Arbitration and Law Issues - Essay Example

? Arbitration and Law Contents Introduction 2 Privity of Contract 2 Horizontal and Vertical Privity 2 Arbitration 3 Critical Evaluation 3 Conduct of Related Arbitrations 4 Enforcement of Orders and Awards 4 Discussion 5 Case Study 6 The Contract 6 The Problem 6 Arbitration 7 Jurisdiction 10 Arbitration and Courts 12 Discussion 12 Conclusion 12 13 Bibliography 14 Articles 14 Books 14 Cases 15 Conventions 15 Statutes 15 Introduction Arbitration is a system that has allowed for contracts to be engaged across borders, letting corporations conduct business on a global level. While engaging in business within a country is based on the laws of the country in which the business is conducted, when borders are to be crossed the nation under which the law is enforced becomes a more difficult prospect. The New York Convention of 1959, made under the authority of the United Nations, put into place structures through which contracts and consequential disputes could be addressed and through which an agreement to honour arbitration was put into place. The problem, however, is that even when arbitration takes place, the disputing parties will continue to engage the problem through additional courts in order to come to the best possible resolution for their interests. The following essay discusses the issues of arbitration, first by engaging the question of disputes in arbitration and the consequences to the courts, then through the exploration of a case study, and then finally through undergoing an investigation of the events within the case study. Privity of Contract Privity, in legal terms, refers to a relationship that develops between parties in regard to the property, promises or warranties of a contract. The privity of contract concept is to ensure that only parties that are involved in a contract are actually part of the entirety of the process and included in all subsequent actions. Disputes concerning the privity of contract result from engaging the contract for who is able to participate in the process. The limitation of privity prevents a great many lawsuits by those who believe they have been affected by the actions of a party, but who is not directly a part of the contract and are not able to create liability claims because they are not a part of the contract.1 Horizontal and Vertical Privity Horizontal privity occurs when a third party is the recipient of an item. When an item or benefit in question is intended for a third party, then horizontal privity is in place. Vertical privity occurs when an independent contract is in place with one of the parties of a contract between two parties. If A has a contract with B and B has a contract with C, vertical privity is in place between A and C. The consumer rarely has any rights in terms of privity. The laws in regard to consumers was revised in the Contract Act of 1999 in which the Rights of Third Parties were addressed so that “...a third party may not enforce a contractual provision, either if the contract contains an express term to that effect, of if it purports to confer a benefit upon him”.2 The problem with consumer relationships to the process is that there is no implied position within the contract for the consumer. Arbitration Arbitration is the process by which two parties enter into an agreement to choose privately defined proceedings in which to settle their differences. The arbitration process is internationally recognized as a resource through which disputes between internationally represented businesses can find resolutions without clogging court systems and without disputes about jurisdiction in regard to nation.3 Disputes are defined by any disagreement that occurs during the process of the contract relationship. Disputes are more often handled by arbitration that has been defined within a contract. According to Harris, Planterose, and Tecks, “This will distinguish the procedure, the application of any statute and the finality of the intended process from other options, such as a decision by any expert of adjudication”.4Arbitration, when situated within the contract as the method of dispute resolution, is a binding method and will not be undone by a court or other resource if the arbitration has been conducted properly and without a reason to be questioned. Critical Evaluation Any aspect of law will more than likely be challenged, especially where business is concerned. The idea of arbitration is to allow for there to be a set system in which the discussion of disputes has been agreed to be settled. However, any party who is not likely or has not been led to a positive outcome within a dispute is not likely to willingly let go of their case until all potential aspects have been exhausted, which may include appealing to the next available resource to set aside the decision created in arbitration. Subsequent actions may include, but are not limited to, matters of jurisdiction, challenges of conflicts of interest, and enforcement of rulings. Before arbitration occurs there may be pleas for emergency relief, judicial help in obtaining discovery, or orders of consolidation.5 While arbitration should be a relief to the courts, the existence of a dispute may create problems that preface or extend beyond the event of arbitration. Conduct of Related Arbitrations The New York Convention or the Convention on the Recognition and Enforcement of Arbitral Awards was entered into in June of 1959. The agreement as it was put forth through the United Nations that provided for the agreement for nations with contracting parties to agree to the conclusions of arbitration and to enforce arbitrated consequences.6 The agreement provides for a cooperative setting between nations in supporting the notion of private arbitration as a means to settling disputes. Although the nation in which an arbitration is conducted is agreed upon in a competently handled contract, the excuse does occur where there is a claim of ignorance on how the arbitration is legally conducted, which leads to a withdrawal from the agreed upon arbitration process and claims to be established in the party’s nation of origin. Enforcement of Orders and Awards Of course, the result of private arbitration does not always satisfy the parties, and this is where the idea of cooperation falls short. Annulled awards, referred to as Local Standard Annulments often disrupt and subvert the cooperative standards that have been set forth by the arbitrations between parties with different states of origin. States have willingly subverted awards or placed awards, setting aside the verdicts of arbitration and violating the system in such a way as to place it in danger of becoming an impotent system.7 The New York Convention does allow for such actions under Article V (l)(e) where it states “recognition and enforcement of the award may be refused ...if the award...has been set aside...by a competent authority of the country in which, or under which the law in which, that award was made”.8 This portion of the article creates ambiguity and has a lack of clarity with the use of the word ‘may’ which also allows for the oppositional stance in which ‘may not’ is allowed. The use of this word as a point on which to support claims is one of the ways in which the courts are engaged and burdened with the problems associated with arbitration. Discussion The privity of arbitration means that only directly involved parties are allowed to engage in arbitration over the events of a contract. This means that in trying to save the courts from arbitrary and frivolous suits, the rights of some affected parties are not relevant to the proceedings, meaning that other means of engaging parties legally must be discovered, eliminating arbitration as a resource. The conduct of arbitration and the assignment of awards and orders are based upon an agreement that has ambiguous language from which further court action can easily be obtained. Arbitration allows for a disinterested nation to be assigned in order to create a more equitable resolution to a dispute, but if the arbitration can be challenged and the orders and awards set aside in the nations of origins, then the court systems across the field engaged in the contracts will be further burdened.9 Case Study The Contract The case study that is examined in this paper is defined by contracts with Smolkin Inc. which is based in Texas, USA that is based on the provision of Texas heavy crude oil. Brech & Brewer Ltd, a corporation from Canada and Zhao Ahong from the People’s Republic of China dispute that the crude oil they ordered is heavy, claiming it is actually light crude oil. The following arbitration clause is in each of the agreements made with Smolkin Inc.: The courts of England and Wales shall have exclusive jurisdiction. All disputes and differences between the parties hereto arising out of or in any way connected with this agreement shall be referred to London arbitration for final settlement. The Problem The delivery of the oil was accomplished on time, but ZZ claimed that the oil was not heavy, but light crude oil which was not the substance contracted. On 12 March 2010 ZZ sent a notice to B&B about their intention to go into arbitration. At that point, B&B entered into an injunction against Smolkin, Inc. through the Texas District Court to freeze the bank release for the balance of the payment to Smolkin, Inc. B&B then gave notice of their intention to also go into arbitration against Smolkin, Inc. The issues that are presented between the various parties are as follows: Smolkin asks for the two arbitrations to be consolidated, when this is lost they ask that the first arbitration be put on hold until after the second arbitration. Jurisdiction was challenged on the basis of an injunction that was filed by B&B in Texas, thus leading Smolkin to claim that the arbitration process had been violated. Smolkin then filed in the New York District court to have the arbitration invalidated After evidence from the second arbitration was admitted into the proceedings of the continued first arbitration, Smolkin moved that arbitration was once again invalidated because of an irregularity in the proceedings. One of the problems not challenged by Smolkin, but central to the issue to the denial of the consolidation is that the same arbitrators for the first arbitration were to be used in the second. In the first arbitration, ZZ choses Chang Libao and Smolkin chooses Malcolm Boyle, who then choose Gerard Shaw as chair. For the second arbitration, B&B chooses Malcolm Boyle and Smolkin chooses Gerard Shaw, while the two choose Chang Libao as Chair. One arbitration is defined based on Texas Law while the other is defined by English Law, despite the use of the same arbitrators. Chang Libao and Malcolm Boyle as their respective arbitrators, and those two appointed Gerard Shaw as Chair (the 1st arbitration). B&B and Smolkin Inc. appointed, respectively, Malcolm Boyle and Gerard Shaw as their arbitrators, and those two appointed Chang Libao as Chair (the 2nd arbitration). The decision to not consolidate is puzzling as the same arbitrators would be hearing the same evidence twice. In order to have valuable benefits to all the parties for the two arbitrations, separate arbiter groups should have been established. As none of the parties objected to this point, the admission of the evidence from the second arbitration into the first arbitration once it was continued was a moot point for a challenge of jurisdiction as the evidence of the second arbitration was already well known for the case of the second arbitration. If after consolidation was turned down, a fresh arbitration panel was not created for the second arbitration, there would be no point to challenge the admission of the second arbitration evidence into the first arbitration as the facts were well known by all parties. Arbitration The first arbitration established that the proper law for the arbitration was based on English law as this was the format that was established in the original contracts. Smolkin, Inc. asked for the arbitrations to be consolidated as it would be unfair for Smolkin, Inc. to lose in both arbitrations. This was declined as ZZ opposed the application. The arbitration was stayed, however, until after the date of the final Award of the second arbitration. Consolidation occurs when a group of arbitrations have enough similarity that the courts can bring the actions together into one trial. Because this was opposed by ZZ, it was decided to give each of the companies who were bringing action against Smolkin their own opportunity. In Article 35 of the Arbitration Act 1996 it clearly states that the incidence of consolidation must be agreed upon by all parties involved.10 One of the problems with the clause in the contract is that while it designates which court system will be used for arbitration, it does not specifically say which law system will be used. While it is implied that English law will govern the terms of the contract, it does not specifically state this will be the case, which leads to a discrepancy between the first arbitration and the second arbitration where one uses English law and the other uses the laws of Texas. According to Cotula, when the rule of law is not specifically addressed in a contract, the law is determined by both the laws of the hosting state and that of the relevant terms of international law.11 One of the problems that can occur is that a conflict of law will create a conflict in the verdict. As an example, in Elektrim SA v Vivendi Universal, laws of the New York Convention, the Geneva 1961 International Commercial Arbitration Convention, and the general laws of the EU came into conflict as Elektrim had declared bankruptcy in Poland. Elektrim moved that the arbitration be closed in accordance with Polish insolvency laws, but the tribunal declined to close the proceedings awarding against Elektrim.12 Just as Elektrim could not invoke the laws of Poland, Smolkin Inc. was not able to challenge the jurisdiction based upon the injunction in Texas. During the second arbitration, Smolkin Inc. challenged jurisdiction because B&B had applied for an injunction in Texas in order to freeze payment. Smolkin Inc. maintained that this violated the agreed upon terms of arbitration from the contract, making the methodology of dispute management void through the original agreed upon arbitration. They claimed that this constituted an abandonment of arbitration in favour of litigation by B&B and that further issues should be handled in the Texas courts, however, the second arbitration did not agree and dismissed this application. The result of the arbitration awarded B&B compensation in the amount of $750,000 and asserted the authority of the arbitration, while declaring that the laws of Texas were the basis of their decisions. B&B applied to the New York District court to enforce the second arbitration award, while Smolkin Inc. filed to resist this application still asserting that the second arbitration had no jurisdiction because the agreement about arbitration was void. It is common for contracts to go into private arbitration once litigation has begun.13 Because of this common occurrence, it is clear that litigation activities would not preclude judgment via arbitration. Therefore, and because of the liberal litigious environment in the United States, B&B had a right to ask the courts to stop further payment of their contract until arbitration had been conducted. B&B did not ask for any legal conclusion, only a hold on funds until disputes could be settled. The contract agreed that disputes would be settled in arbitration. The injunction did not create a decision, but held the payment for goods in stasis until such time as a judgment was rendered. This action was to put a hold on the processing of the contract, not to discontinue the terms of the contract. B&B was within their rights to ask for the injunction, although the opinion of someone else may have disagreed with the above assessment. While they had a right, they took a risk. As the first arbitration was resumed, ZZ asked that the tribunal admit an expert’s report on the nature of the crude oil. This report was also provided to both B&B and Smolkin Inc. A second request was made that the evidence of the second arbitration of the Award be entered into evidence. The evidence was admitted. The trial lasted three days and this resulted in an Award in favour of ZZ on 24 August 2011. Smolkin Inc. has challenged the Award based on the admission of the evidence of the first arbitration which biased the tribunal. This, according to Smolkin Inc, voided the jurisdiction of the second tribunal for arbitration. They claimed this was an irregularity and that it was an error in law to admit the judgement of the first tribunal into the second tribunal. Because the same arbitration panel was selected for both arbitrations, the denial of the results of the evidence in the first arbitration was not a point of bias. As well, estoppels allow for truths to be considered absolute and that they cannot be disallowed. If there was no dispute to the validity of the evidence, then there was no reason to not allow it. According to the UNCITRAL Model Law on International Commercial Arbitration, “The power conferred upon the arbitral tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence”.14 The decisions of the tribunal in regard to evidence is absolute and the powers of this body are defined by the ability to place into evidence whatever they see fit as relevant. According to this structure, the decision of the tribunal to admit evidence from the first arbitration into the second is founded on a right that the tribunal has to admit whichever evidence they choose into the proceedings. One of the problems that occur in the process of the arbitrations involves the idea of a partial award. According to Article 47 of the Arbitration Act of 1996, an award is an interim award and must be specifically awarded according to issues or claims. An award may be challenged that comes out of a tribunal of arbitration, but decisions that happen during arbitration may not be challenged. The partial award is an award because it was not given for part of the arbitration, but for the entirety of the claim. This award can be disputed as it is not merely a decision under Article 68 of the Arbitration Act of 1996. It can also be considered an award under Article 46 of the Arbitration Act of 1996 as the award is related to the substance of the dispute and the arbitration agreement has no agreed upon substantive law through which to provide foundation. Jurisdiction One of the problems with using a ‘neutral’ party nation as the arbitrator is that it gives a basis for which the parties can take their complaints back home. According to Moses, where Belgium had at one time instilled a policy of ‘non-review’ of awards, the experiment failed as Belgium was then avoided for arbitration because the security net of litigation had been removed.15 Without the availability of a backup for support of the results of arbitration, the parties are unlikely to initially choose arbitration as a method of dispute settlement. The problem, however, is in having the option to continue litigation the point of arbitration is almost rendered moot. Just as in the case example, Smolkin Inc uses all of the available ‘kinks’ in the process to provide a resource from which to render the decisions invalid. The arbitration as it is set out in the contract is presumed to be valid. The burden of proof that there is a valid reason to either declare the arbitration null and void or inoperative is on the party invoking this claim.16 Arbitration is a private act in which parties have predetermined that they will agree to the conclusion of the tribunal. A tribunal usually consists of three ruling members in which each party selects one and the third is selected by the two chosen members. This is intended to create a fair and even result to the proceedings. As stated, this is entered into voluntarily through private means and contractually agreed upon. This works because it is “held in place by a complex system of national laws and international treaties”.17 Through cooperation and collaboration, the decisions of the arbitration process should be upheld. An example of how jurisdiction can be used as a way of changing outcomes can be seen in the case Accentuate Limited v Asigra Inc. Sinclair asserts that the section of the Arbitration Act of 1996 that provides a framework for Accentuate Limited to sue in England is section 9.18 Section 9 of the Arbitration Act of 1996 provides for the courts in England to place a stay on their proceedings until the conclusion of arbitration, placing arbitration somewhat above the actions of the court. In other words, the use of arbitration should not be supplemented by the use of the court. Arbitration and Courts Discussion In the first section of this essay, the use of arbitration was balanced against the use of the courts in a discussion of how the courts become burdened by having to address the myriad of issues that come out of arbitration. The case study provides several examples of how the decisions of the tribunal are being frivolously challenged. Williams states “Merchants who contract for an arbitral situs should be held to the implicit consequences of the bargain”.19 In creating an agreement for arbitration in England and Wales with customers, Smolkin Inc. defined an arrangement in which both parties agreed to abide by the decisions of the arbitrators from a neutral state from which a decision would be rendered. As an example, the first action taken by Smolkin Inc. was to ask for consolidation, believing that they should not have to go through two arbitrations for the same cause of action, even though they were from two different companies. While it is within the rights of Smolkin Inc. to ask for consolidation, once that was turned down, Smolkin Inc. then turned and asked that evidence from the second arbitration not be included in the first arbitration and has used this as a reason to try to invalidate the first arbitration. Additionally, they are trying to have the second arbitration invalidated because B&B used the courts as a resource to freeze the progress of the contract. Because both tribunals found for the complainants, it is likely that the crude oil was not the oil that had been promised to them. Therefore, the use of the courts is likely a way of stalling on the refund plus expenses that are due to the complaining parties. If this is the case, then the court tactics is a violation of the spirit of the agreement between the contracted parties and a misuse of the system as the truth and fairness has been won out through arbitration. Conclusion In theory, the use of arbitration should be a way in which to alleviate the courts from adjudicating on privately held contracts. Used in an international context, this also provides a neutrality of interests in finding fairness to resolutions for disputes. However, because the governmentally supported courts are not used, the room for further disputes that find their way into local courts increases as every minute detail can be excised and used as a reason for appeal. Local courts become overburdened with ruling on all of the aspects of the private trials, thus creating more court time rather than less. While the agreement to use private arbitration should be absolute, the reality is that the dispute in accordance to the complaint of bias and unfairness creates a larger burden for local courts, nullifying the purpose of the private arbitration system. . 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(International Institute for Environment and Development 2010) Ferrari F and Kro?ll S Conflict of Laws in International Arbitration (Sellier, 2011). Harris B Planterose R and Tecks J The Arbitration Act 1996: A Commentary (Blackwell, 2007) Moses M L The Principles and Practice of International Commercial Arbitration (Cambridge University Press 2008) Poudret J, Basson S, Berti S and Ponti A Comparative Law of International Arbitration. (Sweet & Maxwell, 2007) Redfern, A Law and Practice of International Commercial Arbitration (Sweet & Maxwell 2004) Sutton D. St. J., et al, Russel on Arbitration, (Twenty- First Edition, Sweet & Maxwell, London, 1997) Cases Accentuate Ltd v Asigra Inc (A Company Incorporated In Canada) [2009] EWHC 2655 (QB) Elektrim SA v Vivendi Universal SA Rev 1 [2007] APP.L.R. 01/19 Conventions Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1959) UNCITRAL Model Law on International Commercial Arbitration 1985, with amendments as adopted in 2006 (UNITED NATIONS PUBLICATION Sales No. E.08.V.4) Statutes Arbitration Act 1996 Word count 3317 Read More