International Commercial Arbitration and Privity of Contract - Essay Example

?International Commercial Arbitration and Privity of Contract Introduction The formation and development of international commercial arbitration has grown in importance as the world of business progresses on a global level. Contracts are increasingly formed on a worldwide basis between different countries. In the response to the difficulties caused by conflicts in laws and contract disputes, international commercial arbitration devised a way in which such conflicts could be avoided and disputes solved easily out of court. This paper will assess whether the principle of privity of contract undermines the application and functioning of ICA in that it causes unnecessary disputes that have little to do with the actual contract and more to do with the method of arbitration, the conduct of arbitrations and the recognition of awards and orders. What is international commercial arbitration? International commercial arbitration is a way in which parties can use an alternative method of dispute resolution on an international level. International law however does not clearly and concisely define what it is in reality. Alternatively, the UNCITRAL contains a Model Law which governs and defines more clearly international commercial arbitration as “any arbitration whether or not administered by a permanent arbitral institution”.1 David also provides a definition which states that ICA is a tool by which parties can settle a question by decisions of third parties “who derive their powers from a private agreement, not from the authorities of a State, and who are to decide the case on the basis of such an agreement”.2 Indeed, arbitration clauses are often specifically contained in contracts, which are specified as binding on the parties outside of court: ICA is binding privately according to the agreement of the parties.3 The purpose of the UNCITRAL Model Law is to aid states in reforming and brining up to date their national laws and regulations on the process of arbitration and it was adopted and implemented globally some 26 years ago.4 The Model Law is comprehensive and applies to all signatory states in many areas of ICA, including the recognition and enforcement of orders and awards, though states are not obliged to directly apply the law in their domain. Such countries prefer to use the Model Law as a framework which they adapt to coincide with their own national laws, economic systems, and public policy norms. Privity of Contract in International Commercial Arbitration Privity of contract requires that all parties to an agreement must voluntarily commit to the agreement for it to be enforceable; this is otherwise termed as mutual consent. In an ICA context, it can thus be applied to state that the parties to a contractual arbitration clause must voluntarily agree to the content of the clause before it can be deemed binding upon the parties. Essentially, it is stated that arbitration without privity is not enforceable; particularly if “coercion, fraud,...[and]... lack of identity of the parties” is evident.5 Privity of contract thus aims to provide an equal playing field for both parties who come from different counties, as it allows them to rely on arbitration clauses in order “to be free of national procedural and substantive law”.6 ICA thus allows disputes which may arise between parties to become subject to regulations which are on a different level to the national laws of the parties so that claims concerning international privity of contract may be avoided. By agreeing on an alternative method of arbitration, both parties are able to be defined as autonomously agreeing to settle their disputes in a value-free manner. However, this again is differently viewed in practice, as many express concern in relation to privity of contract because parties to a contract may not be said to be parties to the international regulations on ICA. This claim is further aggravated by the fact that the UNCITRAL in particular is often altered or adjusted to fit in with national law, and its content is thus differentiated between states. It has been stated that “the formula of arbitration without privity reminds of the small letters section within standard contracts, a practice that has been the source of discontent in debates on the common law of contracts”.7 While it could be claimed that parties are free to accept or reject international treaties on arbitration, particularly NAFTA, doing so provides little alternatives or other options for the parties, unless they resort to the national courts. This practice of resorting to national courts is undesirable, hence the creation of ICA legislation and treaties. The New York Convention, Article II requires that “each contracting state shall recognize an agreement in writing under which the parties undertake to arbitration...differences which have arisen or which may arise between them in respect of a defined legal relationship...concerning a subject matter capable of settlement by arbitration”. The agreement can hence only apply to and include the parties who freely and expressly entered into the agreement: they must harbour “the intention to be bound by an arbitration agreement”.8 The issue has taken up much time, particularly in terms of defining when and under what circumstances a party can be said to fulfil the privity rule, as well as to what extent they can be said to be subject to the arbitration agreement. The Supreme Court in the case of Dayhoff v HJ Heinz Co9 defined the approach “to mean that no party could be compelled to arbitrate unless it specifically and expressly agreed to arbitration”.10 Much of the application of ICA law is arguably utilised to determine whether the conduct of the parties could be construed as fulfilling the privity rule. This is particularly the case in large international contracts, because they often include several parties, some of which may enter the contract after it has been formed or part-performed; such agreements can also be contained in a number of contracts. Although ICA has the aim of forming and implementing “arbitration rules...created to remove investment disputes from the heated political arena of state-to-state controversy to the cooler … tribunal”,11 it appears to have caused more problems in terms of analysing and interpreting the conduct of the parties. Is this beneficial? Does this solve more problems or pose more problems than resorting to national law to solve contract disputes? It is clear that the stance of national law on certain matters such as third parties joining the contract, or the arbitration clause being applied by a chain of contracts, causes confusion and unnecessary claims in the area of ICA.12 The conduct of the arbitration disputes is also important in terms of how it is undertaken and whether procedural errors are evident. Is this a valid or effective use of ICA, or is it merely the cause of unnecessary disputes? Indeed if the courts are occupied more with how the conduct of disputes is carried out, does this not detract from the content of the dispute? On the other hand it could be argued that the outcome and fairness of the arbitration depends on the way in which it is conducted, as well as valid assessments of whether the conduct of the parties can be said to effectively bind them to the agreement. Recognition and Enforcement of Orders and Awards This area of ICA in relation to privity of contract is similarly related to the New York Convention and the Model Law. In terms of orders and rewards enforcement, the Convention aims to provide universal standards of legislating for the recognition of arbitral awards and orders and aims to aid the enforcement of international arbitration awards and orders so that they may have the binding effect intended.13 The existence of the Convention is predominantly concerned with the prevention of discrimination of awards which are not domestic, and it thus requires that the parties recognize and enforce the awards and orders in their national jurisdictions as they would their own national awards and orders. This is also linked to the prevention of parties from referring to national courts in order to solve disputes which they have agreed should be solved by arbitration. These are effective provisions because they ensure that the outcomes and implementation of arbitration and arbitral awards and orders are actually carried out and not discriminated against; something which ICA intended to focus on. The Convention provides the framework under which awards and orders must be enforced nationally, though foreign awards and orders are defined more narrowly by the Convention than domestic awards.14 Essentially, the Convention requires that member states should recognize, enforce and implement arbitral awards and orders as agreed by the parties. Failure to implement this principle would result in the arbitration process having little purpose if its outcomes are not able to be fully implemented due to discrimination. It provides the security that the parties will be subject to arbitral awards and orders regardless of the jurisdiction in which they are to be enforced. Moreover, the recognition and enforcement of international awards should be refused only on certain limited grounds.15 The provisions in the New York Convention prefer to apply to international arbitral awards rather than domestic awards. Thus, the grounds for refusal of the recognition and enforcement of domestic arbitral awards would be dependent upon the provisions of the Arbitration Act in each state. However, the Convention does state certain grounds which will succeed as bases for refusing to recognize and enforce awards and orders, and this arguably undermines the whole purpose of ICA and privity of contract as a whole. Indeed, there are major problems in the enforcement of awards and orders, as well as the requirement that they be recognized in national states. Firstly, the participation of the court is severely limited to merely providing support for recognizing and enforcing awards,16 meaning that additional involvement of any national court is not legitimate and thus not binding in effect. UNCITRAL is similarly restrictive on the involvement of national courts, restricting their involvement to few particular areas.17 Additionally, it is recognized by Lew that the enforcement and recognition of awards and orders depends on whether the particular state is governed by common or civil law systems: hence, in the UK, the Arbitration Act 1996 grants the courts power to award injunctions by way of section 72(1), whereas the civil legal system of France generally does not allow the granting of such injunctions.18 The New York Convention is similarly extremely restrictive in granting grounds for recognition and enforcement of awards and orders, as is the Model Law.19 One of the biggest problems posed by the recognition and enforcement of awards is the fact that, although the New York Convention requires that states interpret its provisions in a way that allows it to be applied consistently, this does not happen in practice. Consequently, the effect of ICA is compromised, and much effort is placed into definitional and interpretive issues which causes uncertainty and causes unnecessary disputes to arise. This is evident, for example in the application of states of the principle of public policy to grounds for refusing to enforce and recognize awards. Public policy varies broadly between states and as a result there is not predictable basis upon which the refusal to enforce awards can be placed. For example, the UK courts refused to enforce an award in the decision of Soleimany v Soleimany20 on grounds of public policy, because the award granted as a result of arbitration between father and son had been decided by Jewish Law. The court held that the parties were not able to overrule the reliability of the arbitration process by way of private agreement undertaken to conceal an illegal contract. A similar approach was taken in the case of Westacre Investments Inc. v Jugoimport- SPDR Holding Co. Ltd,21 in which the court was required to evaluate whether an award was contrary to the public policy of Switzerland. It can thus be concluded that, due to the broad nature of ICA law as contained in the various regulations, provisions and treaties, the privity of contract rule has negative effects on the outcomes of arbitration. The way in which the arbitration process and the privity of contract rule will be applied and interpreted is rather unpredictable, and this causes unnecessary disputes to arise on many occasions. Part B – Problem Question The arbitration clause clearly states that English and Wales courts will have exclusive jurisdiction and that all disputes will be referred to London arbitration. This places the chosen governing country in both terms of the applicable law and the place of arbitration in England. Such express short-form arbitration clauses are not uncommon, as was the case in Arab African Energy Corp. Ltd v Olieproducten Nederland BV,22 though such short clauses are generally not desirable. When a clause refers only to the seat of arbitration, the courts or arbitral tribunal often applies the law of the place of the chosen seat. However, this is not applicable in the current context because the clause refers both to the seat and law as being that of England. Whether the law of England and Wales will actually apply in every case depends on the underlying law of the contract: in C v D,23 the court of Appeal in England held that English law nevertheless was to apply to a contract defined as bring governed by New York law because of the arbitration clause stating so. This is also confirmed in the decision of Noble Assurance Company and Shell Petroleum Inc v Gerling Konzern General Insurance Company UK Branch.24 In the present case it can thus be said with some degree of certainty that the clause will function to require disputes to be settled in and under English law. This most likely leads to the conclusion that B & B’s application to the Texan Court would be held as a breach of the arbitration agreement. In the absence of this clause it is to be noted that Texas law would have most probably applied.25 However, this case also suggested the contrary, which is also evident in the Federal Arbitration Act 1925. The FAA is interpreted as being applicable to arbitration proceedings even in the event that the parties have expressly agreed to arbitrate under a different jurisdiction.26 Alternatively, the New York Convention states that awards made must be valid ‘under the law to which the parties have subjected it’.27 The law often expresses conflict in defining which law should govern the arbitration agreement: that of the contract or that of the agreement? As has already been stated, the express agreement of the parties in this case suggests that English law will prevail. Was B & B’s application to the Texas court thus a breach of the arbitration clause? This issue was addressed in the case of CMA CGM SA v .Hyundai Mipo Dockland Ltd,28 which explored whether award of damages could be assigned for breaching the arbitration agreement. This case established that London arbitrators could even overrule a conflicting judgment of another state, though this case only dealt with conflicting decisions between countries within the EU. The next important issue explores whether the position of the arbitrators in both disputes could amount to bias or conflict of interest. International arbitration is based on the extremely important and fundamental concept of impartiality and fairness on the part of the arbitrators. This also includes impartiality towards the parties who chose the arbitrators,29 the latter of which are expected to be fully impartial and neutral in arbitral proceedings.30 In the present case there is potential for B & B’s challenge to the first arbitration on the basis of bias. UNCITRAL allows arbitrator decisions to be challenged on the grounds of lack of impartiality and independence, which could be argued here because the arbitrators took part in both decisions. The requirement of impartiality and independence must be implemented and satisfied throughout the whole process. In the current case it is arguable that the arbitrators had a conflict of interest by way of their being involved in both arbitrations. There are two potential respects under which conflicts of interest may be available for B & B to claim. Firstly, the issue of conflict concerns parties who act in two different arbitrations on the same or a similar point of law.31 In an attempt to harmonize the requirements of arbitrators, the International Bar Association created Guidelines on Conflicts of Interest in International Arbitration, which sets out certain standards expected of arbitrators. Conflicts of Interests are specifically set out in Part 2 of the Guidelines, which adopt both subjective and objective tests of assessing impartiality. It is arguable that the arbitrators who took part in the first decision would be categorized as fulfilling a waivable conflict of interests because they could be interpreted as having previous involvement in the situation. If this is found, the parties are able to object to the appointment of the particular arbitrators within a specified period of time, after which they will be classed as waiving their right to object. The fact that B & B did not object to the appointment of some same arbitrators in the second case and the first case suggests that their claim of bias cannot be challenged. An issue that further operates against B & B’s bias claim is the fact that they requested the first arbitration to wait until the second had been decided. This shows that B & B were aware of the combined interests in the arbitrations and accepted the positioning of the some of the arbitrators in both arbitrations. If this is found to be the case, B & B has little chance of challenging the arbitration awards because it is rare for challenges to arbitration to be successful. B & B also breached the arbitration agreement by initiating the injunction in Texas. Its claim against the arbitration tribunal on grounds of error of law is also not possible because tribunal decisions are meant to be final and binding.32 B & B could attempt to challenge the decision on grounds of jurisdiction, though such challenges are often required before the award is handed down, when the arbitral procedure commences. Unless the arbitration agreement specifies terms on awards to be damaged and limits the financial amount of awards, B & B will find any challenge difficult. The overall degree of the parties’ rights and obligations depends on whether Texas law will be held to apply. If it is held that English law is applicable, then the actions of the parties and the decisions of the arbitrators will be assessed according to UK law, particularly the Arbitration Act 1996. This is because the express agreement in the clause defined English law as both the basis of the law and the place to be used for arbitration. The decision of the second arbitration is thus likely to be found void, because it was based on Texan law.33 However, the reluctance of the courts to review decisions of arbitration has often caused them to uphold decisions which ignore the desires of the parties in terms of the choice of legal jurisdiction.34 The courts will only find the decision of the second arbitration invalid if it is considered to be extremely irrational35 which is unlikely in this case considering the fact that B & B initiated proceedings in the Texas court. Part C The above sections convey that real cases are often affected in a negative manner by the content of ICA law. The privity of contract rule can often operate to the detriment of the parties, particularly where court decisions are reluctant to judicially review arbitration awards. While privity of contract is a necessary component of contract law, perhaps more on an international level than any other, the discrepancies between recognising awards and orders and the need to enforce arbitration agreements are many. It is arguable that there should perhaps be a lower degree of privity required when contracts are undertaken on a global reach. While this will allow a common sense approach to be taken to the intentions of the parties, it will also prevent problems caused by arbitration, which often have little to do with the actual contract and more to do with the conduct of arbitration proceedings and the recognition of awards. While a basic arbitration clause can be said to fulfil the privity rule, the application of the clause in practice has the potential to cause cases to be submitted to court based on procedural errors and jurisdictional disputes rather than the actual content of the decisions. Is this desirable, or does it undermine the actual purpose of arbitration? It is evident that a balance needs to be struck between ensuring that arbitration clauses are understood and agreed upon freely by the parties, and the spending of much time and money disputing clauses rather than the contract itself. The current situation suggests that the balance falls more on the latter, and hence situations arise as in the problem question which ignores the actual contract and possible breaches of it because focus is placed on the conduct of the arbitration proceedings and the validity of awards and orders. References Publications Born, GB 1994. ‘Choices of Law in International Arbitration’ in International Commercial Arbitration in the United States: Commentary and Materials. Boston: Kluwer Law. Born, GB 2009. International Commercial Arbitration. The Hague: Wolterskluwer Law & Business. David, R 1985. Arbitration in International Trade. The Hague: Kluwer Law. 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Case Law Arab African Energy Corp. Ltd v Olieproducten Nederland BV [1983] 2 Lloyd’s Rep 419. Borst v Allstate Insurance Company [2006] 717 NW 2d 42. Bulgarian Foreign Trade Bank Ltd v Al Trade Finance Inc [2001] XXVI Ybk Comm Arb 291, Swedish Supreme Court, 27 October 2000, Case No T1881-00. C v D [2007] EWHC 1541 (Comm). CMA CGM SA v .Hyundai Mipo Dockland Ltd [2008] EWHC 2791 (Comm). Dayhoff, Inc. v. H.J. Heinz Co., No. 93-1794, slip op. at 7 (W.D.Pa. July 10, 1995). McDonald v. Rodriguez, 184 B.R. 514, 517 (S.D. Tex. 1995). Noble Assurance Company and Shell Petroleum Inc v Gerling Konzern General Insurance Company UK Branch [2007] EWHC 25322. Revson v Hack [1997] 239 A.D.2d 169, 169, 657 N.Y.S.2d 51, 52. Soleimany v Soleimany, [1999] Q B 785. Westacre Investments Inc. v Jugoimport- SPDR Holding Co. Ltd, [1999] 2 Lloyd’s Rep 65 (CA). Read More