What is Arbitration?

Arbitration, a form of alternative dispute resolution (ADR), is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons (the “arbitrators”, “arbiters” or “arbitral tribunal“), by whose decision (the “award“) they agree to be bound. It is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides.[1] Other forms of ADR include mediation[2] (a form of settlement negotiation facilitated by a neutral third party) and non-binding resolution by experts. Arbitration is often used for the resolution of commercial disputes, particularly in the context of international commercial transactions. The use of arbitration is also frequently employed in consumer and employment matters, where arbitration may be mandated by the terms of employment or commercial contracts.

 Arbitration can be either voluntary or mandatory and can be either binding or non-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.

 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.[3]

The Terms and Wording of the Arbitration Clause

 The clauses should be specific

Arbitration agreements must be in writing in virtue of most arbitration statutes. Proof of the terms of the agreement would otherwise be extremely difficult if not impossible.

Sources of law

States regulate arbitration through a variety of laws. The main body of law applicable to arbitration is normally contained either in the national Private International Law Act (as is the case in Switzerland) or in a separate law on arbitration (as is the case in England). In addition to this, a number of national procedural laws may also contain provisions relating to arbitration.

By far the most important international instrument on arbitration law is the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. Some other relevant international instruments are:

  • The Geneva Protocol of 1923
  • The Geneva Convention of 1927
  • The European Convention of 1961
  • The Washington Convention of 1965 (governing settlement of international investment disputes)
  • The UNCITRAL Model Law (providing a model for a national law of arbitration)
  • The UNCITRAL Arbitration Rules (providing a set of rules for an ad hoc arbitration)

Who decides – the arbitrator or the court?

 In the United States, the loss of the right to arbitrate because of a time bar has been held to be a procedural rather than a substantive matter, and thus, under federal law, it is the arbitrator, not the court, who must decide the issue of timeliness.[4]

 In the United Kingdom, Lord Diplock in The Morviken, after drawing a distinction between jurisdiction clauses and arbitration clauses, indicated that the arbitrator must determine the proper law of the contract and apply that proper law to the interpretation of the arbitration clause. He hinted, however, that if the arbitrator, by relying on a choice of law clause, rendered the arbitration clause null and void under the law of the place where the contract was made, then the arbitrator would have to treat the choice of law clause as null and void. In other words, the arbitrator’s discretion not to apply The Hague/Visby Rules, and specifically art. 3(6), would seem to be very narrow.

Arbitration – Nine Steps To Follow

 The right to stay a suit because of an arbitration clause in a contract of carriage of goods follows most of the rules of forum non-conveniens as they apply to jurisdiction clauses. In fact, an arbitration clause is merely a jurisdiction clause sending a dispute to a different type of forum. Very often the arbitration clause also calls for a different territorial jurisdiction. Assuming that suit has been taken in a particular court and that a motion is made to stay or dismiss the action because of an arbitration clause in the contract of carriage, the following are the steps that the court must take to decide the motion:

 1) The court seized with a motion to stay the suit must first decide if it has jurisdiction in respect of the suit in order to hear the motion; otherwise it must dismiss the suit out of hand. Nevertheless the court may have sufficient jurisdiction to stay the suit by virtue of:

  1.                     I.            its inherent jurisdiction. Such jurisdiction was declared to exist in Williams & Glyns Bank v. Astro Dinami Co.[5] and in more recent decisions as well[6]. The U.K.’s Arbitration Act 1996[7] also recognizes indirectly this inherent jurisdiction. It also is interesting that the Supreme Court Act 1981of the United Kingdom at sect. 49(3) would seem to recognize that such inherent jurisdiction exists, as would sect. 50(1) of Canada’s Federal Court Act ;
  2.                  II.            a provision of law[8]

 2) Assuming it has jurisdiction, the court must next decide whether there is any prohibition in domestic law preventing the stay of suit in order to arbitrate.

3) The court must determine whether arbitration is prohibited in the forum which the clause invokes.

 4) The arbitration clause must be scrutinized to determine whether it validly calls for arbitration of the claim at hand. For example, the clause may contain some illegal provision such as arbitration within six months, which is arbitration before the one-year time limit under The Hague Rules or the time limit as extended beyond one year under the Hague/Visby Rules.

 5) If the arbitration clause is incorporated by reference into a bill of lading, the court must confirm that the incorporation is proper and valid.

 6) If third parties are to be bound by the arbitration agreement, the court must confirm that the specific third parties have been validly included into the terms of that agreement.

7) The court must then decide if it has the discretion to stay or not stay. For example, the New York Convention 1958[9] imposes a mandatory stay, as does the UNCITRAL Model Law[10] and the U.K.’s Arbitration Act 1996 

 8) The court, if it has discretion, may then declare that a) the forum or b) arbitration per se is or is not convenient for the parties in the circumstances.

 9) If the court does exercise its discretion in favor of arbitration, it should stay the court proceedings under terms and conditions which protect the rights of the parties, including the right to security already provided, and confirmation that the delay for suit will not expire, etc.

Four choices of law problems:In arbitration, there are four basic choices of law issues:

1)      the law of the arbitration agreement;

2)      the law of the arbitral procedure;

3)      the law of the substance of the dispute; and

4)      the conflict of law rules applicable to the first three problems.[11]

In most cases, however, at least some of these matters are usually held to be subject to the same law.

1) The law of the arbitration agreement

 The Rome Convention 1980 on the Law Applicable to Contractual Obligations,[12]

at act.1(2)(d), does not apply to arbitration or choice of forum agreements. Accordingly, in European Union States such as France and the United Kingdom, national conflict of law rules governs the proper law of the arbitration agreement.

 The UNCITRAL Model Law 1985[13],at act. 7, defines the arbitration agreement and describes its form, with the result that the Model Law, as adopted in the national legislation of countries party to it such as Canada, governs the arbitration agreement. Nevertheless, it is clear from acts. 34(2)(a)(i) and 36(1)(a)(i) that the parties may choose or indicate the law applicable to the agreement.

 In general, under most national conflict rules, the parties to an arbitration agreement may choose the law that will govern their relationship by expressly stipulating the applicable law. When the parties have not clearly stipulated which law will govern, and when no such choice is implicit in the terms of the contract or the circumstances of the case, the arbitrators should conclude that the law the parties intended was the law with which the contract has its closest and most real connection (i.e. the proper law of the contract).The arbitrators may presume that by selecting a particular forum for arbitration, the parties intended the law of the forum to be the substantive law governing their relationship.

2) The law of the arbitral procedure

 The law of the arbitral procedure, or” curial law” of the arbitration may be freely determined by the parties under the UNCITRAL Model Law 1985, and, absent such agreement, the arbitral tribunal may conduct the arbitration as it considers appropriate (act. 19(1) and (2)). Under the New York Convention 1958, act. V(1)(d), recognition and enforcement of an award may be refused where the composition of the tribunal or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, with the law of the country where the arbitration took place.

 By national conflicts rules too, the procedural law governing the arbitration itself will almost always be the law of the arbitral forum.

Where the parties have chosen London as the “seat” (i.e. the principal or “legal” place) of the arbitration, for example, they are generally taken to have agreed that English procedural law will apply to their arbitral proceedings. Where no “seat” has been chosen, the curial law will be determined by the terms of the arbitration agreement and circumstances when the arbitration began.

3) The law of the merits of the dispute

 The law applicable to the merits of the dispute will, in most cases, be the proper law of the underlying contract. Under the UNCITRAL Model Law 1985, this law may be chosen by the parties (act. 28(1)), failing which the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable (act. 28(2)). The tribunal may decide ex aequo et bono (i.e. based on equitable considerations) or a samiable compositeur 

(permitting the arbitrators to decide the dispute according to the legal principles they believe to be just, without being limited to any particular national law)(act. 28(3)), only if the parties have expressly authorized it to do so. In all cases, however, the tribunal must take account of the “…terms of the contract and shall take into account the usages of the trade applicable to the transaction”.

            The New York Convention 1958 refers to the law applicable to the dispute in permitting a State, in signing, ratifying or acceding to the Convention, to declare that it will apply the Convention only to differences, whether contractual or not, which are considered as commercial under the national law of the State making such declaration (act. I(3)). The grounds for refusing recognition and enforcement of a foreign award include the impossibility of settling the subject matter of the difference by arbitration under the law of the country where recognition and enforcement is sought, and the incompatibility of the award with that State’s public policy (act. V(2)(a) and (b)).

 The U.K. Arbitration Act 1996 is similar in authorizing the tribunal to decide the dispute according to the applicable law chosen by the parties (sect. 46(1)(a)), or “such other considerations as are agreed by them or determined by the tribunal” (sect. 46(1)(b)), thus honoring “honorable engagement clauses” or clauses requiring disputes to be determined in accordance with principles

4) The conflict of law rules

The conflicts rules used to determine the law applicable to the substance of the dispute are chosen by the arbitrators under the UNCITRAL Model Law, art. 28(2) if the parties have not designated the applicable law.


            From our research on arbitration it can be concluded that arbitration is always the better option in terms of solving a dispute between two parties. Instead of going for law suits and wasting time in the court, choosing the form of arbitration to come to a solution is viable. Nowadays choosing the form of arbitration is being practiced worldwide. Through recent studies and research it is found that:

  • Many Multinational Corporations are using arbitration
  • Certain industries, such as insurance, energy, oil and gas and shipping, use International Arbitration as a default resolution mechanism.





[1] Sullivan, arthur; Steven M. Sheffrin (2003). [http://www.pearsonschool.com/index.cfm? locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4 Economics: Principles in action]. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 324. ISBN 0-13-063085-3.

[2] http://www.wikimediation.org/

[4] Louis  Dreyfus Corp. v. Cook Ind.505 F. Supp. 4 at p. 6, 1981 AMC 1550 at pp. 1553-1554 (S.D.N.Y. 1980)

[5] [1984] 1 Lloyd’s Rep. 453 at p. 456 (H.L.)

[6] See, for example, The Sylt [1991] 1 Lloyd’s Rep. 240 at p. 243; Deaville v.Aeroflot Russian International Airlines [1997] 2 Lloyd’s Rep. 67 at pp. 70 and 71.

[7]U.K. 1996, c. 23, sect. 1(c)

[8] The U.K.’sArbitration Act 1996, U.K. 1996, c. 23 at sect. 9(1)

[9] Supra, note 7 at art. II(3)

[10] Under art. 8(1) of the UNCITRAL Model Law,

[11] W. Tetley, International Conflict of Laws, 1994 at p. 391.

[12]80/934 E.E.C., adopted at Rome, June 19, 1980 and in force April 1, 1991; O.J.E.C., No. L 266/1, October 9, 1980.For the text and a brief commentary, see W. Tetley, International Conflict of Laws, 1994, Appendix “F” at pp. 1032-1048.

[13] Adopted by the United Commission on International Trade Law (UNCITRAL) at Geneva on June 21, 1985.