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Arbitration defined
“Arbitration” has a contractual and a judicial element.
It can be defined as a private and consensual form of adjudicative dispute resolution based on an agreement between the parties to refer a current or future dispute between them arising from a defined legal relationship to an impartial third party appointed by the parties (the arbitral tribunal) to settle their dispute in a judicial manner after hearing both sides and to be bound by the result.
Pursuant to the Model Law on International Commercial Arbitration promulgated by the United Nations Commission on International Trade Law (UNCITRAL) in 1985 (the “UNCITRAL Model Law”), an arbitration may be defined as an “international” arbitration if:
Institutional arbitration
An “institutional” arbitration is an arbitration conducted pursuant to the rules of an established arbitration institution. In institutional arbitrations, certain procedural steps, for example the appointment of the arbitral tribunal or service of documents, may involve or be administered by the president or secretariat of the institution (see further below).
In the area of international commercial arbitration, there are a number of leading international arbitration institutions, such as the International Court of Arbitration of the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the Swiss Chambers of Commerce and Industry, the Deutsche Institution für Schiedsgerichtsbarkeit (DIS) and others.
In addition, most countries have their own commercial arbitration institutions which deal both with domestic and international arbitrations.
There are also a number of specialist trade associations which administer their own arbitration schemes, dealing with disputes concerning, for example, particular internationally traded commodities, or shipping. Leading examples of such specialist arbitration schemes are those set up by the Grain and Feed Trade Association (GAFTA), the Waren-Verein der Hamburger Börse e.V., the London Metal Exchange (LME), the German Maritime Arbitration Association (GMAA) and the London Maritime Arbitrators Association (LMAA). Many countries also have arbitration institutions which deal primarily with disputes in the construction industry.
Most arbitration institutions have published their own arbitration rules, which parties may incorporate into their arbitration agreements by reference, using standard form arbitration clauses suggested by these arbitration institutions. Sample clauses recommended by selected leading arbitration institutions are set out in Appendix 1 to this Guide and the arbitration rules of all of the main arbitration institutions, and many more, are set out in Appendix 4.
If institutional arbitration rules are adopted by the parties in their arbitration agreement, these rules replace (to the extent permitted by the substantive law governing the arbitration agreement and the procedural law governing the arbitration proceedings, and to the extent that the parties have not agreed otherwise) the statutory arbitration procedure provided for by the national arbitration laws of the country where the arbitration is to take place (or has its juridical “seat”). Most arbitration institutions also have a secretariat which, in return for payment of a fee, will assist the parties with the administration of their arbitration proceedings and with constituting an arbitral tribunal by appointing arbitrators where this cannot be achieved by agreement between the parties.
The advantages for the parties to an arbitration agreement of agreeing to the rules of an international arbitration institution, and thereby benefiting from the services provided by that institution in relation to any arbitration which arises, may include the following:
The disadvantages of institutional arbitration are that:
Ad hoc arbitration
An ad hoc arbitration is an arbitration pursuant to an arbitration agreement between the parties which does not specify an arbitration institution to provide administrative services and/or the procedural rules pursuant to which an arbitration shall be conducted. When agreeing to an ad hoc arbitration, the parties can either design their own arbitration procedure to suit their particular requirements, refer to “non-institutional” arbitration rules such as the UNCITRAL Arbitration Rules, or simply rely on the arbitration law of the country where the arbitration has its seat to provide the procedural framework for their arbitration proceedings.
There are advantages and disadvantages connected with both institutional and ad hoc arbitration. As a general rule, however, parties are well-advised to agree on arbitration administered by one of the leading arbitration institutions. The main international arbitration institutions regularly revise and update their rules, and they are generally keen to ensure that the parties, having chosen their institution, benefit from the advantages outlined above. For example, unlike in ad hoc arbitration proceedings, the institution may exercise some informal control over the speed at which the arbitrators deal with the matter and the fixing of the arbitrators’ fees.
This Guide will explore the national arbitration laws applicable in a large variety of jurisdictions including some of the leading European arbitration centres, China, the Middle East and South America, and provide selected reference materials on international commercial arbitration. Even in an international context, national arbitration legislation remains relevant. Firstly, it provides back-up procedures, which apply if the parties have not adopted a specific set of institutional arbitration rules in their arbitration agreement, or have not included in their arbitration agreement rules dealing with the specific procedural issues which arise. Secondly, there are a number of important areas in which the application of national arbitration law is mandatory even where the parties have agreed upon an ad hoc procedural framework or to subject their arbitration to institutional arbitration rules.
Thus, not only the national arbitration laws of the country in which the arbitration has its (juridical) seat, but also the national arbitration laws of countries where the arbitration proceedings or some part of them take place, where relevant evidence or assets are located, or where an arbitration award is to be enforced, may apply to the same arbitration proceedings to the extent that the arbitration proceedings affect that country and may confer jurisdiction on the national courts of that country to deal with issues arising from such arbitration proceedings.
National arbitration law continues to determine, in particular, issues such as:
Because arbitration is based on the consent of the parties to submit their dispute to arbitration instead of State Courts, arbitration has been described as “privatised court proceedings”. Court and arbitration proceedings are essentially adjudicative processes and a number of key features of arbitration proceedings are similar to State Court procedures. Following constitution of the arbitral tribunal, the parties file their submissions. Thereafter, they produce their evidence (which may be documentary, written or oral, or a combination of all three). There will usually be one or more hearings before the arbitral tribunal. Therefore, the parties will normally have their “day in court”. Following the substantive hearing, the arbitral tribunal will deliver its award which, if not satisfied, may then be enforced in the same way as a court judgment.
It is important that due process considerations are satisfied when parties set out to resolve their disputes by arbitration (indeed, this is one of the main concerns of the arbitration laws discussed in this Guide). However, it would in most cases and, in particular, in an international dispute come as a surprise and prove unsatisfactory if arbitrators simply copied court procedures. Such an approach does not make use of the principal advantage of arbitration over court litigation: that of flexibility. A party aware of the potential flexibility of arbitration proceedings may have an advantage over his opponent by seeking to agree or asking the tribunal to adopt procedures appropriate to the nature of the dispute in question.
The speed and efficiency of “look and sniff” commodity arbitrations are only one example of how arbitration can help parties to resolve their disputes speedily and efficiently. Indeed, one of the key features of the arbitration laws discussed in this Guide is that (in keeping with the objectives of the UNCITRAL Model Law) they provide the parties with a large degree of autonomy in the conduct of their arbitration proceedings, and the arbitrators with wide-ranging procedural powers, to ensure that the conduct of any arbitration is proportionate and appropriate to the issues in dispute, subject only to such safeguards as are necessary in the public interest.
Arbitration/litigation
Litigation seeks to resolve disputes between parties in public proceedings before a judge in a court of competent jurisdiction provided by the State; the judge obtains his authority to act in the proceedings between the parties from the State.
Arbitration, by contrast, is a private (and generally confidential) form of dispute resolution based on an agreement between the parties to refer a current or future dispute between them to arbitration. Instead of a judge, the parties appoint an arbitral tribunal (usually consisting of one or three arbitrators) as an impartial third party to resolve their dispute in a judicial manner after hearing both sides, and agree to be bound by the result. The arbitral tribunal obtains its authority to act in the arbitration from the agreement of the parties to refer their dispute to arbitration. The members of the arbitral tribunal need not be lawyers or legally qualified and may be selected for their specialist knowledge of particular fields in commerce, industry, science, etc.
Arbitration/ADR
The term Alternative Dispute Resolution (“ADR”) covers a wide range of dispute resolution techniques ranging from structured negotiation, through mediation and conciliation to adjudication, early neutral evaluation, expert determination, mini trial and many others.
The common characteristic of mediation and conciliation, in particular, is that they aim to produce an amicable settlement between the parties while avoiding formal proceedings, and thereby to create a “win/win” solution to the dispute from which both parties benefit without there necessarily being a winner and a loser. These methods seek to neutralise the adversarial nature of formal legal proceedings.
Although ADR can be a useful tool to deploy either before or during litigation or arbitration proceedings, the success of ADR is dependent on the continuing co-operation and goodwill of the parties: they need to be prepared to settle their dispute by agreement because no solution can be imposed upon them. However, once a substantial dispute has arisen between the parties, the scope for party co-operation may often already have been exhausted. In such circumstances, there must, as a last resort, be a mechanism by which one party can enforce its rights as against the other and obtain a binding and enforceable ruling from an impartial tribunal. Only litigation or arbitration can provide such a mechanism.
The tribunal
In arbitration the parties are free to choose their own tribunal and can appoint an arbitrator with special technical or commercial qualifications, expertise, and knowledge of the subject matter of their dispute, of the technical terminology, and of the customs of their trade. This can contribute to the overall efficiency, speed and cost-effectiveness of the dispute resolution process because an arbitrator chosen for his specialist knowledge or experience of a trade, industry, product or process does not need lengthy technical explanations of such matters, as a judge may do. Also, an arbitrator’s award may be better reasoned because of a more thorough understanding of the issues underlying the dispute.
Having said this, in most disputes the substantive issues between the parties will raise primarily difficult questions of law. In such a situation, it may be more prudent for the parties to choose legal proceedings in the Courts or legally qualified arbitrators. In many areas of law where specialist know-how is required in order to be able properly to determine the dispute (examples are international construction projects or post M&A disputes), arbitration can offer advantages over State Court proceedings, because the parties can ensure that the members of the arbitral tribunal are experienced in this area of law. A further advantage of arbitration in this respect is that there is continuity in the composition of the tribunal appointed to settle the dispute, unlike court proceedings in many countries where a number of different judges may be involved in a case at its various stages. An arbitrator is in principle appointed to deal with a particular dispute from beginning to end. This continuity enables the arbitrator to get to know the parties, their advisers, and the case as it develops. Should the opportunity arise, he or she is therefore well placed to guide the parties in developing a suitable procedure for resolving their dispute (and perhaps in reaching a negotiated settlement in the course of the proceedings).
On the other hand, the powers which may be exercised by an arbitral tribunal are more limited than those conferred on a court of law. Should it become necessary for an arbitral tribunal to take enforcement steps to deal properly with the case before it (in relation to interim protective measures for example, or compelling the attendance of witnesses to give evidence before it), such action can generally only be taken indirectly by the arbitral tribunal with the assistance of the courts.
Representation
In arbitration the parties can also decide whether they want to be represented in the proceedings by a lawyer, or by a technical expert, or by any other person of their choice, or whether they prefer to dispense with representation altogether. Generally in court proceedings, corporate parties are required to be represented by advocates qualified in the jurisdiction of the relevant court.
Flexibility
A major advantage of arbitration is its flexibility. Arbitration does not need to follow established court rules and can therefore take better account of the fact that the resolution of different disputes may require different approaches.
The parties to an arbitration are given wide autonomy and are able to exercise greater control over the dispute resolution process than in court proceedings. They may design the arbitration process so that it is best suited and appropriate to dispose of the issues in dispute between them in order to meet their commercial and other requirements.
In particular, in international disputes with parties from different jurisdictions and legal cultures, this flexibility is a major advantage of arbitration compared to State Court proceedings, as the parties and the arbitral tribunal are able (and in fact expected) to adapt the proceedings to the individual circumstances of the case taking into account the different legal background of the parties (for details see below).
A further advantage of the flexibility of international arbitration is that the parties may agree on measures to reduce costs and to speed up the proceedings. For example, they may do the following: adopt fast track procedures aimed at resolving the dispute as quickly as possible; limit the evidence which may be presented to the arbitrator; (in jurisdictions which provide for disclosure of documents, such as England) limit the extent of disclosure of documents and take further measures to streamline the proceedings. Often, by adopting the rules of arbitration of an international arbitration institution in their arbitration agreement, the parties will enable themselves to benefit in those respects since those rules will authorise the arbitrators to adopt such measures if they consider them to be appropriate.
Furthermore, the parties may also agree to make the arbitration process more convenient by holding hearings in unconventional places (for example, on a construction site, on board a ship, or indeed in cyberspace (i.e. so-called ‘online arbitration’), or at unconventional times (for example, by making use of video-link facilities while bridging different time zones), or by communicating by e-mail.
Finally, the parties may choose the substantive law to be applied by the arbitrator in arriving at his decision; or they may agree that the arbitrator does not have to make his decision based strictly on the basis of the law but based on other principles, such as trade usage, or even ex aequo et bono (i.e. on the basis of equitable principles of fair dealing), or under the principles of the lex mercatoria (i.e. internationally recognised principles of merchant law and trade customs).
Speed
Arbitration proceedings have the potential to be speedier than court proceedings, particularly in countries with over-burdened court systems. The parties can control the procedure applied to the arbitration proceedings, may agree a more or less strict timetable and have only limited bases for challenging the final award of the arbitral tribunal. There is, however, no guarantee that arbitration will necessarily save time compared to litigation. Arbitration is to a certain extent consent-driven and arbitrators have less robust armoury in the face of a recalcitrant party than a court judge. In addition, an obstructive party can sometimes seek to delay the arbitration proceedings by invoking the supervisory jurisdiction of the courts at the seat of the arbitration.
Quicker and cheaper proceedings, such as summary proceedings to enforce payment of liquidated debts, are sometimes available in the courts. In the early stages of any dispute the immediacy of arbitration may be less than that of court proceedings because it may take time for the arbitral tribunal to be constituted. But in some jurisdictions the courts are so over-burdened that even this impediment may result in a significantly earlier arbitration award than any court judgment. This is particularly the case if the judgment rendered by a State Court is subject to an appeal on facts and law as this will significantly extend the duration of the proceedings before a final judgment is rendered.
Costs
Arbitrating a dispute rather than taking it to court may result in a saving of costs, but arbitration is not necessarily a cheaper method of resolving disputes than litigation. In arbitration proceedings the fees and expenses of the arbitrators must be paid by the parties. It may also be necessary to pay the administrative fees and expenses of an arbitral institution. In particular the fees and expenses of the arbitrators can be considerable, namely, when they are assessed by reference to the amounts in dispute. Rooms for meetings and hearings and other services also have to be paid for by the parties to arbitration proceedings. In addition, although the losing party may be ordered to pay some or all of the
winning party’s legal costs, the winning party may in practice end up paying such costs himself if the losing party is impecunious.
In litigation, the services of the judge and court officers, and the premises for hearings, are provided by the State and covered by the court fees (which tend to be lower but may be considerable as well).
Confidentiality
Arbitration is a private process and hearings are normally conducted in private. Court hearings are generally held in public. In arbitration the documents produced by the parties, and the arbitrator’s award, generally remain confidential; it is therefore easier for the parties to avoid damaging publicity, trade secrets can be preserved, and sensitive commercial information protected. This may also help to maintain a valuable business relationship between the parties for the future. Not all jurisdictions in which an arbitration may take place hold that arbitration is confidential as a matter of principle. But, if there is any doubt, confidentiality provisions can be (and often should be) built into the arbitration agreement or enshrined in a separate confidentiality agreement. Such provisions are usually upheld in most jurisdictions.
Certainty
Arbitration may result in the rendering of a definitive decision more quickly than in litigation proceedings. Under modern arbitration statutes, the arbitration award is normally final and binding, with only limited grounds for any challenge of the award. Any right there may be to appeal or challenge an award may be further restricted in the arbitration agreement. In a commercial environment, where all parties need to know where they stand as soon as possible, this can be a considerable advantage over litigation where obstructive parties can delay the final outcome of a dispute for years by pursuing a protracted series of appeals. If necessary, an arbitration award can in most circumstances readily be enforced through the courts in the same way as a final court judgment.
International disputes
Arbitration has particular advantages in relation to disputes with an international element. When agreeing to arbitration, a claimant does not have to submit the dispute to the jurisdiction of a foreign court, which will (under the rules of international civil procedure as established, for example, in the EU Regulation (EC) No. 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments, the “Regulation 44/2001”) or the 1988 Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (the “Lugano Convention”)) frequently be a court in the defendant’s home country, with whose laws and procedures the claimant may not be familiar, and where he will not be able to instruct the lawyers with whom he is used to dealing, who know his business, and in whom he trusts.
An arbitral tribunal need not be representative of the home courts of one party only and a “neutral” territory can be selected as the juridical seat of and/or venue for the arbitration. This can be of particular relevance if a foreign State or foreign State entity is involved in the dispute as a party, and sovereignty considerations prevent submission under the jurisdiction of the courts of another country. The parties are also free to agree on the language (or languages) of the arbitration.
More than 150 States including most of the leading trading nations have now ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), and other multilateral conventions or bilateral treaties providing for the recognition and enforcement of arbitral awards. It is therefore generally possible to enforce an arbitration award in another jurisdiction more easily than a foreign court judgment (unless there exist (reciprocal) enforcement arrangements between the jurisdictions in question). Enforcement of arbitral awards will be addressed in more detail in the individual country chapters. A list of the signatories to the New York Convention is in Appendix 3 of this Guide.
International arbitrations can, within the limits provided for by the applicable procedural law of the juridical seat, adopt procedures recognising that the parties may come from different legal systems. Those procedures can and in many cases in fact do represent a compromise reflecting a middle course between the parties legal systems or an entirely different approach to the parties’ national courts. As mentioned, the flexibility of arbitration as a dispute resolution mechanism is a major advantage in this context.
Limitations on arbitration
Arbitration is a contract-based process and the submission of disputes to arbitration is limited to disputes arising between the contracting parties and covered by the arbitration agreement. This principle of contractual privity can give rise to problems in multi-party situations where the rights of third parties may be affected by a dispute. However, such circumstances can often be anticipated and appropriate provision be made in the arbitration agreement at the contract drafting stage. Some national arbitration laws and institutional arbitration rules expressly address specific problems to which multi-party disputes may give rise.
Absent agreement between all parties involved, it may otherwise not be possible to consolidate multi-party disputes before one and the same arbitral tribunal; whereas in court litigation all relevant parties can usually be joined in one action and multiple proceedings concerning the same parties or subject matter be consolidated on application so that they can be heard (and decided) at the same time. Moreover, unless all the issues arising between the parties are covered by the arbitration agreement, it may be necessary to resolve the outstanding issues in separate but parallel court and/or arbitration proceedings, which may give rise to an inherent risk of conflicting decisions in relation to the subject matter of the dispute.
Finally, certain civil and commercial disputes (e.g. disputes relating to personal status and insolvency issues) are often regarded as not arbitrable as a matter of national public policy. Such disputes may therefore have to be resolved in litigation.
International investment arbitration
An important but relatively new aspect of international arbitration is international investment arbitration. International investment arbitrations are proceedings brought by foreign investors against the State in which they invested (the host State) to settle claims arising directly out of their investment pursuant to an international investment treaty. There are now over 2,500 international investment treaties and the growth in this form of dispute resolution in the last two decades has been exponential. Although a number of international investment arbitration awards have been handed down, this field is still evolving. This edition of the Guide includes, as an introduction to this field, a separate chapter on international investment arbitration.
Conclusion
Arbitration can have clear advantages over litigation as a means of settling commercial disputes. It is important to appreciate that there may be a choice between litigation or arbitration and that the most appropriate dispute resolution mechanism should always be determined on a case by case basis, depending on the particular circumstances of each case. The nature of the dispute, the identities of the parties, the courts which might otherwise have jurisdiction, and the location of assets are only some of the many factors which should be taken into account when deciding which form of dispute resolution to agree. In the absence of an express dispute resolution agreement, the only certainty is that any dispute will end up before a court somewhere. The risk is that that court, for a variety of reasons, may not have been the first choice of one or more of the parties to the resulting litigation.
The CMS Guide to Arbitration covers a large variety of jurisdictions including countries from the Middle East, South America and China. However, as the majority of countries included in the Guide are European, and Europe plays an important role in international dispute resolution, it seems helpful to provide an initial overview of dispute resolution in general with a particular focus on Europe as an introduction to the chapters regarding dispute resolution in the individual countries.
An overview
Historical background
Historically, the countries covered in this Guide have quite different legal traditions. Comparative law distinguishes (amongst others) between the Napoleonic, Germanic and Common Law systems of law, all of which have in turn been influenced to a greater or lesser extent by Roman law. In addition, the former socialist countries in Central and Eastern Europe are in the process of adapting their legal systems to the economic and political circumstances of democratically governed market economies.
But today an increasing number of European countries have one overriding factor in common, which has already had, and continues to have, a substantial impact on the recent development and future convergence of their legal systems: they are, or intend to become, members of the European Union (“EU”) and subject to an ever-increasing volume of primary and secondary EU legislation and instruments.
Dispute resolution techniques: the choice
Where negotiation fails, disputes can be resolved either through litigation in the State Courts or through a private dispute resolution mechanism such as arbitration. These two more traditional methods of resolving disputes have in recent years been complemented by ADR techniques. ADR applies in the context of cross-border European or international commercial disputes as much as in relation to purely national disputes.
ADR, and in particular mediation, originated in the United States but is now widely accepted and practised in the United Kingdom, and is a subject of increasing interest throughout continental Europe. This is reflected by the fact that the EU Directive on certain aspects of mediation in civil and commercial matters (Directive 2008/52/EG) entered into force in June 2008 (the “EU Mediation Directive”) covering certain aspects of mediation. By looking beyond and behind the issues in dispute between the parties, ADR techniques can produce results (by agreement between the parties) which no adjudicative method of dispute resolution could achieve.
ADR can readily be combined as a complementary first step in a structured contractual dispute resolution procedure agreed between the parties. A structured dispute resolution clause (also known as a ‘multi-tier’ or ‘escalating’ dispute resolution clause) may, for example, stipulate that the parties may only resort to arbitration or litigation once ADR has failed to produce a settlement of the dispute within a reasonable agreed timeframe. When drafting so-called multi-tier dispute resolution clauses combining different dispute resolution techniques, it is important to clearly define the different steps in the dispute resolution process and to stipulate whether each (ADR) step is mandatory or whether a party may skip individual steps in the multi-tier clause. If an (ADR) step is mandatory, it is important to define unambiguously the circumstances in which a party may proceed to the next step in order to avoid future disputes on such issues.
It is also common for parties to agree to ADR on an ad hoc basis once a dispute has already arisen.
Although this Guide focuses on arbitration, it is important for parties to a contract and their legal advisers to appreciate that there are clear choices which can and should consciously be exercised when it comes to drafting dispute resolution clauses.
Dispute resolution does not necessarily simply mean suing the other party and going to court. Often a much more mutually advantageous result can be achieved for both parties if they agree upon a dispute resolution technique (or combination of techniques) which more easily and effectively takes into account the parties’ mutual interests and benefits and their commercial objectives. The guiding principle is that courts determine disputes in accordance with the law. Arbitrators, on the other hand, generally have more latitude to take into account relevant trade customs and even principles of equity if so agreed by the parties.
Litigation
Cross-border litigation in Europe was simplified by two Conventions applied throughout the Member States of the EU, one on substantive and one on procedural law: the 1980 Rome Convention on the Law Applicable to Contractual Obligations (the “Rome Convention”) and the Brussels Convention on Jurisdiction and the Recognition and Enforcement of Judgments (the “Brussels Convention”). The Lugano Convention also makes parallel provision for civil litigation matters as between the Member States of the EU and the European Free Trade Area (“EFTA”), by adopting the rules of the Brussels Convention, with some minor modifications. The Brussels and Lugano Conventions have now been replaced for EU Member States by Regulation 44/2001.
Regulation 44/2001 provides common and binding rules on the jurisdiction of the courts of EU Member States in civil and commercial matters as well as for the (“full faith and credit”) recognition and enforcement of final court judgments and orders made in any Member State. The Lugano Convention will continue to apply to the non-EU EFTA members. In practical terms, an EU or EFTA court judgment is today as readily enforceable in another EU or EFTA jurisdiction as in the jurisdiction in which it was made.
These Conventions have made cross-border litigation in Europe a much more predictable experience, although there remain differences in the way in which the Conventions are applied by the national courts of the Member States. This problem is remedied to some extent by the fact that the European Court of Justice (“ECJ”) has over the years created a substantial body of case law on the interpretation and application of the provisions of the Conventions. In the case of the Brussels Convention and latterly Regulation 44/2001, such case law is binding on the (Courts of the) EU Member States and, in the case of the Lugano Convention, constitutes persuasive authority.
The Rome Convention sets out rules on how the law applicable to the substance of contractual disputes is to be determined. The applicable law so identified will, however, still be the internal national law of a specific country.
Thus, although within the EU litigation is now a fairly predictable enterprise, nevertheless, litigation essentially remains tied to a given national system of law and court procedure. It suffers not only from the general and systemic inherent disadvantages of litigation discussed above but also from all the additional specific problems afflicting the civil justice systems and litigation in any particular country.
The costs of litigation and the scale of court fees vary widely throughout the EU; some countries calculate court fees by reference to the amount in dispute; in other countries court fees are calculated essentially as flat fees regardless of the amount in dispute. There are also substantial differences in the way lawyers calculate their professional fees and in the rates charged.
Other differences between the national courts of the Member States of the EU concern the time it takes to bring court proceedings to a conclusion, from the issuing and service of proceedings to final judgment (and through any available appeal process). The performance of courts not only varies between the courts of different countries but even between the courts of different regions within the same country or within the court structure of each country.
Arbitration
For all of these reasons, arbitration remains attractive on a European level; this is even more true in relation to international disputes on a wider scale to which the framework provided by Regulation 44/2001 or the Lugano Convention does not apply. For example, even in relation to, say, such important European trading partners as the United States, China or Japan, there do not exist common treaty rules on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
There is at present no EU framework for arbitration, and arbitration is expressly excluded from the application of Regulation 44/2001 and the Lugano Convention. However, most of the European countries (and many non-European countries) covered in this Guide have in recent years reformed their national arbitration legislation to a greater or lesser extent on the basis of or by reference to the 1985 UNCITRAL Model Law on International Commercial Arbitration (see Appendix 5), which is increasingly accepted internationally as the model to which countries look when it comes to updating their arbitration legislation. As a result, the emerging international similarity of approach makes arbitration laws increasingly more uniform and arbitration more attractive as a means of resolving international business disputes.
Many of the countries covered in this Guide are old trading nations and have a longstanding tradition of arbitration as a preferred dispute resolution mechanism for trade disputes, sometimes going back to the days of the Hansa and further; they have sophisticated arbitration laws and distinguished arbitration institutions and encourage and support dispute resolution by arbitration. However, this Guide also shows that countries which do not necessarily look back on a long tradition of arbitration recognise arbitration as an appropriate mechanism for the settlement of international commercial disputes and are, accordingly, ratifying the principal international Conventions on arbitration as well as enacting sophisticated arbitration laws based on international instruments such as the UNCITRAL Model Law. That said, it is notable that a number of, in particular, Latin American countries have begun to view international arbitration less favourably in recent years.
More than 140 States including nearly all of the world’s leading trading nations are today signatories to the New York Convention, which is designed to ensure that written arbitration agreements are universally recognised and enforced between signatory States, and to provide a framework for the recognition and enforcement of foreign arbitration awards. Arbitration awards are today much more readily enforceable in a much larger number of countries than are court judgments; only within the EU and EFTA is the enforcement of judgments from other member States as fast and relatively easy as international enforcement of arbitration awards under the New York Convention. In addition, arbitration remains a genuine alternative to litigation when choosing between dispute resolution techniques in the EU and/or EFTA because of other potential advantages of arbitration such as flexibility, speed, confidentiality and the ready enforceability of arbitration awards beyond the EU and EFTA.
ADR
As mentioned above, the fact that the EU Mediation Directive entered into force in June 2008 shows that the importance of mediation as a dispute resolution mechanism is growing. This development is also evidenced by the growing number of mediation institutions throughout Europe and the generally increasing awareness of mediation as an alternative to arbitration or litigation. Furthermore, a number of European countries have passed legislation to facilitate ADR.
In particular, in England and Wales, ADR has over the last few years become an integral (albeit not compulsory) part of the civil justice system. Reasons for this development, inter alia, seem to be that the costs of access to justice in England and Wales are comparatively high and, in particular, that under English law it is incompatible with the role of a judge or arbitrator to make settlement proposals or to get involved in settlement discussions with the parties. In contrast, in civil law jurisdiction generally there is an obligation on the judge hearing the dispute actively to encourage settlement and to assist the parties in coming to a settlement.
The different levels of progress in the adoption of ADR as an accepted part of dispute settlement procedures and the different expectations of the parties regarding the role of a judge and arbitrator can make it (more) difficult to employ ADR in cross-border disputes, and may require legal and cultural barriers to be overcome. The real merits of ADR probably lie less in providing a complete alternative to litigation or arbitration than in its potential for facilitating settlement of commercial disputes at any stage of the dispute, pre- and post-commencement of contentious legal proceedings.
Common law and civil law
An introduction
The common law and civil law systems are the two main streams of Western legal tradition. They are historically defined primarily by reference to their sources of law. On the one hand common law, with its judge made law and doctrines of judicial precedent and stare decises, and on the other hand civil law, with its pronounced Roman law roots and the great codifications of the 19th century such as the French Civil Code and Nouveau Code de Procedure Civile, and the German Bürgerliches Gesetzbuch and Zivilprozessordnung.
All this is familiar ground to legal historians, but how relevant is this distinction still today? What is left of the differences between common law and civil law in everyday legal practice in an age of global markets and how does it affect arbitration? Are there today more similarities than differences between the systems?
Perhaps one of the more surprising revelations of modern European comparative law is how the classical distinctions and differences between common law and civil law have become less and less clear. In the civil law countries the code-based law can today hardly be understood or applied in practice without recourse to an ever-increasing body of case law, which interprets the codes and adapts them in a continuing process to the ever changing requirements of modern society. In common law countries, on the other hand, most areas of the law are today either directly governed by statute law or are, at least indirectly, affected by primary or secondary legislation.
Whilst in practical terms the boundaries between both systems become more and more blurred and both systems are, in addition, increasingly suffused and harmonised by an increasing volume of supranational EU regulations and directions, differences nevertheless remain in two important areas: legal methodology (i.e. the way lawyers think and work) and the way in which court litigation is conducted. We shall look below in more detail at some of the main differences in the way court proceedings are conducted in civil law and common law jurisdictions and at the way in which this affects arbitration. Nevertheless, even in relation to court proceedings, the civil justice reforms in England and Wales in the late 1990s, and the Civil Procedure Rules which were introduced as a result, have adopted new concepts into English procedural law which are clearly derived from continental European procedural practice.
This Guide is concerned with arbitration rather than litigation in the State Courts; but the legal system of a country and, in particular, its civil procedure, colour the perceptions and expectations of the parties and their legal representatives as to the way disputes should be resolved and their understanding of due process and procedural fairness. Understanding the differences between legal (and business) cultures helps parties to arbitration proceedings and their legal representatives to bridge this cultural gap and to identify and agree cost and time-efficient procedures which afford both parties the feeling that, no matter what the outcome of the proceedings, they were given an opportunity to put forward their arguments, and that those arguments were duly considered by the tribunal and resulted in a fair and just award.
Codification and judicial precedent
In England and Wales, the law consists of a mixture of common law and legislation. Judges can create new law by the decisions they make and lower courts are bound by the doctrine of precedent to follow the judgments of higher courts unless the case before them can be distinguished on the facts. Law text books are, save for a handful of exceptional treatises, not recognised as authoritative sources of the law in court proceedings. Legislation is generally passed by Parliament in a piecemeal fashion to deal with specific issues as and when they arise. Acts of Parliament are generally interpreted by the courts strictly, having regard to the meaning of the words used rather than to the underlying purpose or spirit of the legislation (although recent years have seen a move away from this literal approach). In civil law countries, the law is traditionally found primarily in a series of codes. These are intended to be comprehensive and are normally written in broader and more conceptual language than common law statutes. The courts interpret the codes having regard to the purpose of the law and seek to give effect to their underlying legislative intention. Decisions of higher courts are not necessarily binding on lower courts but they are persuasive, especially those of the supreme courts. Academics play a greater role in civil law countries than they do in common law countries and their views on the interpretation of code law can be as influential as the judgments of higher courts.
“Inquisitorial” versus “adversarial” court procedure
In order to compare the differences between the civil law and the common law system, proceedings in the courts of civil law countries are sometimes described as “inquisitorial” rather than as “adversarial”, which is the description normally given to court procedure in common law countries. This can be explained by looking at the following procedural differences between the systems.
Statements of case
While the focus of civil law court procedure lies on written proceedings in order to enable the judge to play a proactive role from the beginning of the case, common law proceedings place a much greater importance on the oral hearing. Therefore, in common law countries, statements of case remain formal written submissions served by the parties and filed at court which set out the facts of the case but do not normally cover in detail the evidence or law on which the parties intend to rely, or the arguments which they intend to raise at the hearing.
In civil law jurisdictions, the parties’ submissions tend to set out their respective cases much more fully and to contain submissions on the relevant facts, evidence and law. The documents on which the parties rely in support of their submissions are normally exhibited to the pleadings and relevant witnesses are named therein and a description of this evidence is normally given.
Disclosure
Under the common law system, the parties do not normally exhibit the documents which are relevant to the dispute to their statements of case. Instead, there is a procedure known as “disclosure”, by which the parties must disclose to each other in the form of lists all relevant documents in their control – an obligation that is very widely defined and also includes documents which are detrimental to that party’s own case or support the opposing party’s case. These lists may have to be verified on oath. The documents on the list can subsequently be inspected and copied by the other party. A party can ask the court to order further specific disclosure if it believes full disclosure of all relevant documents has so far not been made.
Documents which are detrimental to a party’s own case, or documents on which a party does not rely in support of its case, are not normally produced by that party in civil law proceedings unless the court makes a specific order for disclosure of individual clearly identified documents. All other documents which the parties consider relevant to their respective cases will have already been exhibited to their submissions.
Witnesses
Under common law procedure, detailed written statements of the witnesses’ evidence are taken and exchanged before trial. The parties are witnesses in their own cause.
In civil law jurisdictions written witness statements are not frequently used and there is no general procedure for the exchange of such statements before trial. Before civil law courts, parties cannot normally give evidence in their own cause.
In a common law trial, witnesses are examined in chief or their written statement will stand as their evidence in chief. The witness is then cross-examined by the parties’ lawyers. The judge will ask few (if any) questions, mainly to clarify the evidence which a witness has given, rather than to elicit further evidence. In a civil law trial, the judge plays a much more proactive role. Based on the extensive written submission, he will determine on which issues he will need to hear (witness) evidence in order to be able to decide the case submitted to him. It is also the judge who will do the main questioning of the witnesses with the parties’ lawyers asking additional questions thereafter, which do, however, usually not amount to a cross-examination of witnesses in the common law sense.
Court-appointed versus party-appointed experts
In civil law proceedings, experts are typically appointed by – and report to – the court. Parties may appoint their own experts, but less weight is usually attributed to the evidence of party-appointed experts.
In contrast, in common law proceedings it is traditional for each party to appoint its own expert (witness); expert reports are exchanged between the parties before trial and agreed between the experts as far as possible. In England and Wales, however, the new Civil Procedure Rules make provision for court appointed experts and clarify that the duty of experts (whether appointed by a party or by the court) is to the court.
The hearing and the role of the judge
The Court hearing (or “trial” in common law proceedings) is the main forum for the parties to present all their evidence and arguments to the court. A common law judge presiding at the trial will not be familiar with the case and will receive short written summaries of each party’s case (“skeleton arguments”) and a reading list for the main statements of case and (witness and documentary) evidence only shortly before the hearing. More often than not, the judge will only have had a passing look at the court bundles prior to the hearing.
The parties are fully in charge not only of preparing the case for trial (albeit subject to the court’s case management powers) but are also the main actors at trial. It is traditional in common law systems for the judge to take the role simply of the passive umpire in a match between two opposing parties and to declare the winner at the end. The judge is not concerned so much with taking an active part in ascertaining the truth but rather in deciding which of the parties’ cases he finds more convincing. Indeed, the judge’s active role only really starts after the parties have made their final closing submissions. However, common law proceedings can often involve a very broad examination of the facts and background to a dispute if either party chooses to adopt that approach. Although there will be some constraint on the scope of factual investigations, the common law procedure and particularly disclosure can lead to such a result.
In civil law systems, the court plays a proactive role. It takes charge of the case when proceedings are first issued, and thereafter (normally the same judge) remains actively involved in the management of the case. As stated, the focus of civil law proceedings lies on the written proceedings, where the parties have to lay out their case fully. On the basis of these written submissions the judge, who will at the end of the day have to decide the dispute before him, determines on which issues he will need to take evidence in order to render a decision. As he also plays a proactive role with respect to the examination of witnesses and with respect to (court-) appointed experts, oral hearings in civil law proceedings are generally much shorter than in common law proceedings.
When discussing the procedural differences between civil law and common law countries, a person with a common law background will usually point out that the common law approach aims at finding out the truth underlying the dispute. A “civil lawyer” will also stress that the civil law approach is aimed at finding out the truth but will emphasise that the civil law approach will significantly reduce the cost and duration of the proceedings. In the vast majority of cases, the outcome will be the same under both approaches.
The impact of the differences between common law and
civil law on arbitration
Procedurally, and to the extent that arbitration has been described as “privatised court proceedings”, the background of the parties and their lawyers involved in international arbitration proceedings has an impact on the expectations and concepts which they hold as to how such proceedings should be conducted in the interest of justice and fairness.
Parties and lawyers from common law countries will normally expect there to be disclosure of documents, and that detailed witness statements will be prepared and exchanged between the parties, followed by cross-examination of witnesses at the main hearing. In such cases the arbitral tribunal will therefore be confronted with a much larger volume of factual material than would be the case in arbitrations involving only parties and lawyers from civil law countries with more limited disclosure of documents. Equally, arbitrators from common law countries will often consider this the most appropriate procedure and will also put more weight on oral hearings than an arbitral tribunal composed of civil lawyers, who can normally be expected to rely to a greater extent on written submissions and to reduce the number and length of oral hearings. At the same time, arbitrators from civil law countries are more likely to take an active part in the management of the arbitration proceedings than their common law colleagues, including an involvement in settlement discussions between the parties.
Getting the best of both worlds
As stated, a crucial advantage of arbitration is its flexibility and the possibility to adapt the procedure to the individual circumstances of the case. It is possible to have a “civil law arbitration” in a case involving a French and a German party while an arbitration between an English and an Austrian party is likely to be a compromise between civil law and common law proceedings. In a dispute between parties from Wales and the United States, the flexibility of arbitration allows the parties and the tribunal to tailor the proceedings as a compromise between English- and US-style arbitration proceedings. Thus arbitration allows the parties to combine procedural aspects from different legal systems and thereby tailor the arbitral procedure to the circumstances of the individual case.
In recent years, certain standards for the conduct of arbitration proceedings involving parties from common law and civil law countries have developed which form a sort of “best practice” for such proceedings. In such international arbitration proceedings, the parties will be expected to prepare comprehensive written submissions addressing the underlying facts, the relevant evidence (exhibiting to the submissions copies of any relevant documents), and legal argument. In an early first hearing before the tribunal procedural issues will be discussed, and the parties will be encouraged to narrow down the substantive issues in dispute and to agree a procedural order and timetable for the further conduct of the proceedings.
With respect to the taking of evidence in such international arbitration proceedings, the IBA Rules on the Taking of Evidence which were adopted by the IBA in 1999 play an important role. Their intention is to bridge the gap between civil law and common law with respect to the taking of evidence and to strike a balance between the different approaches. For example, they allow a narrow disclosure of (specific or narrow categories of) documents and require that the party requesting disclosure establishes why such documents and material are relevant to the outcome of the case.
In such international proceedings, usually written witness statements will be prepared and exchanged, which will then stand as evidence in chief at the hearing. While the arbitrators will play a more proactive role in the preparation of the hearing and also during the hearing, the parties will usually have the opportunity to cross-examine witnesses, even though cross-examinations in international arbitrations are likely to be shorter than in pure common law proceedings.
Commercial disputes can only be referred to and resolved by arbitration if the parties enter into an arbitration agreement. An arbitration agreement can be made at any time – even after a dispute has arisen – although it may by that stage be more difficult to achieve a consensus between the parties. Normally, the arbitration agreement is concluded at the same time as the main commercial contract to which it relates, and simply forms a clause in that main contract (albeit that the arbitration agreement remains technically a separate or separable contract).
The arbitration agreement sets out the terms on which the parties agree to refer defined disputes to arbitration. The main purpose of an arbitration agreement is to establish a practical, efficient and objectively fair method of dispute resolution and to ensure that the arbitrators’ decision can be widely enforced. An effective and well-considered arbitration agreement is essential for a successful arbitration. The arbitration institutions offer standard arbitration clauses. A number of selected arbitration clauses are in Appendix 1 to this Guide. The advantage of these standard agreements is that they have been tested in practice and their adoption, therefore, reduces the risk of later disputes about the validity or the scope of the arbitration agreement.
Generally, the parties should consider and the arbitration agreement should spell out:
Further aspects the parties may wish to take into consideration in order to tailor the arbitration agreement to the circumstances of the specific contract are:
The parties should be aware that an overly complicated arbitration agreement also increases the risk of later disputes regarding the meaning, scope and validity of the arbitration agreement.
It is therefore recommended that parties seek legal advice regarding the drafting of the arbitration agreement in order to ensure that it is valid; that it reflects the intentions of the parties; and that it limits the scope for future jurisdictional challenges.
The selection and appointment of the arbitrator is crucial to the effectiveness of the arbitration proceedings. Selecting the right arbitrator is a complex and difficult task that involves a large variety of considerations and requires a profound knowledge of the underlying dispute and wide experience in the field of arbitration.
When selecting an arbitrator, the parties should be aware that all arbitrators, including the party-appointed arbitrators, should be independent and impartial. Contrary to a misconception on the part of some parties, the party-appointed arbitrator is not a “counsel” of the appointing party within the arbitral tribunal, but under a strict duty to remain independent from the parties (as is the chairperson or sole arbitrator). There is a significant risk that a biased party-appointed arbitrator will be quickly identified by the other arbitrators and will lose credibility with the other members of the arbitral tribunal.
When approaching a potential (party-appointed) arbitrator, the following issues can and should be discussed in particular:
It is permissible to contact and to meet potential arbitrators in order to discuss the issues mentioned above – namely the questions of qualification, availability and independence and impartiality – prior to the appointment of the arbitrator. However, these topics may only be discussed in general terms. It is not permissible to discuss the individual circumstances of the dispute in question or the arbitrator’s views on specific issues that are likely to be relevant in this context. The parties should be aware that most arbitrators will, if appointed, make detailed disclosure regarding the contents of such an interview.
Involving lawyers who understand your business and have a sound commercial approach to dispute resolution can help minimise any negative impact which a dispute may have on your business or business relationships. They can, in particular: