“There are three common methods of solving disputes outside the court- negotiation, mediation and arbitration. Arbitration is a more formal process in which disputing sides agree to have a third person to listen to their argument and make a decision for

Introduction

A contract is an agreement between two or more parties with the intention of creating a legal obligation.  Any sort of breach of contract will be enforceable by law and the remedy could be compensation of money or damages ordered by court. Conflicts can sometimes cause problems, but it can also be productive if handled in a responsible way. The goal of our legal system is to settle as many disputes as possible outside the courts. There are three common methods of solving disputes outside the court- negotiation, mediation and arbitration. Negotiation is the most informal. In negotiation, people involved in a dispute discuss their problems and try to reach an agreeable solution. Mediation takes place when a third person, a mediator, helps the disputing parties to talk about their problems. It is a voluntary and is used to solve a variety of disputes. Arbitration is a more formal process in which disputing sides agree to have a third person to listen to their argument and make a decision for them. In this case, the arbitrator acts like a judge by declaring a solution for the disputing parties.

 Arbitration agreement

If a contract is bearing “arbitrary clause”[1], it means the parties have to resolve their disputes through an arbitration process. It is a commonly used clause which binds the parties to a type of resolution outside the court. The arbitration agreement is ordinarily a clause in a larger contract. The dispute may be about the performance of a specific contract, a claim of unfair or illegal treatment in the workplace, a faulty product, among other various issues. People are free to agree to use arbitration concerning anything that they could otherwise resolve through legal proceedings.

An arbitration agreement can be as simple as a provision contract stating that by signing that contract someone is agreeing to arbitrate in the case of any future disputes. A party cannot be forced to arbitrate a dispute unless he agrees to do so. In practice, many fine-print arbitration agreements are inserted in situations in which consumers and employees have no bargaining power. Moreover, arbitration clauses are frequently placed within sealed user manuals within products, or on websites.

Such agreement is divided in two types.

  • Agreements which provide that, if a dispute arise it will be resolved by arbitration.
  • Agreements which are signed after a dispute has arisen, agreeing that the dispute should be resolved by arbitration which is called submission agreement.

In keeping with the informality of the arbitration process, the law is generally keen to uphold the validity of arbitration clauses even when they lack the normal formal language associated with legal contracts.

According to London Court of International Arbitration (LCIA),

“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.

  • The number of arbitrators shall be [one/three].
  • The seat or legal place of the arbitration shall be [city and/or country].
  • The language to be used in the arbitral proceedings shall be [language].
  • The governing law of the contract shall be the substantive law of [jurisdiction].”

Types of Arbitration

Arbitration can be two types:

a)      Binding

b)      Non-binding

Binding means the participants must follow the arbitrator’s decision and court will enforce it. In this decision there is no way of rejecting. In nonbinding, either party is free to reject the arbitrator’s decision and take dispute court as if the decision had never taken place. Binding arbitration is more common.

 Arbitration Procedure

An arbitration procedure can be varied and tailored to suit the needs of the different parties. This is one of the main advantages of using arbitration to resolve a dispute rather than court proceedings. In court proceedings, strict procedural rules must be followed, and parties can incur cost penalties for non-compliance with these rules. On the contrary, there is no stringent arbitration procedure.

It is normally left for the parties to agree an arbitration procedure. In some instances, the procedure may be set out in the contract between the parties. If it is not, the appointed arbitrator may set out the procedure for the parties to follow.

In some cases, the cost of arbitration proceedings may be fixed. This is known as the Fixed Cost Arbitration Procedure. This procedure is designed to limit the costs incurred in arbitration proceedings. Not all disputes are suitable for the Fixed Cost Arbitration Procedure, for example, disputes involving large sums.  The reason for this is that the amount awarded to the successful party in Fixed Cost Arbitration proceedings is capped.

If you think your dispute can be heard under the Fixed Cost Arbitration Procedure than you should consider using it. The benefits of the procedure are:

  • The costs are fixed so you know the limit of costs involved
  • It is normally quite expedient
  • It is possible to appeal the decision of the arbitrator if necessary

There are two popular model clauses are below:

ICC Model Arbitration Clause

All disputes arising out of or in connection with the present contract shall be submitted to the International Court of Arbitration of the International Chamber of Commerce and shall be settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

 AAA Model Arbitration International Clause

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined by arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules

There are few process of arbitration are listed below.

  1. 1.      File a Claim

A claimant initiates arbitration by filing a statement of claim that specifies the relevant facts and remedies requested.

  1. 2.      Answer a Claim 

Then the respondent responds to an arbitration claim by filing an answer that specifies the relevant facts and available defenses to the statement of claim.

  1. Arbitrator Selection
    Arbitrator selection is the process in which the parties receive lists of potential arbitrators and select the panel to hear their case.
  2. Prehearing Conferences
    Prior to the hearing, the arbitrators and parties meet telephonically to schedule hearing dates and resolve preliminary issues.
  3. Discovery 
    Discovery is the exchange of documents and information in preparation for the hearing.
  4. Hearings 
    The parties and arbitrators meet in person to conduct the hearing in which the parties present arguments and evidence in support of their respective cases.
  5. Decision & Awards
    After the conclusion of the hearing, the arbitrators deliberate the facts of the case and render a written decision called an award.

 Validity of Arbitration

Arbitration often allows you to resolve disputes more quickly and cheaply than by going to court. Instead of judges or juries, arbitrators decide if wrongdoing occurred and how to correct or compensate for it.

When the arbitration is over, the decisions of the arbitrators are final and not subject to appeal. If someone is unhappy with the result, he cannot go to court to try again. The arbitrators’ decisions can only be challenged under very limited circumstances—for example, if anyone can demonstrate that an arbitrator was biased. If he wants to challenge an arbitrator’s decision he must do so within three months or less in a “motion to vacate.”

The arbitration clause should be wide enough to encompass all possible disputes and claims – this includes damages claims as well as breach of contract. The words ‘disputes relating to or ‘arising in connection with’ the contract are wider than disputes ‘arising under’ the contract, which a court may interpret as covering only contractual claims.

There must be clear, unambiguous and mandatory submission of disputes to arbitration. For example, a clause that provides that ‘disputes may be referred to arbitration’ might not be effective, depending on the approach of the local courts, to prevent a party from taking the dispute to court.

 Essentials Terms of Arbitration

  • Arbitration agreement should be written to be valid and binding. Such an agreement must satisfy all the essential elements of a valid contract.
  • Signatures of the parties are not necessary but it must be shown that they agreed to the settlement of disputes by arbitration. It is not necessary that the agreement should be contained in a formal document. The record of such an agreement in a clause in the contract or in a letter or memorandum is enough.
  • Arbitrator name is not important. So it is not necessary that arbitrator’s name should be mentioned in the agreement.
  • The agreement may be to refer present differences to arbitration.
  • When there is an arbitration clause in a contract and the contract comes to an end owing to frustration or is avoided on the ground of fraud or misrepresentation. The arbitration clause may continue to be binding. If there was no contract at all, the arbitration clause is not binding.

That means if there is two people involve in a contract and one of them proved fraud clause may continue to be biding and if there was no contract arbitration clause is not binding.

  • The agreement to refer disputes to arbitration is not valid. Such as if the essential elements are not available of a contract it can be fraud or coercion.
  • The construction of an arbitration agreement is not to be thwarted by narrow pedantic interpretation. Meaning that agreement will not be disillusioned by any obscure interpretation.

 Advantages of Arbitration

Followings are found to be advantages of arbitration.

  • Arbitrators often work faster than a judge to dispute.
  • Less costly, this process can be done without appointing lawyers.
  • Appointments are scheduled with the arbitrators at the mutual convenience of all concerned; no other cases compete for attention.
  • Not a public hearing; there is no public record of the proceedings. Confidentiality is required of the arbitrator and by agreement the whole dispute and the resolution of it can be subject to confidentiality imposed on the parties, their experts and attorneys by so providing in the arbitration agreement.
  • Arbitration meeting tend to be less formal than court, so parties may feel more comfortable and confident to speak.
  • The parties decide when and how much time the arbitrator spends on their case, not the court calendar. It saves time also.
  • Limited discovery because it is controlled by what the parties have agreed upon and it is all controlled by the arbitrator.

Disadvantages of Arbitration

  • There is no right of appeal even if the arbitrator makes a mistake of fact or law. However, there are some limitations on that rule.
  • Parties pay by the hours for the arbitrator’s time.
  • The arbitrator’s authority is determined by the contract that the parties sign. Parties must carefully review exactly what issues are to be decided by the arbitrator.
  • Unknown bias and competency of the arbitrator unless the arbitration agreement set up the qualifications or the organization that administers the arbitration, has pre-qualified the arbitrator.
  • There is no jury, in complaint point of view that may be a serious drawback.

 Conclusion

Essentially the most important factors are that arbitration offers a self help route in settling disputes outside the court system where the parties are in greater control over the proceedings. Generally arbitration is more efficient, less procedural and cheaper route to solving disputes although this may not necessarily be the case as arbitral proceedings become more complex. The advantages of arbitration are more evident in cases where expertise in a certain area is required. So when a contract bears arbitration clause it bind the parties to arbitrate with each other in case of any future disputes out o the contract and the parties cannot seek remedy without exhausting the arbitration procedure which is embedded in contract.

References

M/S Bremen v. Zapata Off-Shore Co. (1972), 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513.

 The International Centre for Dispute Resolution is the international division of the AAA which

administers international commercial cases. See AAA website: http://www.adr.org

(visited on Feb 19, 2012)

 http://cms-arbitration.com/wiki (visited on Feb 19, 2012)

 http://en.wikipedia.org/wiki/Arbitration (visited on Feb 20,2012)

 http://www.sec.gov/ ((visited on Feb 21,2012)

 http://www.contactlaw.co.uk/arbitration-procedure.html(visited on Feb 21,2012)

[1]  Information World Mediation WikiMediation

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