen, S, Butler, D, & Dixon, B 2009 Contract Law, Third Edition, Oxford    University Press, North Melbourne.

 (1870-71) LR 6 QB 597

 R. Austen-Baker, ‘Gilmore and the Strange Case of the Failure of Contract to Die After All’ (2002) 18 Journal of Contract Law 1

A. REDFERN & M. HUNTER, supra note 1, at 53-55.

Branson & Wallace, Choosing the Substantive Law to Apply in International Commercial Arbitration, 27 VA. J. INT’L L. 39, 46 (1986).

A. REDFERN & M. HUNTER, supra note 1, at 72-73

von Mehren, International Commercial Arbitration: The Contribution of the French Jurisprudence, 46 LA. L. REV. 1045, 1053 (1986).

Statute of the International Court of Justice, art. 38 [hereinafter I.C.J. Statute], reprinted in CURRENT INTERNATIONAL TREATIES 137 (T. Millar ed. 1984).

A. FATOUROS, GOVERNMENT GUARANTEES TO FOREIGN INVESTORS 21-28 (1962); see also Buffenstein, Foreign Investment Arbitration and Joint Ventures, 5 N.C.J. INT’L L. & COM. REG. 191, 194 (1980)

McNair, The General Principles of Law Recognized by Civilized Nations, 33 BRIT. Y.B. INT’L L. 1 (1957).

http://www.nolo.com/legal-encyclopedia/arbitration-clauses-contracts-32644.html

Branson & Wallace, supra note 10, at 42; Croff, supra note 10, at 623-24

von Mehren, Special Substantive Rules for Multistate Problems: Their Role and Significance in Contemporary Choice of Law Methodology, 88 HARV. L. REV. 347 (1974)

Croff, supra note 10, at 632-33.

Rosett,Critical Reflections on the United Nations Convention on Contracts for the International Sale of Goods, 45 OHIO ST. L.J. 265, 266-68 & n.8 (1984)

http://www.nolo.com/legal-encyclopedia/arbitration-pros-cons-29807.html

http://bizlawfirm.com/all-practice-areas/breach-of-contract/

Glanville Williams. Learning the Law. Eleventh Edition. Stevens. 1982. p. 9

Douglas Laycock, The Death of the Irreparable Injury Rule (Oxford Univ. Press 1991).

Bray, Samuel (2010). “Preventive Adjudication”. University of Chicago Law Review 77: 1275, 1281.