Chapter – V

Applicable Laws in International

Commercial Arbitration
 APPLICABLE LAW IN
INTERNATIONAL COMMERCIAL ARBITRATION
“Individuals would deal cooperatively with those known to be trustworthy while refusing
to interact with those known to be untrustworthy. These solidarity rules evolved
spontaneously as individuals’ utilized ostracism instead of violence.”
- Bruce L Benson.

Nature is diverse, heterogeneous and a conglomeration of wealth and wonders

with myriad principles and practices. Every species of nature has got its own ‘Rule of
Law’ and the same principle applies to the world of commercial nature. Commerce is
based on confidence and confidence is encapsulated in mercantile principles and practice.
Trade customs and dealings are in fact ‘sui generis’ and also ‘sui juris’ and this is the
‘Rule for Lex Mercatoria’. Thus for any construction or transformation or termination of
commercial relations, there must be a stated law and a defined process of application of
law. Resultantly, application of appropriate law to a given commercial issue occupies a
prominent place in commercial arbitration, and arbitrability is the nobility of international
commercial arbitration.

5.1. ARBITRABILITY.

Arbitrability is one of the issues where the contractual and jurisdictional natures
of international commercial arbitration meet head on. According to Carbonneau and
Janson,320 “arbitrability determines the point at which the exercise of contractual
freedom ends and the public mission of adjudication begins.” It involves the simple
question of what types of issues can and cannot be submitted to arbitration. Party
autonomy espouses the right of parties to submit any dispute to arbitration. It is the
parties’ right to opt out of the normal national court jurisdiction. National laws often
impose restrictions or limitations on what matters can be referred to and resolved by
arbitration. For example, states or state entities may not be allowed to enter into
arbitration agreements at all or may require a special authorization to do so. This is
called “SUBJECTIVE ARBITRABILITY”. More important than the restrictions relating
to the parties are limitations based on the subject matter in issue. This is “Objective
320
Carbonneau and Janson, “Cartesian Logic and Frontier Politics: French and American Concepts of
Arbitrability”, 2 Tul Journal of International and Comparative Law, 193 (1994)
 arbitrability”.321 Certain disputes may involve such sensitive public policy issues that it is
felt that they should only be dealt with by the judicial authority of state courts. An
obvious example is criminal law which is generally the domain of the national courts.
These disputes are not capable of settlement by arbitration. This restriction on party
autonomy is justified to the extent that arbitrability is a manifestation of national or
international, public policy. Consequently, arbitration agreements covering those
matters will, in general, not be considered valid, will not establish the jurisdiction of the
arbitrators and subsequent award may not be enforced. In the U.S. the term “arbitrability”
is often used in a wider sense covering the whole issue of the tribunal’s jurisdiction.322

To understand the prevailing international situation with regard to arbitrability,

three important aspects are to be studied. They are-
i) Law applicable to questions of arbitrability,
ii) The limitations imposed in different countries, or Substantive Rules on Objective
arbitrability; and
iii) Whether arbitration tribunals have the right and duty to deal with the issue of
arbitrability on their own initiative.(Lack of arbitrability)

5.1.1. LAW APPLICABLE TO QUESTIONS OF ARBITRABILITY:

Determination of the law governing arbitrability is of considerable importance.

Despite the generally prevailing tendency to increase the scope of arbitrable disputes
national laws frequently differ from each other. A number of disputes which are not
arbitrable under the law of one country are arbitrable in another country where the
interests involved are considered to be less important. The approach to bribery is an
example of existing differences. In many countries, whilst bribery is a vitiating factor in
all contracts, it can be considered by arbitrators. In other countries not only is bribery
illegal but also to preclude it from being legitimized, by a commercial or consultancy
arrangement, if allegations of bribery are raised they cannot be considered by arbitrators.
Consequently, in some countries, consultancy contracts relating to public procurement
are not arbitrable because of the prevalence of excessive commissions considered to be

321
Fouchard Gaillard Goldman, On International Commercial Arbitration, Para-533; Kirry, ‘Arbitrability:
Current Trends in Europe’, 12 Arbitration International 373 (1996) 381 et seq.
322
First Options of Chicago vs. Manuel Kaplan et and MK Investment, Inc, 115 S Ct. 1920, 1943 (1995).
bribes. The law governing arbitrability of a dispute may depend on where and at what
stage of proceedings the question arises. Tribunals may apply different criteria than
courts in determining this law and the criteria applied by courts at the post-award stage
may differ from those at the pre-award stage.

International Conventions vs. National Laws:

Under the various conventions the obligations of national courts to enforce

arbitration agreements and awards only exist where the dispute is arbitrable. Therefore
these conventions generally regulate which law governs arbitrability. If a dispute is
arbitrable according to this law, courts may not rely on non-arbitrability of the dispute
under a different law to refuse enforcement of the arbitration agreement or award.

The New York Convention provides for the law of arbitrability only from the
perspective of enforcement. It requires the enforcing court to look to its own law to
determine whether the dispute is arbitrable. Art-V (2) (a) provides – “Recognition and
enforcement of an arbitral award may also be refused if the competent authority in the
country where recognition and enforcement is sought finds that:

The subject matter of the difference is not capable of settlement by arbitration under the
law of that country…” In contrast to this clear rule at the enforcement stage the New
York Convention does not contain a rule as to what law governs the question of
arbitrability at the pre-award stage. For example, when a party challenges the jurisdiction
of a court invoking the existence of an arbitration clause, Art-II (1) only states that
arbitration agreements have to be recognized so that courts have to deny jurisdiction
under Art-II (3) unless the dispute is not capable of settlement by arbitration. According
to which law the dispute has to be capable of settlement by arbitration, however, is not
expressly provided for and has given rise to a number of divergent views in national court
practices.

It is not uncommon that courts support the application of different criteria depending on
whether the question arises at the referral stage or at the enforcement stage. This is well
illustrated by a 1986 Belgian case involving an exclusive distributorship between a Swiss
and a Belgian party.323 The contact was submitted to Swiss law and contained an
arbitration clause. The Belgian party started court proceedings in Belgium relying on a
provision of Belgian law that disputes arising out of distributorship contracts were not
arbitrable. The Swiss party asked for the dispute to be referred to arbitration. The
application was granted by the Court of Appeal in Brussels which held that – “The
arbitrability of a dispute must be ascertained according to different criteria, depending on
whether the question arises when deciding on the validity of the validity of the arbitration
agreement or when deciding on the recognition and enforcement of the arbitral award. In
the first case, the arbitrability is ascertained according to the law which applies to the
validity of the arbitration agreement and … its object. It is therefore the law of
autonomy which provides the solution to the issue of arbitrability. An arbitrator or court
faced with this issue must first determine which law applies to the arbitration agreement
and then ascertain whether, according to this law, the specific dispute is capable of
settlement by arbitration.

Within the framework of the New York Convention, the expression ‘concerning a
subject matter capable of settlement by arbitration’ Article II(1) does not affect the
applicability of the law designated by the uniform solution of conflict of laws for
deciding on the arbitrability of the dispute at the level of the arbitration agreement.
According to the New York Convention, the arbitrability of the dispute under the law of
the forum must be taken into consideration only at the stage of recognition and
enforcement of the award and not when examining the validity of the arbitration
agreement. This rule can be explained by the consideration that the arbitral award will, in
the majority of cases, be executed without the intervention of land enforcement court.324

An interesting approach was also adopted by the US District Court for the Eastern
District of New York in Meadows Indemnity Vs. Shoop Insurance Services.325 The
claimant initiated court proceedings in the US, despite an arbitration agreement, alleging
that the dispute in question was not arbitrable under the law of Guernsey, where it was
incorporated and where an award would have been enforced. The court had to decide
whether to enforce the arbitration agreement under Article II New York Convention or

323
Cour d’appel Brussels, 4 October 1985, Company M vs. M SA, XIV YBCA 618 (1989).
324
Ibid, 619.
325
760 f Supp 1036-1045, XVII YBCA 686 (1992) (EDNY 1991
whether the claim was not arbitrable. It treated Article-II as a substantive rule, providing
for an autonomous international concept of arbitrability. The court held that –

“Reference to the domestic laws of only one country, even the country where
enforcement of the arbitral award will be sought, does not resolve whether a claim is
‘capable of settlement by arbitration’ under Art-II (1) of the Convention. The
determination of whether a type of claim is ‘not capable of settlement by arbitration’
under Art-II (1) must be made on an international scale, with reference to the laws of the
countries party to the Convention. The purpose of the Convention, to encourage the
enforcement of commercial arbitration agreements, and the federal policy in favour of
arbitral dispute resolution require that the subject matter exception of Art-II is extremely
narrow.” However, in the majority of cases courts have determined the question of
arbitrability at the pre-award stage according to their own national law.326

While this is frequently done without any conflict of laws analysis, courts which
have reviewed the issue properly have in general applied Art-V (2)(a) New York
Convention. This approach and the underlying rationale of applying the national law are
well illustrated by two Italian cases.

In Fincantieri Vs. Iraq,327 the Court of Appeal in Genoa was faced with the
question whether disputes as to the effects of the United Nations embargo against Iraq
were arbitrable. Dealing with the question of applicable law the court held that – “The
answer must be sought in Italian law, according to the jurisprudential principle that, when
an objection for foreign arbitration is raised in court proceedings concerning a contractual
dispute, the arbitrability of the dispute must be ascertained according to Italian law as this
question directly affects jurisdiction, and the court seized of the action can only deny
jurisdiction on the basis of its own legal system. This also corresponds to the principles
expressed in Art-II and V of the (New York Convention). Hence, the answer to the
question of arbitrability can only be that the dispute was not arbitrable due to Italian
embargo legislation.”

326
Belgium, Tribunal de Commerce, Brussels, 20 September 1999, Matermaco SA vs. PPM Cranes Inc et
al, XXV YBCA 673 (2000) 675
327
Corte di Appello Genoa, 7 May 1994, FINACANTIERI-CANITERI NAVALI ITALIANI SPA AND
OTO MELARA SPA vs. MINISTRY OF DEFENCE,ARMAMENT AND SUPPLY DIRECTORATE OF
IRAQ, REPUBLIC OF IRAQ, 4 Riv Arb 505 (1994), XXI YBCA 594 (1996)
 The practice of national courts determining arbitrability according to their own
law is also supported by Art-VI (2) European Convention. This provides in its pertinent
part – “The courts may also refuse recognition of the arbitration agreement if under the
law of their country the dispute is not capable of settlement by arbitration.”

Like Art-V of New York Convention, Art-VI (2) of European Convention clearly
distinguishes between the law applicable to the issue of arbitrability and the law
governing the validity of the arbitration agreement. While the latter is primarily
submitted to the parties’ choice and in the absence of a choice to the law of the place of
arbitration, each national court determines the arbitrability of a dispute according to its
own law.328 This distinction and the perception that arbitrability is an issue of the general
validity of the arbitration agreement has lead to the view that the dispute must be
arbitrable according to both the law governing the arbitration agreement and the law of
the deciding court. (Also, Art-44 of the draft Japanese Arbitration Law according to
which the arbitration agreement is only valid if it fulfils the requirements of both the law
of Japan and the law applicable to the arbitration agreement.

However, such an interpretation of the relevant provision is unnecessarily

restrictive and not in line with the general tendency to favour arbitration. Though
arbitrability is often considered to be a requirement for the validity of the arbitration
agreement it is primarily a question of jurisdiction. Therefore the better view is that the
law applicable to the question of arbitrability in court proceedings should be governed
exclusively by the provisions of he law of the national court which determines the
case.329 That is also the way in which Art V (2)(a) of New York Convention should be
interpreted when the issue is the enforcement of an arbitration agreement at the pre-award
stage. Each country determines for itself which disputes it considers to be arbitrable.330

328
Arfazadeh, “Arbitrability under the New York Convention: The Lex Fori Revisited” 17 Arb. Int.73
(2001)
329
Reithmann Martiny. Internationales Vertragrescht (5thj ed. Schmidt 1996) para 2380.
330
Julian D M Lew, Loukas A Mistelis and Stefan M Kroll, Comparative International Commercial
Arbitration, Kluwer Law International, South Asian Reprint Edition, Indian Reprint – 2007. pp.187-194)
NATIONAL ARBITRATION LAWS:

In so far as National Arbitration Laws are concerned, the different national

arbitration rules do not regulate which law governs the question of arbitrability. Rather
they determine directly which disputes are arbitrable. While in common law countries
this approach can traditionally be found in case law, various civil law countries have
attempted to legislate the law applicable to arbitrability. In civil law countries two
different approaches can be distinguished.

The first relies primarily on substantive criteria which are completely self sufficient. For
Ex. Swiss PIL Art-177 provides:

1. “Any dispute involving property can be the subject-matter of arbitration.

2. If a party to the arbitration agreement is a state or an enterprise held, or an

organization controlled by it, it cannot rely on its own law in order to contest its capacity
to be a party to arbitration or the arbitrability of a dispute covered by the arbitration
agreement.” This approach is based on a broad notion of arbitrability defined by the
national legislator. Complex conflict of laws questions may only arise for few claims
involving no economic interest in the sense of the broad notion given to this concept.
The second approach generally relies on the parties’ power to dispose of the rights
involved in the dispute or to reach a compromise. This requires a conflict of laws
analysis. An example of this approach is Art-167 (1) Belgian Judicial Code which
provides –“Any dispute which has arisen or may arise out of a specific legal relationship
and in respect of which it is permissible to compromise may be the subject of an
arbitration agreement.”331

5.1.2. SUBSTANTIVE RULES ON OBJECTIVE ARBITRABILITY

(LIMITATIONS):

Every national law determines which types of disputes are the exclusive domains of
national courts and which can be referred to arbitration. This differs from state to state
reflecting the political, social and economic prerogatives of the state, as well as its
general attitude towards arbitration. It involves a balancing of the mainly domestic

331
Ibid, p.194.
importance of reserving certain matters for exclusive decision of courts with the more
general public interest of promoting trade and commerce through an effective means of
dispute settlement.332

Therefore, the decision may be different in cases arising in a purely national

context from that in relation to international transaction. In Mitsubishi Vs. Soler,333 the
U.S. Supreme Court held that in an international context the ambit of arbitration may be
wider than in a national context. Though the case only dealt with US Law, the decision
describes what the prevailing view is now. The case also evidences a second general
trend: the increase in the types of disputes which can be referred to international
arbitration. While originally arbitration was often limited to claims arising directly out of
a contract, gradually more and more claims based on statutes, for example regulating
important parts of national economy in the public interest, have become arbitrable. In
Mitsubishi vs. Soler, the Court declared anti-trust disputes to be arbitrable which in
American Safety Equipment Corp Vs. J.P. Maguire & Co.334 were still held not to be
arbitrable in a domestic context. Although in general limits on arbitrability of disputes
arise from public policy only few laws make express reference to the notion of ‘public
policy’.335 Not only is the notion often too vague to give clear guidance but in the
contemporary arbitration friendly environment not every rule of public policy justifies
reserving the disputes involved for determination by state courts.336 Therefore, despite the
underlying public policy consideration, different criteria are adopted in determining
arbitrability. Some national laws refer to very broad notions such as “disputes involving
economic interest” (Germany ZPO Sec.1030 (1), or “dispute involving property”
(Switzerland PIL Art-177). Other national laws rely on the narrower concept of
“capability of the parties to reach an agreement.” The Model Law does not contain any
definition of which disputes are arbitrable. Quite to the contrary Art-1(5) Model Law

332
Westacre Investments Inc. vs. Jugoimport-SPDR Ltd. (1998) 2 Lloyd’ Rep 111, 129 – a decision
involving allegations of bribery and the English Commercial Court dealt with relevant issues in the
balancing process in the context of arbitrability of dispute.
333
MITSUBISHI MOTORS CORP. vs. SOLER CHRYSLER PLYMOUTH INC. 473 US 614, 105 S Ct
3346, 3335 et seq.
334
American Safety Equipment Corp. vs. J.P. Maguire & Co. 391 F 2d 821, 826 et seq (2d Cir 1968)
335
France NCPC Art.2060.
336
Kirry, “Arbitrability:Current Trends in Europe”, 12 Arb. Int. 373 (1996) 374-379.
provides that it is not intended to affect other laws of the state which preclude certain
disputes being submitted to arbitration.

In implementing the Model Law national legislators are completely free to

determine which disputes are arbitrable and which are not. This may be done expressly
where arbitrability of certain disputes are excluded by statute. The exclusion may also
result from conferring exclusive jurisdiction on specialized tribunals or national courts.
The express exclusion of certain disputes from arbitration is well illustrated in German
Law. For example, former Sec-28 Securities Exchange Act (Bors G) provided that
arbitration agreements in contracts for transactions on a German securities exchange were
only valid when the customer was a registered business person (Volkaufmann) or a
company or business person established outside of Germany. Disputes with other
private parties could not be referred to arbitration. The differences between the various
approaches are, however, diminishing with the gradual enlargement of the scope of
arbitration in most countries. The areas where traditionally problems of arbitrability have
arisen are anti-trust and competition, securities transactions, insolvency, intellectual
property rights, illegality and fraud, bribery and corruption, land investments in natural
resources.337

Anti-Trust and Competition Laws:

Anti-Trust and Competition legislation involve important issues of national or

regional economic policy, given the influence they may have on the market structure.
The U.S, Europe and a number of other developed countries have regulations forbidding
agreements and practices which restrict competition, lead to a dominant position or can
be considered to be an abuse of such position. Violations of those prohibitions usually
result in the illegality of an agreement or practice and may give rise to actions for
damages.

Art-81 of European Community Treaty, for example, provides that agreements

which restrict competition and have an effect on the Community market are forbidden
and are void unless entitled to exemption under Art-81(3). Unless by the terms of the
agreement a block exemption applies, these exemptions can only be granted by the

337
Julian D M Lew, Loukas A Mistelis and Stefan M Kroll, Comparative International Commercial
Arbitration, Kluwer Law International, South Asian Reprint Edition, Indian Reprint – 2007, pp.199-201)
European Commission after notification and review. However, it is generally recognized
that most other issues in relation to competition law are considered to be arbitrable. This
has been decided in a number of cases where a party trying to resist contractual claims
invoked the illegality of the agreement for alleged infringements of competition law.338
This has found indirect approval by the European Court of Justice in the Eco Swiss
China Time Ltd. vs. Benetton International NV339 case, though the case only dealt
with the enforcement of an award. It is accepted that under EC law private enforcement
of competition remedies is permissible.340

This European approach has been largely influenced by the prevailing opinion in
the US case law for antitrust disputes involving claims based on the Sherman Act. The
Supreme Court decision in Mitsubishi vs. Soler341 considered the control at the post-
award stage to be sufficient to safeguard the national interests underlying the antitrust
legislation. In this case, the Puerto Rican distributor had entered into a distributor
agreement with Chrysler International (CISA), according to which it was to sell
automobiles produced by Mitsubishi Motors, a Japanese car manufacturer, a joint venture
between CISA and Mitsubishi Heavy Industries. The distributorship agreement required
Soler to buy a certain amount of cars from Mitsubishi per year, and provided that any
disputes should be resolved by arbitration in Japan under the rules of the Japan
Commercial Arbitration Association. After a period of successful selling Soler was
unable to maintain the required sales volumes. It requested permission from CISA to
sell cars outside the designated area but this was refused. Soler brought an action in the
District Court of Puerto Rico for breach of the US Sherman Act and other competition
laws. CISA sought a stay of the court proceedings and an order to compel Soler to
arbitrate in Japan.

The Supreme Court determined that the issues were arbitrable and compelled the
parties to go to arbitration in Japan, under the JCAA Rules, in accordance with the
agreement. Only at the enforcement stage would the Court review the anti-trust issue.
338
Italy, Corte di Appello Bologna, 21 December 1991 no. 1786, SpA Coveme vs. CFI-Compagnie
Francaise des Isolants SA, XVIII YBCA 422 (1993) 425 et seq; Switzerland, Tribunal Federal, 28 April
1992, V SpA vs. G SA, XVIII YBCA 143 (1993) 148; Hanotiau, ‘The Law Applicable to Arbitrability’,
van den Berg(ed) ICCA Congress series No. 9, 146, 161.
339
(1999) ECR I 3055 – ECJ, 1 June 1999, Case 126/97.
340
Idot, “Arbitrage et Droit Communautaire” RDAI/IBLJ/ 561 (1996).
341
473 US 614, 105 S Ct. 3346 (1985)
The Court stated: - “The importance of the private damages remedy ... does not compel
the conclusion that it may not be sought outside an American court. Notwithstanding its
important incidental policing function, the treble-damages cause of action conferred on
private parties by Sec-4 of the Clayton Act…And pursued by Soler …seeks primarily to
enable an injured competitor to gain compensation for that injury.

Sec-4 … is in essence a remedial provision. It provides treble damages to any

person who shall be injured in his business or property by reason of anything forbidden in
the antitrust laws …. Of course, treble damages also play an important role in penalizing
wrongdoers and deterring wrongdoing, as we also have frequently observed …. It
nevertheless is true that the treble-damages provision, which makes awards available only
to injured parties, and measures the awards by a multiple of the injury actually proved, is
designed primarily as a remedy. There is no reason to assume at the outset of the dispute
that international arbitration will not provide an adequate mechanism. To be sure, the
international arbitral tribunal owes no prior allegiance to the legal norms of particular
States; hence, it has no direct obligation to vindicate their statutory dictates. The
tribunal, however, is bound to effectuate the intentions of the parties. Where the parties
have agreed that the arbitral body is to decide a defined set of claims which includes, as
in these cases, those arising from the application of American antitrust law, the tribunal
therefore should be bound to decide that dispute in accord with the national law giving
rise to the claim. And so long as the prospective litigant effectively may vindicate its
statutory cause of action in the arbitral forum, the statute will continue to serve both its
remedial and deterrent function.”342 Where a comparable reasoning was adopted. Though
the result is convincing, the argument is flawed by the fact that it presupposes
enforcement will take place in the US. If the losing party has assets in another country
the award may be enforced there without US courts having a chance to intervene to
safeguard the public interest protected by the Sherman Act.343 Though any award
violating US competition law may not be enforceable in the US it may be enforceable in
other countries.

342
See also the U.S.Supreme Court decision in relation to the protection granted under the Carriage of
Goods by Sea Act, “Vimar Seguros Y Reaseguros, SA vs. M/S. SKY REEFER, her
343
See contrasting views of Werner, “A Swiss Comment on Mitsubishi”, 3(4) Journal of International
Arbitration 81 (1986) and Jarvin, “Mitsubishi ICC comment”, 4 (1) Journal of International Arbitration 87
(1987). Engines etc. et al 115 S Ct. 2322 1995, 132 L Ed. 2d. 462.
Securities Transactions:

In the area of Securities transactions, national laws seek to protect the market but
also often grant special protection to customers. Certain transactions may not be
enforceable or customers are given special statutory rights to recover damages incurred.
For example, the US Securities Act 1933 and the Securities Exchange Act 1934 grant
special statutory rights to customers. All agreements which have the effect of limiting
those rights granted are declared void. These rules were considered to prevent the
arbitrability of all or certain disputes in relation to securities transactions. In particular in
the US the arbitrability of securities transactions has undergone considerable change over
the years. The history of judicial hostility towards securities arbitration can be traced to
the Wilko vs. Swan 344decision of 1953. There the US Supreme Court held that claims
under the Securities Act 1933 were not capable of being resolved by arbitration and had
to be referred to the courts, as arbitration offered the parties less protection of their
statutory rights than the courts.

Since then the legal position has shifted completely. First in 1974 in Scherk Vs.
Alberto-Culver Co.345 the Supreme Court recognized the arbitrability of federal
securities claims with an international element. The case involved a cross-border
transaction between a German citizen and a US company containing an arbitration clause.
As the court emphasized, the international nature of the agreement was the essential
difference between Wilko and Scherk. While purely domestic claims could not be
arbitrated, an international element could make the dispute arbitrable. Indeed the
Supreme Court acknowledged that “a parochial refusal by the courts of one country to
enforce an international arbitration agreement ….. Would damage the fabric of
international commerce and trade and imperil the willingness and ability of businessmen
to enter into international commercial agreement.”346

In 1987, in Shearson Vs. Mc.Mahon347, the Supreme Court extended that

position to claims under the Securities Exchange Act in purely domestic transactions.
Finally two years later, in 1989, in Rodriquez De Quijas Vs. Shearson/Amerian

344
346 US 417 (1953)
345
417506 (1974)
346
Ibid.
347
S. 220 (1987)
Express Inc348, the Wilko rationale was overruled, and all federal securities claims were
declared arbitrable regardless of the nature of the transaction. In that case, the plaintiffs
had opened a brokerage account with American Express and their agreement
incorporated a standard pre-dispute arbitration clause. The Supreme Court no longer
regarded arbitration as falling short in protecting investors’ rights, due to the Securities
Exchange Commission supervision, and stated that – “arbitration agreements should not
be prohibited under the Securities Act, since they, like the provision for concurrent
jurisdiction, serve to advance the objective of allowing buyers of securities a broader
right to select the forum for resolving disputes, whether it be judicial or otherwise.”349

The Court recognized that WILKO was pervaded by “the old judicial hostility to
arbitration… and it would be undesirable for the decisions in Wilko and McMahon to
continue to exist side by side.350 Since the Rodriquez decision there has been an
‘explosion’ of securities arbitration.351 Brokerage firms in the US now regularly require
investors to sign in their consumer accounts agreements to the effect that any dispute is to
be settled by arbitration, generally under the stock exchange or self-regulatory body of
which the broker is member, such as the National Association of Securities Dealers and
the New York Stock Exchange. The positive impact of arbitration in the securities area is
nowadays evidenced by the fact that most self-regulatory organizations such as the New
York Stock Exchange (NYSE), the National Association of Securities Dealers (NASD),
the American Stock Exchange (Amex) and the Commodity Exchange administer
arbitration services. This trend is not with their own arbitration bodies and structures,
which adopt specially tailored arbitral procedures and clearly defined rules for settling
securities disputes.

Insolvency Law:

The arbitrability of disputes with an insolvent party has been an issue in a number
of cases in various countries.352 In this respect one has to distinguish between “pure”

348
490 US 477 (1989)
349
Ibid, pp.482-483.
350
Ibid, p.484.
351
Park, “Arbitration in Banking and Finance”, 17 Annual Review of Banking Law 213 (1998) 232.
352
Westbrook, The Coming Encounter:International Arbitration and Bankruptch”, 67 Minnesota Law
Review 595 (1983); Newman and Burrows, “Enforcement of Arbitration Provisions in Bankruptcy”, NYLJ
bankruptcy issues, such as appointment of an administrator, opening of proceedings and
other issues. It is beyond doubt that the “pure” bankruptcy issues are generally not
arbitrable.353 Their purpose is not so much the settlement of disputes between the parties
but they are more proceedings for the collective execution or reorganization of the debtor.

Most cases however, are not concerned with such ‘pure’ bankruptcy issues but
with standard monetary claims against or by an insolvent party. In these cases the
question arises whether disputes which are clearly arbitrable as such lose their
arbitrability due to the insolvency of one party. The reason for this is that separate
arbitration proceedings might conflict with the policies of the national insolvency laws.
In order to centralize all claims and to enable the assets of a debtor to be dispersed in an
equitable, orderly and systematic manner the national laws often provide for suspension
of individual actions, dispossession of the debtor and an exclusive jurisdiction of a
particular court. The conflict is well described by the Bankruptcy Court of
Massachussetts which held in Sonatrach Vs. Distrigas354 that – “There will be
occasions where a dispute involving both the Bankruptcy Code… And the Arbitration
Act… Present a conflict or near polar extremes; bankruptcy policy exerts an inexorable
pull towards centralization while arbitration policy advocates a decentralized approach
toward dispute resolution.”

The court came to the conclusion that the strong policy of the Federal Arbitration
Act favouring arbitration in international cases overrode the policies underlying the
bankruptcy law. The main argument was that the type of dispute involved i.e. the
determination of damages arising out of the termination of a contract, did not implicate
any major bankruptcy issue. The importance of the type of dispute for its arbitrability
becomes even more apparent in a recent decision of the Court of Appeal for the Second
Circuit.355 In taking up the distinction in the Bankruptcy Code between “core matters”
and “non-core matters”, the Court in denying the arbitrability of the claim in dispute held
in relation to the balancing of interest and potential conflict between the Federal

3 (June 18/1992); Mantilla-Serrano, International Arbitration and Insolvency Proceedigns, 11 Arbitration

International 51, (1995); Fouchard, Arbitrage et faillite, Rev. Arb 471 (1998).
353
Lazier, Insolvency Proceedings, 156-157.
354
R 606, 610 (D Mass 1987).
355
United States Lines Inc. et al (US) vs. American Steamship Owners Mutual Protection and Indemnity
Association, Inc. et al (US), In re United States Line, XXV YBCA 1057 (2000) (2d Cir, 1 November 1999)
Arbitration Act and the Bankruptcy Code. – “Such a conflict is lessened in non-core
proceedings which are unlikely to present a conflict sufficient to override by implication
the presumption in favour of arbitration. ….Core proceedings implicate more pressing
bankruptcy concerns, but even a determination that a proceeding is core will not
automatically give the bankruptcy court discretion to stay arbitration. Certainly not all
core bankruptcy proceedings are premised on provisions of the Code that inherently
conflict with the Federal Arbitration Act; nor would arbitration of such proceedings
necessarily jeopardize the objectives of the Bankruptcy Code.” …However, there are
circumstances in which a bankruptcy court may stay arbitration, and in this case the
bankruptcy court was correct that it had discretion to do so. In exercising its discretion
over whether, in core proceedings, arbitration provisions ought to be denied effect, the
bankruptcy court must still carefully determine whether any underlying purpose of the
Bankruptcy Code would be adversely affected by enforcing an arbitration clause …. The
Arbitration Act as interpreted by the Supreme Court dictates the arbitration clause should
be enforced unless the Supreme Court dictates that an arbitration clause should be
enforced unless (doing so) would seriously jeopardize the objectives of the Code. In the
instant case, the declaratory judgment proceedings are integral to the bankruptcy court’s
ability to preserve and equitably distribute the Trust’s assets. Furthermore, as we have
previously pointed out, the bankruptcy court is the preferable venue in which to handle
mass tort actions involving claims against an insolvent debtor … The need for a
centralized proceeding is further augmented by the complex factual scenario, involving
multiple claims, policies and insurers.356 Thus in the light of the above test, the
distinction between ‘core matters’ and ‘non-core matters’ becomes relevant.
Disputes relating to the latter are probably with very few exceptions arbitrable
while the opposite is true for ‘core matters’. Comparable distinctions underlie the
question of arbitrability in other countries, with the effect that the majority of contractual
disputes against the insolvent debtor are probably considered to be arbitrable. In France,
the exclusive jurisdiction of the Commercial Court in Art-174 of the Bankruptcy Law
only covers ‘pure’ bankruptcy issues. The same applies to Italy. By contrast under
Dutch law only non-monetary claims against the estate are arbitrable while claims for

356
Ibid para 14-16.
payment have to be settled by the special ‘renvoi procedure’ if they are contested in
bankruptcy.

Under the German law, the insolvency of one party does not in general affect the
arbitrability of a dispute. Claims against the estate have to be filed in bankruptcy and if
contested are then arbitrable. Only enforcement actions are barred by the insolvency of
the debtor, which do not include actions to have an award declared enforceable. A more
serious threat to arbitration than the issue of arbitrability, however, in connection with the
insolvency of one party derives from the wide interpretation by German courts of the
notion of ‘inoperability’ of the arbitration clause. German courts have consistently held
that an arbitration agreement becomes inoperable if one of the parties lacks the necessary
funds for arbitration proceedings, which might be the case when a company is
insolvent.357

Intellectual Property Rights:

Intellectual Property rights derive from legal protection granted by a sovereign

power, which affords the beneficiary certain exclusive rights to use and to exploit the
intellectual property in question. Their existence often requires the registration with a
governmental or quasi-governmental agency which alone can grant, amend or revoke
these rights and determine their scope. It is this involvement and the effect decisions
concerning the existence of an intellectual property right have on third parties which have
led to the non-arbitrability of these disputes in some countries. For example, in the
European Union disputes directly affecting the existence or validity of a registered
intellectual property right are still not considered to be arbitrable.358 By contrast in
Switzerland where the law contains a comparable definition of arbitrability the opposite
is true: arbitration awards are recognized by the Swiss Patent and Trade Mark Office as a
basis for revoking the registration of a patent.359

357
Julian D M Lew, Loukas A Mistelis and Stefan M Kroll, Comparative International Commercial
Arbitration, Kluwer Law International, South Asian Reprint Edition, Indian Reprint – 2007. P-206-208)
358
EC Regulation 44/2001 Art. 22(4) which confers exclusive jurisdiction on certain national
courts in relation to the registration and validity of patents and trademarks;Simms, Arbitrability
of Intellectual Property Disputes in Germany, 15 Arb Int 193 (1999) 196.
359
Blessing, “Arbitrability of Intellectual Property Disputes”, 12 Arb Int. 191 (1996) 200.
Fewer problems concerning arbitrability arise if the dispute is not about the validity of an
intellectual property right but involves the contracts concluded in the exercise of such a
right. Disputes as to validity, effect and royalties due under licensing agreements,
contracts for the transfer of property rights, or research and development agreements
intended to lead to intellectual property rights are generally considered to be arbitrable.
They usually do not have a direct effect on third parties360 which held that claims that do
not involve the validity of a patent but just the breach of contract are arbitrable under
French law irrespective of Article 68 of the law patents. Two legal systems which accept
the arbitrability of almost all intellectual property disputes are Switzerland and U.S.
Most other countries do not exclude intellectual property rights as a whole from the
jurisdiction of arbitration tribunals but usually draw a distinction between those rights
which have to be registered, i.e. patents and trademarks, and those which exist
independently of any such formality, such as copyright.

With regard to the former category, most jurisdictions will only permit an award
which takes effect between the parties. However, most related issues such as ownership,
infringement, transfer or violation of the patent can be freely arbitrated in all major
jurisdictions. In violation of the patent can be freely arbitrated in all major jurisdictions.
In respect of intellectual property rights which are not subject to registration, such as
copyright, arbitrability appears to be internationally accepted. The general acceptance of
the arbitrability of intellectual property disputes is reflected in the arbitration system
under the World Intellectual Property Organization Rules. A hybrid system has been
established for the non-judicial settlement of domain name disputes. Domain names
which are akin to trademarks are subject to registration under the Uniform Domain Name
Dispute Resolution Policy (UDRP) of the Internet Corporation for Assigned Names and
Numbers (ICANN).361 The procedure deals with the issue of abusive domain name
registrations. While it is arguable whether the UDRP system is an arbitration system, the
point remains that disputes about domain names may be referred to arbitration.

5.1.3. ILLEGALITY AND FRAUD:

360
Decisions on French law by the Cour D’ appel Paris, 24 March 1994, Societe Deko vs. G Dingler et
Societe Meva, Rev Arb 513 (1994) 518 and ICC case No. 6709, 119 Clunet 998 (1992) 1000
361
Davis, “The New New Thing: Uniform Domain-Name Dispute Resolution Policy of the Internet
Corporation for Assigned Names and Number”, 17(3) Journal of International Arbitration 115 (2000)
 Allegations of illegality and fraud have always raised serious problems as to the
arbitrability of dispute. In conjunction with the acceptance of the doctrine of separability
it has become increasingly accepted the allegations of illegality of the main contract do
not necessarily lead to the non-arbitrability of the dispute. This is only where the
provisions which lead to illegality are of such kind that they require the dispute to be
decided by state courts. One type of provisions which has led to divergent views in this
context is United Nations embargoes. In connection with Iraq embargo legislation
Italian and Swiss courts came to opposing conclusions as to the arbitrability of the
dispute. In the Italian case362 Fincantieri and other Italian providers of army technology
had entered into contacts with agencies of the Republic of Iraq for the supply of corvettes
for the Iraqi Navy. After the invasion in Kuwait an embargo was declared by the United
Nations Security Council followed by similar legislation by the European Union and Italy
which made any dealings with Iraq illegal. At that time, most of the corvettes had not
yet been built or delivered.

The Italian parties commenced proceedings against Iraq in the Court of First
Instance of Genoa, alleging frustration of contract and seeking termination and damages.
The Iraqi parties objected to the court’s jurisdiction and maintained that the dispute
should have been referred to arbitration as provided for in the contracts. The Italian
parties replied that only arbitrable matters may be referred to arbitration and that the
dispute concerned matters which would have been arbitrable before the embargo
legislation was issued but were no longer so. They maintained that arbitrability must be
ascertained under Italian law and relied on Art-806 Code of Civil Procedure. This
provided that only disputes concerning rights of which the parties may freely dispose
may be referred to arbitration. They alleged that, due to the embargo legislation, the
parties could not freely dispose of the contractual rights at issue.

The Court of Appeal ruled that Italian courts had jurisdiction over the case as the
dispute was not arbitrable under the applicable Italian and European embargo legislation.
In connection with the EC Regulation 3541/1992 it held that – “……Art.21 of this
Regulation forbids (parties) to meet or take any measure to meet Iraqi requests to perform
362
(Corte di Appello Genoa, 7 May 1994, Fincantieri – Cantieri Navali Italiani SpA and Oto Melara S;A
vs. Ministry of Defence, Armament and Supply Directorate of Iraq, Republic of Iraq, XXI YBCA 594
(1996),
in any way under contracts or transactions falling under Resolution No. 686/1990….. Art.
1.2 explains that ‘request’ means a request made in or out of court, before or after the
date of entry into force of the Rule; that ‘transaction’ ….. generally means negotiation,
and that this provision, in the light of its ratio, must be interpreted in the sense that it
forbids not only meeting a request but also any (voluntary) act aiming at meet it. This
JUS SUPERVENIENS is worth mentioning; even where the answer given above to the
question of jurisdiction were uncertain under the legislation in force at the time of
commencing this action, (this EC Rule) would make the arbitral clause null and void and
grant the Italian court’s jurisdiction to hear the case. This solution finds no obstacle in
the fact that the main claim aimed at terminating the contracts, not obtaining performance
under them. Also in this case, referral of the dispute to the arbitrators could have
affected …. Rights which international and national embargo legislation had made
‘indisponibili’……. Further, as a set-off had been claimed, in case termination were
granted, between the Iraqi parties’ credits for advance payments made and their allegedly
higher debts, the arbitration could have led to meeting (Iraqi requests) in violation of the
said supranational legislation. Also, a hypothetical arbitral award against the claimants,
denying termination of the contract, would have recognized the continuing validity of the
contracts, thereby affecting, in a contrary but similar manner, “DIRITTI
INDISPONIBILI” The Swiss Supreme Court came to the opposite conclusion in a
dispute involving the Italian party and its agent for the sales to Iraq.363

The agent had initiated arbitration proceedings for outstanding payments under
the agency contract. In a preliminary award the arbitration tribunal held that despite the
embargo legislation it had jurisdiction. An action for the annulment of the award went to
the Swiss Supreme Court which rejected the claim that the dispute involved was not
arbitrable. The court held that generally the only condition for the arbitrability of
disputes according to Swiss law was that it was a dispute in relation to property. Public
policy considerations included in the embargo could only lead to non-arbitrability if they
required the submission of disputes to the state courts and not only the non-enforcement
of the substantive contract. The court held that –“The arbitrability of the dispute does
not depend on the material existence of the claim. Thus it cannot be denied for the only
363
Tribunal Federal, 23 June 1992, Fincantieri – Cantieri Navali Italiani SpA and Oto Melara SpA vs. M
and Arbitration tribunal, XX YBCA 766 (1995) paras 10, 11.
reason that mandatory provisions of law or a given material public policy make the claim
null and void or its execution impossible; it could be denied only as far as the claims are
concerned which should have been heard exclusively by a State court, according to
provisions of law which were to be taken into consideration for reasons of public policy.

“This is not at all the case here. The commercial measures taken against the
Republic of Iraq raise indeed the issue of the validity of the contacts concluded before
these measures were taken, or the issue of the subsequent impossibility to perform under
said contracts. It does not seem, however, and (Fincantieri and Oto Melara) in any case
do not prove, that all this must lead us to find that the claims arising out of these contracts
are not arbitrable, and even more that the claims arising out of related contracts, like the
agency contract on which M. bases his claims, are not arbitrable.”

In the US it has long been recognized that a tribunal has jurisdiction to hear a
dispute concerning a contract which has allegedly been induced by fraud. In Prima Paint
Corporation Vs. Flood 7 Conklin Mfg. Co.364 The Supreme Court was faced with the
question of whether a claim of fraud in inducement of an entire contract was arbitrable
under an ordinary arbitration clause providing for reference of “any controversy or claim
arising out or relating to agreement or breach thereof.” The court held that under the
Federal Arbitration Act the claim should referred to arbitration, in the absence of any
evidence that contracting parties intended to withhold that issue from arbitration.”365

BRIBERY AND CORRUPTION:

Bribery and corruption have been at the heart of several famous arbitrations
arising out of contracts for consultancy and related services in the acquisition of contracts
of public procurement. The usual situation has been that a party who wants to resist
claims for payment of fees or commission alleges the agreement was actually one for the
payment of bribes and is therefore void, negating the arbitration agreement as well. In
1963, in, Argentine Engineer vs. British Company366 Judge Lager green concluded the
dispute relating to bribery was not arbitrable. After determining that he had to enquire

364
Ct. 1801, 18 L Ed 2d 1270.
365
ICC case No. 1110, published by Wetter, “Issues of Corruption before the International Arbitral
Tribunals: The Authentic Text and True Meaning of Judge Gunnr Lagergren’s 1963 Award in ICC case
No. 1110”, 10 Arb Int 277 (1994)
366
ICC case No. 1110, 3 Arb Int 282 (1987)
into his jurisdiction ex officio, despite a different view by the parties, Judge lager green
held that neither French law, as the law of the place of arbitration, nor Argentine law, as
the law governing the contract, would allow the dispute to be arbitrated.

He continued: “….. Finally it cannot be contested that there exists a general

principle of law recognized by civilized nations that contracts which seriously violate
bonos mores or international public policy are invalid or at least unenforceable and that
they cannot be sanctioned by courts or arbitrators. This principle is especially apt for use
before international arbitration tribunals that lack a “law of the forum” in the ordinary
sense of the term.

After weighing all the evidence I am convinced that a case such as this, involving such
gross violations of good morals and international public policy, and have no countenance
any court either in the Argentine or in France or, for that matter, in any other civilized
country, nor in any arbitral tribunal. Thus, jurisdiction must be declined in this case. It
follows from the foregoing, that in concluding that I have no jurisdiction, guidance has
been sought from general principles denying arbitrators to entertain disputes of this
nature rather than from any national rules on arbitrability. Parties who ally themselves in
an enterprise of the present nature must realize that they have forfeited any right to ask
for the assistance of the machinery of justice (national courts or arbitral tribunals) in
settling their disputes.367

But the Supreme Court of Pakistan in “The Hub Power Company Ltd.
(HUBCO) vs. Pakistan WAPDA and Federation of Pakistan”368 stated that such
matters which require finding about alleged criminality are not referable to arbitration
according to the public policy. The underlying rationale is that due to the criminal
element involved those issues should be left to the state courts. These have greater
means of investigation and can better serve the public interest in prosecuting those acts.

However, the now prevailing view in international arbitration practice, in

particular in Europe, supports the arbitrability of disputes involving allegations of
corruption and bribery. Relying on the doctrine of separability arbitration tribunals and

367
Westacre Investments Inc vs. Jugoimport – SPDR Ltd. (199209) 2 Lloyd’ Rep 65 (1999) 1 All ER
(Comm) 865 (CA).
368
15(7) Mealey’s IAR /a1 (2000)
courts have come to the conclusion that the arbitration agreement as such is generally not
tainted by alleged corruption which only affects the main contract.

Despite the International Public policy implications it is felt that the tribunal
should be allowed to decide whether or not there was bribery or corruption involved.
National courts retain control over contracts involving bribery and corruption at the
enforcement stage since awards which uphold such contracts would be contrary to public
policy. This is clearly stated in the award and the various court decisions in the
Westacre Vs. Jugoimport369 which arose out of a consultancy agreement between West
care Investments, Inc. and Jug import – SDPR Holding Co Ltd. and Beogradsk Banka
(the old Directorate). West care had agreed to assist Jug imports in relation to orders to
be placed by the Kuwait Ministry of Defence (KMD) for M-84 tanks. In return West acre
was to receive a substantial percentage of the value of the contracts. The contract was
submitted to Swiss Law and provided for ICC arbitration in Geneva. After the old
Directorate had secured an order from the KMD it gave West care written notification
that it was terminating their contract because it was in violation of a circular of the KMD
which prohibited the use of agents or intermediaries.

Westacre started arbitration proceedings for the unpaid monies. The arbitrators
awarded westacre approximately 50 million US dollars and interest. The arbitration
tribunal held that the consultancy agreement was not invalid: there was no infringement
of bona mores. Furthermore, it had not been established that the KMD Circular was part
of the mandatory law of Kuwait, as distinct from a term of the M-84 contract or that it
belonged to international public policy. They also held that the respondent had failed to
establish that the consultancy agreement was null on grounds that the parties were to
procure a contract with the Kuwait Government by illicit means. Accordingly, the
consultancy agreement did not violate international public policy. Lobbying by private
enterprises to obtain public contracts was not, as such, illegal activity and contracts to
carry out such activities were not illegal.370 The Arbitration Tribunal made a strong case
for the separability of the arbitration agreements and the function of illegality as a
defence that renders an agreement void, as well as the adversarial nature of the

369
(1999) 3.Wlr.811
370
Westacre award excerpt in (1999) 1 All ER (Comm) 865, 869.
proceedings which limit significantly, if not extinguish, the inquisitorial role of the
tribunal. More importantly, the tribunal expressed a confident opinion that it was entitled
to discuss an allegation of bribery.

The defendant sought to have the award annulled before the Swiss Supreme Court
claiming that West acre was a shell for a member of the Kuwaiti Government. The
Swiss court sought information from the arbitrators as to whether this information had
been provided during the arbitration. The arbitrators reported that the claim had not been
made before them and that in the arbitration proceedings the Directorate had sought to
play down the role of the Government official it now claimed was behind West care.
Despite the new evidence, the Swiss court refused to go behind the facts as found by the
arbitration tribunal and dismissed this claim in 1995. The claimants had also applied to
have the award enforced in Kuwait and in May 1994, without challenge from the
respondents, the Kuwaiti court enforced the award.371
Later in 1995, Westcare applied to enforce the award in England. Through
affidavit, the respondents presented more evidence of their claim that Westacre was
merely a shell for the Kuwaiti government official, including that Westacre was run by
the son-in-law of the government official in question. The main issue before the English
courts was whether the facts should be re-opened to consider the new evidence on the
grounds that it may show that the contract violated English public policy. The Court of
Appeal refused to reopen the facts holding “that the public policy of sustaining
international arbitration awards on the facts of this case outweighs the public policy in
discouraging international commercial corruption.”372 At the heart of these divergent
approaches lies the different weight accorded to the various public policy issues involved
in those disputes. There is a clear conflict between the public policies of sustaining the
parties’ agreement to arbitrate all their disputes, and not enforcing illegal contracts.
Allowing arbitration tribunals to deal with disputes involving allegations of bribery does
not generally lead to the enforcement of illegal contracts. Arbitration tribunals have
refused to enforce such contracts where bribery or corruption was proved. Where

371
XXIII YBCA 836 (1998) 837-8.)
372
Westacre Investments Inc vs. Jugoimport-SDPR Holding Co Ltd. And others (1998) 4 All ER 570
(QBD) (1999) 1 All ER (Comm) 865 (CA)
tribunals have gone wrong and have issued awards, which have upheld illegal practices,
courts have refused to enforce those awards.373

Nevertheless there might be cases which could lead to the enforcement of illegal
contracts. Under the existing system courts do not go behind the acts established by the
arbitrator unless the basic rules of ascertaining the facts have been violated. They decide
on the basis of the facts established by the arbitrator whether the award violates public
policy. In these circumstances errors of fact may lead in certain cases to the enforcement
of illegal contracts. In England this threat is considered to be so minor that predominant
weight is given to the public policy of sustaining the parties’ agreement to arbitrate their
disputes. In Pakistan it is the other way round. It appears that international arbitrators are
capable of turning national courts, through the enforcement process, into pawns in the
execution of contracts based on Egregious illegality. However, it would also be
inappropriate to submit a foreign investor in a HUBCO-WAPDA situation to the national
courts. In such investment contracts it is unlikely that the foreign investor could obtain a
fair chance to present its case that no corruption was involved, in particular, if the people
in power have changed. Therefore the solution in those cases cannot be to declare the
dispute non-arbitrable but to make sure that no errors of fact arise which could lead to the
enforcement of agreements tainted by corruption.

Objectively the Westcare position may be disturbing. Its effect is to allow an

arbitration award affected by illegality to be upheld by a national court simply because
illegality was not proven during the arbitration process. There should be no reason why,
if new evidence becomes available, a court should not review the award at the time of
enforcement. If precluded from doing so, national courts would be the instrument
through which contracts that are clearly illegal and contrary to public policy would be
legitimized.374

373
Soleimany vs. Soleimany (1998) 3 WLR 811 (CA)
374
Julian D M Lew, Loukas A Mistelis and Stefan M Kroll, Comparative International Commercial
Arbitration, Kluwer Law International, South Asian Reprint Edition, Indian Reprint – 2007. pp.213-218.
5.1.4. DUTY TO DEAL WITH THE LACK OF ARBITRABILITY EX OFFICIO:

In the majority of cases the non-arbitrality of a dispute is raised by one party

seeking to preclude arbitration. It may prefer to have the dispute decided by the courts.
There are, however, cases where none of the parties invokes the lack of arbitrability.
They may either not have realized it or may have an interest in having their dispute
settled in private. For example, parties to contracts involving bribery or certain illegal
conduct may accept the need for their dispute to be resolved but may not want the
relevant authorities to be informed about their contract which will invariably be the case
if the dispute is dealt with in the courts. In such cases the question arises whether the
arbitration tribunal has the right itself to raise the issue of arbitrability even though the
parties do not challenge the jurisdiction of the tribunal. This was done by Judge Lager
green in ICC case 1110.375 After studying the pleadings filed by the parties and oral and
written witness statement, the sole arbitrator raised the question of his jurisdiction ex
officio, to entertain the subject matter of the case and stated –

“In this respect both parties affirmed the binding effect of their contractual
undertakings and my competence to consider and decide their case in accordance with the
terms of reference. However, in the presence of a contract in dispute of the nature set
out hereafter, condemned by public policy decency and morality, I cannot in the interest
of due administration of justice avoid examining the question of jurisdiction on my own
motion.” It is worth noting under the New York Convention recognition and enforcement
of an award may be refused ex officio if the competent authority in the country where
recognition and enforcement is sought finds that (a) the subject matter of the difference is
not capable of settlement by arbitration under the law of that country, or (b) the
recognition or enforcement of the award would be contrary to the public policy of that
country.376

One could argue that arbitration tribunals are not part of any national judicial
system and therefore do not owe any allegiance to a particular state. As long as the
parties want to have their dispute decided by arbitration the tribunal should do so
irrespective of the fact that its award may later be set aside for lack of arbitrability. The

375
Argentine engineer vs. British company 3 Arb Int 282 (1987).
376
Art-V(2) ; Model Law, Art-34(2)(b), 36(1)(b).
duty towards the parties to render an enforceable award only exists as long as the parties
have not renounced it. However, the preferred view is that an arbitration tribunal should
on its own initiative deny jurisdiction if the dispute is not arbitrable on the basis of the
facts submitted by the parties. This is not contrary to the principle of “NE ULTRA
PETITA” i.e. not raising an issuing outside the arbitrators’ authority (ArtV(1)(c) of New
York Convention) but is the result of an application of the law to the facts.

Though the parties are in general free to decide which provisions the tribunal
should apply this freedom does not extend to avoiding the mandatory rules governing the
issue of arbitrability. By declaring certain disputes not arbitrable the legislator has
removed these from the disposal of the parties. Accordingly, the arbitration tribunal,
despite being a creation of the parties, not only owes a duty to the parties but also the
public. The success of arbitration as a recognized dispute settlement mechanism is also
due to the fact that arbitration is not abused to circumvent the policy of states in areas
which are considered to be so crucial that they are reserved for adjudication by courts.
The non-arbitrability of a dispute might also exclude any further court support during and
after the arbitration. A party that agreed to arbitrate a non-arbitrable dispute might later
change its mind when an award has been rendered in favour of the other party and refuse
voluntary enforcement. It is at least doubtful whether in an action to set aside courts
would consider that party from being estopped from raising the lack of arbitrability
defence given the importance of the matter.377

THE NON-ARBITRABILITY DOCTRINE:

The New York Convention contains various exceptions to the general obligation,
set forth in Art-II to enforce written arbitration agreements. In particular, Art.II (1) does
not require arbitration of disputes that are not ‘capable of settlement by arbitration’.
Similarly, Art-V (2) (a) provides that an arbitration award need not be recognized if “the
subject matter of the difference is not capable of settlement by arbitration under the law”
of the country where recognition is sought. Together, these provisions permit the
assertion of non-arbitrability defences to the enforcement of arbitration agreements and

377
Julian D M Lew, Loukas A Mistelis and Stefan M Kroll, Comparative International Commercial
Arbitration, Kluwer Law International, South Asian Reprint Edition, Indian Reprint – 2007. (pp.219-221).
awards under the Convention. Other international arbitration conventions and treaties
contain similar exceptions.

Art-II (3) requires the enforcement of arbitration agreements, provided that they
are not “null and void” without any reference to a non-arbitrability or public policy
defence. It has been suggested that, as a consequence, arbitration agreements must be
enforced, even if they pertain to non-arbitrable claims and if the resulting award would be
therefore unenforceable under Art-V(2)(a) or (b).378 Neither courts nor most
commentators have accepted this view, generally reasoning that non-arbitrability
defences permitted by Art-II(1) and Art-V(2) are incorporated by Art-II(3)’s “NULL
AND VOID” exception.379
As noted above, Art-II (1) of the New York Convention does not require
recognition of arbitration agreements unless they concern a “subject-matter capable of
settlement by arbitration”. Like other exceptions under Art-II and V, the non-
arbitrability doctrine raises a threshold choice of law question: what law(s) apply to
determine whether a claim or dispute is non-arbitrable for purposes of Art-II (3)?
Among commentators, there is no agreement on what governing law should apply.
Indeed, “agreement on the conclusion that there is disagreement seems to be the only
common denominator that one can find between arbitrators, courts, and publicists
regarding the question which is the applicable law on arbitrability.”380
Several choices are possible:

First, the Convention might be regarded as establishing (albeit almost entirely by

implication) a uniform international definition of non-arbitrability, from which no nation
could deviate.

Second, the law governing the parties’ arbitration agreement might define non-
arbitrability, as Art-II (1) and V(1)(a) imply.

Third, non-arbitrability might be defined by the law of the place where the arbitration is
conducted and the award made, as also implied by Art-V (1)(a).

378
G.Gaja, International commercial Arbitration, New York Convention, I.D. n.43 (1984)
379
Scherk vs. Alberto-Culver Co., 417 US 506 n 15 (1973);
380
Bockstiegel, Public Policy and Arbitrability in ICCA Congress Series No. 3, at 184, (Sanders,ed. 1987).
Fourth, the law of the nation in which enforcement of an award will eventually be sought
might define non-arbitrability, as Art-V (2)(a) and (b) specifically contemplate.
Fifth, the law of the judicial forum where an arbitration agreement is sought to be
enforced could govern non-arbitrability; and

Finally, non-arbitrability might be defined by the law that provides the basis for the
relevant substantive claim.

To make matters even more complex, different national laws might but relevant at
different stages in the enforcement process. For example, in a judicial proceeding to
enforce an arbitration agreement, the court might look either to its own law, the curial
law, or the law governing the arbitration agreement – without considering the law in the
place where any award would be enforced. Conversely, a decision to enforce an
arbitration award might look only to the law of the enforcement forum – without
considering whether the arbitration involved claims that were not arbitrable under foreign
law. Finally, some authorities have suggested cumulative application of several of the
potentially applicable laws. There is little considered discussion of the foregoing choice
of law issues by national courts. Where U.S. Federal law provides the basis for allegedly
non-arbitrable claims, U.S. Courts have generally applied federal U.S. law to issues of
non-arbitrability, both at the stages of enforcing arbitration agreements and arbitral
awards. In contrast, where a claim is allegedly non-arbitrable under foreign law, U.S.
courts appear to require that foreign non-arbitrability doctrines satisfy either U.S. federal
or “international standards.” Finally, like other disputes over arbitration agreements, non-
arbitrability issues can arise in both national courts and arbitral proceedings. That
necessarily also raised questions over the allocation of competence between national
courts and arbitral tribunals to decide issues of non-arbitrability.381

5.2. APPLICABLE LAWS AND RULES:

How important is the law in international commercial arbitration – is a never

ending question of interest, and the answer depends upon the particular case. In some
arbitrations, the arbitrators’ task will primarily be to understand the facts and to apply the

381
Gary B Born, International Commercial Arbitration-Commentary and Materials, Second Edition,
Kluwer Law International – Transnational Publishers, P-242-245.
contract terms to the facts. Procedural issues will be resolved in accordance with the rules
chosen by the parties. Legal questions may not be raised or argued. In other arbitrations,
difficult or technical legal questions may be at the core of the dispute.

A number of systems of law may simultaneously have some application to an

international commercial arbitration. For example, take the case of a Delaware
corporation having a contact with a Tunisian corporation which is expressed to be
governed by English law. The contract provides that any disputes arising out of it are to
be submitted to arbitration in Paris pursuant to the Arbitration Rules of the ICC. It is
immediately apparent that a number of systems of law may be relevant in the case.
These will include, amongst other things, the law applicable to: -

a) Determine the capacity of a party to enter into the arbitration agreement;

b) The arbitration agreement itself;
c) The arbitration proceedings (often referred to as the “LEX ARBITRI” i.e. the law
of the seat of arbitration;
d) The dispute itself (the “lex causa”); and
e) The enforcement of any award.
A party to a potential dispute can properly consider its position only when it
knows which law, or laws, may be applicable. There is no complete code, for
determining applicable law, which has general international application. The legal
system of each state has its own particular approach and, if clarification of that approach
is required, advice from lawyers in the relevant state will have to be obtained. What is
set out below can be no more than a brief summary of approaches which have some
measure of general acceptance. Furthermore, in an international arbitration the
determination of what law is applicable, e.g. to the dispute itself, may not be dependent
on the way in which any particular state court would approach that question.

CAPACITY:

In the case of corporate or state entities, the law applicable to establish capacity to
enter into an arbitration agreement (or to continue with proceedings in the event of
insolvency) will usually be the law of the state in which the entity has its domicile. The
fact that corporations have power to enter into arbitration agreements by the law of the
place of arbitration will not generally be enough to give a corporation such a power if it
lacks it in the state in which it is domiciled. A lack of capacity to arbitrate will be fatal
to the enforcement of any award which may be made.

The Arbitration Agreement:

Though an arbitration agreement is often encountered as just one of a number of

clauses in a written contract, it is accepted by the arbitration laws of very many states that
the arbitration agreement is to be treated as a separate agreement and that the arbitration
agreement does not automatically terminate when the contract of which it is a part comes
to an end. This is the so-called concept of the “autonomy” or “severability” of the
arbitration agreement. It follows that the law applicable to an arbitration agreement can
be different from that applicable to the principal contract between the parties. This may
arise from express agreement between the parties or by operation of law. Arbitration
agreements are specifically excluded from the application of the rules of the Rome
Convention of the Law Applicable to Contractual Obligations of 1980. (The European
Commission’s Green Paper of January 2003 on the conversion of the Rome Convention
into a Community Instrument and its modernization proposes that such exclusion should
be continued). However the basis on which to determine the applicable law of the
arbitration agreement may well be the same as those for establishing the applicable law of
the principal contract itself. These are dealt with under the heading “The Dispute”.
Arbitration derogates from the state’s ability to intervene in the resolution of disputes
which may involve one of its nationals or domiciliary. When this simply involves day-to-
day commercial transactions that may not be of much concern to the state. However
when it involves matters such as the welfare of individuals (for example, when financial
provision for the family on the breakup of a marriage is at issue), rights of third parties in
an insolvency, competition issues, intellectual property rights and certain aspects of
employment dispute, the state may well wish to intervene or to reserve to itself the
powers of control and resolution, as a matter of public policy.

This leads on to the concept of the “arbitrability” of disputes. A dispute which is

not “arbitrable” under the law applicable to the arbitration agreement cannot be settled by
arbitration. The same is true for a dispute which is not arbitrable under the lex arbitri,
i.e. the arbitration law of the seat. An award made in respect of any such disputes, or a
dispute which is not arbitrable under the law of state in which enforcement of the award
is sought, will not be enforceable in such state. (Art-VI (a) and 2(a) of the New York
Convention) The arbitrability of a dispute is therefore an important issue and one to
which attention should be given in relation to each of the three principal stages of an
arbitration i.e. when:

a) The arbitration agreement is being made;

b) The arbitration is commenced; and
c) The enforcement of an award is sought.

5.2.1. THE ARBITRATION PROCEEDINGS:

There has been a trend, especially in certain states in continental Europe, to treat
international commercial arbitration as a means of dispute resolution to be completely
independent of any form of state control, except at the stage of the enforcement of an
award. In other words, the courts of the state in which arbitration is taking place are not
to interfere with the arbitration and, in particular that they should not interfere with the
procedure under which the arbitration is conducted or with any decisions made by the
arbitrator. Such a trend has variously been described, such as for example as the
“delocalization” theory of international commercial arbitration.382 It is difficult to
reconcile the immunity of states involved in arbitration proceedings with control of those
proceedings by the courts of the other state in which they take place. It is now said to
apply to international commercial arbitrations, whether or not they involve a state party.
Its proponents point out that the state in which an arbitration takes place is often selected
for a wide variety of reasons and that it is inappropriate that the laws of that state should
have any bearing on the conduct of the arbitration. All that should be required is
compliance with the norms of international public policy. This theory does not have
general acceptance, particularly in countries with legal systems based on the common
law. It may however be encountered in practice often when a state, or a state entity, is
involved in the arbitration. The more widely accepted (and, it is submitted, correct) view
is that arbitrations cannot be conducted in a legal vacuum. There may be occasions
when it may be necessary to: -

382
Phillips Capper, International Arbitration-A Hand Book, Kluwer Law Publications,P12-17.
a) Appoint an arbitrator, if the parties to the arbitration cannot agree on the
appointment;
b) Remove and replace an arbitrator for bias, or other misconduct,
c) Provide assistance to arbitrators (e.g. by enforcing attendance by witnesses at
hearing);
d) Establish whether an award is valid and final.
The performance of these functions early cannot be left entirely to the arbitrators and
parties. An obvious mechanism for their performance is a court of the state (the ‘seat’)
in which the arbitration is taking place – it alone has the power to enforce its decisions in
that country. In accepting jurisdiction and reaching its decisions, such a court will apply
its own law. Thus one arrives at the ‘seat’ theory, which is that the law applicable to the
arbitration proceedings is that of the state in which they take place (i.e. are judicially
rooted, even if meetings or hearing are actually conducted for convenience elsewhere).
Whilst it is quite possible for parties to choose, by agreement, a procedural law applicable
to the arbitration proceedings which is not the same as the arbitration law of the ‘seat’ of
the arbitration, it is not easy to envisage circumstances in which it would suitable to do so
(save in the special case of arbitrations coming into existence pursuant to an international
treaty, such as ICSID arbitrations. Save where the parties have agreed otherwise, the
failure of the arbitral procedure to comply with the arbitration law of the state which is
the seat of the arbitration will render the award unenforceable. (Art-V (1) (d) of the New
York Convention.

THE DISPUTE:

The determination of the law applicable, to the arbitration itself (as opposed to the
substance of the disputes) is based on what are essentially practical considerations.
However, different tests must be applied to determine what should be the law applicable
to the dispute between the parties (the ‘lex causa’)

For example, a Russian party may be in dispute with an English one over the
value of minerals to be delivered to Germany. It may have submitted that dispute to
arbitration which takes place in France, Russian, English and German law each have
some connection with the dispute, but none is obviously ‘practical’ – at least one of the
parties, and possibly the arbitral tribunal, will have to deal with a legal system with which
it has little or no familiarity. How is the law applicable to the substance of dispute to be
determined? State Courts, to whose jurisdiction litigants are obliged to submit (because
of the domicile of the defendant, or some connection with the subject-matter of the
dispute, or prior agreement) have established their own rules for making that
determination. Except where they have been harmonized by a convention such as the
Rome Convention of 1980, the rules will differ from state to state. Where, however, an
international dispute has been submitted to arbitration, it will often be the case that the
parties will have reached no agreement as to the seat of the arbitration and the arbitrator
(or an institution such as the ICC, if it has been appointed) will have to make a decision
on that question. The seat of the arbitration may turn out to be in the state which
physically the most convenient for the parties and the arbitral tribunal. There is no
obvious reason why the rules of that state (the seat) for determining the law applicable to
the dispute should be used. Furthermore, the arbitral tribunal is not linked to that state in
the same way as a judge in its courts is.

The most important principle (a principle which is widely accepted and

fundamental in international arbitration) is that of party autonomy which grants freedom
to choose what they want for their arbitration. In the context of the determination of the
law applicable to the substance of the dispute, this has two facets:

a) The parties may choose the law which is to apply to their dispute (so long as the
choice is bona fide and legal); or
b) Failing such a choice, the parties may establish how the arbitral tribunal is to
choose the applicable law. Thus, if the parties have decided that the ICC Arbitration
Rules are to apply, Art-17(1) of those rules provides that the “Arbitral Tribunal shall
apply the rules of law which it determines to be appropriate”. Art-33(1) of the
UNCITRAL Arbitration Rules contains a very similar provision. In practice, in making
their choice, arbitrators tend (subject to what is said in the next paragraph) to look to
what they regard as general principles of conflicts of laws, or the conflict of law system
of the seat of the arbitration, or to some other system which they consider has a
connection with the dispute.
Where nothing has been agreed between the parties as to the law applicable to the
dispute, or as to how it is to be determined, care has to be exercised. Some countries,
such as France, the Netherlands and Switzerland, have in their laws applicable to
international commercial arbitrations a provision that the arbitral tribunal is able to decide
for itself what rules it considers are appropriate to settle the dispute. Many other
countries do not have such a liberal arbitration regime and require the arbitral tribunal to
apply the conflict of laws rules of the seat of arbitration.

Another important matter to bear in mind is the nature of law which is applicable
to an international commercial contract. Because the parties may come from very
different legal backgrounds they may find it difficult to come to a compromise as to the
system of law which is to govern the contract between them. Often, where one of the
parties is a state and that party insists on the application to the contract of its own system
of law, the other party will wish to protect its position against future changes in that law.
This it may achieve by obtaining agreement to the application to the contract of principles
of international law (such as the obligation to pay appropriate compensation following an
act of nationalization) as a “concurrent” law (i.e. a law whose general principles will
operate alongside, and control, the application of the state’s system of law). Such a party
may also seek the state’s agreement to a “stabilization clause” – that is, a provision in the
contract to the effect that the state will not rely on changes in its law to deprive the other
party of its benefits under the contract, or that if it does, it will pay compensation. (The
efficacy of such clauses is, however, open to doubt because it is not clear that states may
bind their freedom of legislative action in this way.) Where the parties are on a more
equal commercial footing, they may adopt other techniques to arrive at a law applicable
to disputes which will be acceptable to both of them.

One such technique is to make the contract subject to the ex mercatoria or

international trade law – i.e. to those principles governing the conduct of international
trade which are generally accepted by international traders. This technique suffers from
the deficiency that there is no clear statement available as to what these principles are.
Another technique which is frequently encountered in practice is to supplement the
applicable state law by requiring the arbitral tribunal to take into account relevant “ trade
usages” (which would include generally accepted meanings for terms which are in
common use in contracts made in the relevant trade). The laws of a number of countries
permit or require this in any event. The ICC Arbitration Rules (Art-17(2) and the
UNCITRAL Arbitration Rules (Art-33(3) require it.

Finally, in the context of the law applicable to the substance of the dispute, one
may also consider the power of “amiable composition”, or the power of an arbitral
tribunal to decide “EX AEQUO ET BONO”. As with much of the practice relating to
international commercial arbitration, there is no precise and generally accepted definition
of what these are. A useful approximation is that they permit an arbitral tribunal, in the
course of making an enforceable award, to arrive at a decision which it thinks is fair, even
if it is not strictly in accordance with the applicable law. An arbitral tribunal may only
make use of these powers if the parties have agreed that it can do so. If such powers are
to be conferred on an arbitral tribunal it may be best to choose arbitrators more for their
knowledge of the subject matter of the dispute between the parties than for their
knowledge of the applicable law. Such powers may also be conferred on an arbitral
tribunal when the parties have entered into a long-term agreement and are anxious that
disputes arising during the currency of the agreement should be resolved without harming
the continuing relationship between them.

5.2.2. RECOGNITION OR ENFORCEMENT OF AWARDS:

The law which is applicable to the recognition or enforcement of an award is that

of the state in which enforcement is sought (e.g. where the debtor’s assets are located).
That law will determine not only the procedure to be adopted for applications for
recognition or enforcement, but also the defences to any such applications. For these
purposes many states have incorporated into their laws the provisions of the New York
Convention. It is important to note that systems of law other than that of the place of
enforcement may become relevant. Art-V (1) of the New York Convention provides that
recognition and enforcement may be refused, among other grounds, where: -

A) The parties to the arbitration agreement were, under the law applicable to them,
under some incapacity;
B) The arbitration agreement is not valid under the applicable law agreed upon by the
parties or, failing any indication as to that, under the law of the country where the award
was made;
C) The composition of the arbitral tribunal, or the arbitral procedure used was not in
accordance with the agreement of the parties, or failing agreement, was not in accordance
with the law of the state where the arbitration took place. (The seat).383
Although party autonomy is an important element of arbitration, nonetheless, the parties’
contracts, and their dispute, do not exist in a legal vacuum. There are layers of laws and
rules that may be applicable, and complications increase when more than one national
law may properly apply to the arbitration. The term “applicable laws” is used here to
mean all laws applicable to international commercial transaction, not simply the
substantive law. Typically, the parties will choose a law to govern the contract. This law,
which the substantive law, is likely to be the national law of one of the parties. Or, in a
contract for the sale of goods, it could be an international law such as the United Nations
Convention on Contracts for the International Sale of Goods (CISG).

The law applicable to the arbitration procedure is usually a different national law – the
arbitration law at the seat of the arbitration. In addition to these laws, other laws may
come into play. Today, the role of the various laws and their application to international
arbitration is the subject of on-going debate. Some of the debate focuses on the extent to
which an international arbitration can detach itself from national law, how the new “Lex
Mercatoria” can or should be properly used in international arbitration, the amount of
discretion arbitrators have to choose an applicable law and what methodology they
should employ, and the duty of the arbitrator to apply the law.384

DELOCALIZATION vs TERRITORIALITY:

Arguments favouring Delocalization:

A number of years ago, primarily in the 1980, there were some rather passionate
arguments made in favour of delocalization of international arbitration.385 Delocalization
is also referred to as stateless, floating, or a-national arbitration. It is based on a theory
that international arbitration should not be fettered by the local law of the place where the
arbitration occurs. Parties frequently choose a seat of arbitration in a country where

383
Phillips Capper, International Arbitration-A Hand Book, Kluwer Law Publications, pp.16-17)
384
Margaret L Moses, The Principles and Practice of International Commercial Arbitration, Cambridge
University Press, (2008)* p.55.
385
Jan Paulsson, Delocalization of International Commercial Arbitration: When and why it matters, 32
ICLQ 53 (1983)
neither party’s business interests are located. In addition, the seat may be chose simply
because it is convenient to both parties. The concern is that the local peculiarities of a
law and a court system, which might impede the effectiveness of the arbitration
proceedings, should not be imposed on an international arbitration just because the
proceedings happen to be located in the jurisdiction. A matter of particular concern is
that the local court might find a way to vacate the arbitral award under its local law when
a party moves to set aside the award, possibly rendering the process a waste of the
parties’ time and resources.

The proponents of delocalization argued that a State should not have any concern
about a dispute between two parties who are not its citizens over a matter that has no
connection to the State. They viewed international arbitration as self-regulating, and
they opposed court interference with the arbitration process. From their perspective,
international arbitration should be detached from the law of the seat; there was no reason,
for example, why the conflict of law rules of the seat of arbitration should necessarily be
the view, there should not be two legal systems supervising the arbitration process – first
at the place of arbitration and then at the place of enforcement (i.e. the place where the
losing party’s assets are located). Rather, the only pertinent law should be the law
applied by the court at the place of enforcement of the award.

Arguments opposing Delocalization:

The counterargument to delocalization is that every arbitration takes place in a

specific territory, and must conform to the laws – at a minimum to the mandatory laws of
that territory. Moreover, there may be times when the assistance of the court is needed
during the arbitral process, for example, to appoint arbitrators, for emergency relief, for
preserving evidence, or for enforcing arbitral orders. Most states also want to exercise a
supervisory function to ensure that the private system of dispute resolution in their
territory is not being used to defraud, and is not tainted by corruption. When a party
moves to set aside an award, the State where the arbitration takes place can exercise this
supervisory function.

One response to the delocalization movement was a law passed in Belgium in

1985. It provided that parties to an arbitration in Belgium, who were not Belgian citizens
and did not have a business located in Belgium, would not be permitted to apply to a
Belgian court to set aside an arbitral award. There would thus be no judicial review of
the award in Belgium. It was believed at the time that this would increase the number of
arbitrations in Belgium. In fact, however, the law had the opposite effect. Businesses
were not drawn to a system with no possible court review. It appeared instead that
businesses were avoiding Belgium as a place of arbitration. As a result, Belgium
amended its law in 1998 to provide that parties lacking a Belgian link could enter into an
agreement opting out of court review, but otherwise, the court would accept an
application from a party to set aside an award.

Modern approaches to Delocalization:

The Belgian experience suggests that parties are not very interested in completely
delocalized arbitrations, and that they prefer having the possibility of court supervision at
the place of arbitration. Today, the territorial approach prevails over delocalization,
largely because it is easy to comprehend and apply, and because it promotes certainty.
Some commentators have referred to the movement toward delocalization as “having run
into the ground”386 while others have viewed it as a partial failure and partial success.387
No matter how the trend may be characterized, today there are a number of developments
that deal in a new way with some of the issues raised in the delocalization debate.
Moreover, as more modern kinds of arbitration take place, such as sports arbitration and
online arbitration, the role of the law at the place of arbitration is likely to become less
significant.

Sports Arbitrations:

The Court of Arbitration for Sport (CAS), which operates under the aegis of the
International Council of Arbitration for Sports (www.tas-cas.org) conducts arbitrations in
many areas related to sports, including arbitration related to commercial sponsorship
contracts, disciplinary actions of the athletes by sports organizations, and other
complaints, such as complainants of unfair treatment or lack of due process by athletes
against sports organizations. CAS has ad hoc divisions that provide for arbitrations at
various international sports competitions, including the Olympics. The Code of Sports-
386
Alan Redfern & Martin Hunter et al., Law and Practice of International Commercial Arbitration, at 92,
S2-30 (2004)
387
Andrew Tweeddale & Karen Tweeddale, Arbitration of Commercial Disputes, 248, Sec-7-77 (2005)
related Arbitration (the Code) provides that the seat of the arbitration is Lausanne,
Switzerland, although hearings may be held elsewhere. At the Olympic Games, for
example, the hearings are held at the site of the games, but the “seat” is nonetheless
Lausanne.388 The law of the seat applies to procedural issues, to the extent they are not
dealt with by the Code. Because the seat is always Lausanne, regardless of where the
arbitration hearings are actually held, the arbitration to some extent is a delocalized
arbitration, detached from the procedural law at the actual place of arbitration. If a party
wishes to apply to a court to set aside the arbitration, it must do so before the court of the
seat in Switzerland. The seat of the arbitration is thus in some ways a mere fiction,
because hearings do not and are not even expected to occur there. Rather, declaring the
seat to be Lausanne is a way of ensuring that a uniform law will be applied to all sports
arbitrations conducted by the CAS, and that an arbitration-friendly regime will not be
likely to overturn an arbitration award.

5.2.3. ONLINE ARBITRATIONS:

Increasingly, as more business is conducted electronically, there is more interest

in also conducting arbitrations electronically. With online dispute resolution (ODR), it is
indeed difficult to say where the “seat” of the arbitration is found. ODR has had some
setbacks.389 But is continuing to present opportunities for dispute resolution. Some
current methods of ODR are being used for mediation and settlement. For example,
eBay and a number of other web businesses refer users to Square Trade to help resolve
disputes by a form of on line mediation.( www.SquareTrade.Com) There are also a
number of organizations that offer online arbitration n, or at least an arbitration procedure
that is predominantly online390. Under the Electronic Transaction Arbitration Rules of

388
Gabirielle Kaufmann-Kohler, Arbitration and the Games or the The First Experience of the Olympic
Division of the Court of Arbitration for Sport, 12-2 Mealey’s International Arbitration Report (Feb.1997)
389
‘Virtual Magistrate’ begun by the American Arbitration Association, the Cyberspace law Institute, the
Villanova Centre for Information Law an Policy, and the National Centre for automated Information
Research, which was an early forum for online arbitration and fact-finding, became dormant after a short
period of operation. Virtual Magistrate has since been revived by the Chicago-Kent College of Law at
www.vmag.org. “Online Resolution” one of the first ODR providers in the United States, ceased operations
in 2003. (Visited on 3-4-10)
390
(1) The four providers approved by ICANN (Internet Corporation for Assigned Names and Numbers):
(a) WIPO; (b) the National Arbitration Forum; (c) the Asian Domain Name Dispute Resolution Center; and
(d) the CPR Institute for Dispute Resolution (www.icann.org/udrp/approved-providers.htm); (2) Ciber
Tribunal Peruano (www.cibertribunalperuano.org); (3) Resolution Forum (www.resolutionforum.com).
Also www.odr.info, (visited on 5-5-10) The National Centre for Technology and Dispute Resolution.
the Hong Kong International Arbitration Centre, for example, hearing may be conducted
“by video link ,by telephone, or online (by email or by other electronic or computer
communication391 but in-person hearings are permitted if the parties agree or if the
arbitrator thinks it necessary. As for the “seat” of the arbitration, the Hong Kong Rules
are similar to the sports arbitration rules of CAS in that they name the seat in the Rules.

The seat of every arbitration conducted under the Electronic Transaction

Arbitration Rules is Hong Kong Special Administrative Region (SAR) Art.14. Hong
Kong remains the seat, even if the arbitrator decides to hear witnesses or oral argument at
some other appropriate place. Thus, in both sports arbitrations and in some online
arbitration, the seat of the arbitration is a fiction, at least as a place where the hearings
occur. The actual venue of the arbitration hearings (and there may be no real venue in
online arbitration, does not impose its laws and rules, and any challenge to the arbitration
award must be before courts in the specified “seat” of the arbitration. In these instances,
the arbitration is “delocalized”, but only up to a point, since the territory of the named
seat nonetheless provides a place for recourse if there is a problem with the arbitration
process. The selection of one seat for all arbitrations, however, ensures that the seat will
be a place with arbitration-friendly laws and courts that will not obstruct or unnecessarily
intrude upon the arbitration process. Outside of these newer forms of arbitration,
however, the doctrine of territoriality has, for the most part, prevailed over the doctrine of
delocalization. The law of the seat of the arbitration remains an important source of the
law governing an arbitration.392 Nonetheless, international commercial arbitration is
increasingly finding ways to become more international, and less local, as could be seen
in the subsequent Chapter-6.

5.3. ENFORCEABILITY OF ARBITRATION AGREEMENTS /

AWARDS:

Unless a settlement is reached, the objective in any arbitration is a decision of an arbitral

tribunal contained in a valid and enforceable award. There is no definition of the term

391
Hong Kong Electronic Transaction Arbitration Rules.
(www.hkiac.org/HKIAC/pdf/Domain%20Name/en_ETArbRules.pdf.) (visited on 9-8-10)
392
Margaret L Moses, The Principles and Practice of International Commercial Arbitration, Cambridge
University Press,(2008) pp.55-60)
“award” contained in any of the international conventions dealing with arbitration. In
some arbitration there is only one decision by the arbitral tribunal contained in a single
award. In most arbitrations, however, the tribunal will produce a number of decisions
and directions at various stages. These might include decisions on challenges to its
jurisdiction, directions as to the conduct of the arbitration, decisions on some of the
claims submitted to arbitration before decisions on others, as well as decisions disposing
of the totality of the matters in dispute. Not all of these decisions are “awards”.

Making the correct distinction between those decisions which are awards and
those which are not is not merely an academic exercise. “Awards” are decisions of the
tribunal which finally dispose of an issue, or issues, between the parties and which will
be given recognition and effect by state courts (at least in any state with a developed
system of arbitration law). Decisions and directions which relate only to procedural
matters (such as the timetable for submissions, the nature and extent of disclosure of
documents etc.) are not properly described as “awards”. The parties are expected to abide
by any procedural order or directions but generally it is for the tribunal to decide upon the
consequences of that failure (in the light of the arbitration agreement, the relevant
arbitration rules land the law applicable to the arbitration proceedings).

5.3.1. TYPES OF AWARDS:

The following are the principal types of awards

a) Provisional Award.
b) Interim Award
c) Partial Award
d) Final Award
e) Consent Award
f) Default Award.
The names used for different types of awards should be regarded as useful guides rather
than definitive categorizations. The key factors in considering any award are –

i) Does the award deal with the substantive matters at issue between the parties?
ii) Is the award reversible?
iii) Does the award finally deal with all substantive matters at issue between the
parties or only some of these issues?
PROVISIONAL AWARD:

The arbitration laws of a number of states (for example, Sec-39 of the English
Arbitration Act, 1996) and the rules of a number of arbitral institutions (For Ex. Art.25 of
the LCIA Arbitration Rules), as well as Art-26 of the UNCITRAL Arbitration Rules
provide that the parties can agree that the arbitral tribunal should have the power to order
on a provisional basis any relief which it would have power to grant in a final award.
Provisional awards may be useful where it is necessary to protect or preserve property, to
order provisional payments in industries where cash flow is important or to provide
security for costs. The key distinguishing feature of provisional awards is that, as the
name suggests, they are reversible and in that sense do not finally dispose of any matter
at issue between the parties.

INTERIM AWARDS:

An Interim Award is made during the course of an arbitration and usually does
not address the substantive content of the dispute between the parties. It is however a
final decision, but usually on procedural matters which need to be decided so that the
arbitral tribunal can then address the substantive issues. For example, with the term used
in this sense, interim awards will include awards addressing challenges to jurisdiction or
providing a decision on the scope of matters referred. In each case, at least one further
award of the tribunal is needed to dispose finally of all issues between the parties.

PARTIAL AWARDS

These are awards which finally deal with only some of the substantive matters an
issue between the parties typically because matters are being dealt with in the
proceedings in stages. For example, a partial award may require a payment to be made
by one party to the other, either on account of damages to be assessed or following a
decision on only a part of the claims arose before the tribunal.

FINAL AWARD:
 Final awards are awards which dispose of all of the issues in an arbitration (or all
the remaining issues, if there has already been one or more partial awards) and which
thereby conclude the function of the arbitral tribunal. A final award will be the last
award of a tribunal. Some confusion has been caused by the use of the word “final” to
signify that an award finally disposes of the issues between the parties the rules of certain
and that it is not subject to any review procedure. Finality, in this sense, was important
in the context of proceedings for the enforcement of an award under the Geneva
Convention of 1927 (Art-1(2) (d) and is imposed by arbitral institutions (such as the ICC
and the LCIA) and the UNCITRAL Arbitration Rules. Finality in this sense is not
necessary for enforcement under the New York Convention, which simply requires that
the award should be ‘binding’ on the parties (Art-V (1) (e). Accordingly, an interim
award and a partial award can be enforced under the New York Convention.

CONSENT AWARDS:

Consent awards are those made with the consent of the parties following a
settlement of their dispute. Disputes submitted to arbitration are often settled on the
basis that receipt of an all-inclusive payment is made a condition for the termination of
the arbitration proceedings. In such cases, an award terminating the award is not
necessary. There may however be occasions when a settlement is achieved, but the
paying party lacks the means to make an immediate payment and it is agreed that
payment can be made later, or by instalments. If the arbitration is discontinued without
an award, the obligation of the paying party to honour the settlement agreement could
only be enforced by commencing fresh proceedings based on the settlement agreement.
This unsatisfactory situation can be avoided by incorporating the terms of the settlement
in a consent award. Enforcement of the terms of settlement can then be achieved by
enforcing the consent award.

DEFAULT AWARDS:

A Default Award is an award made in proceedings where one of the parties

(usually the respondent) has refused to participate. Such awards are generally regarded
as valid, provided that the absent party has been given a full opportunity to present its
case and that the award amounts to a proper determination after the tribunal has evaluated
the submissions and evidence provided by the party which did participate in their
proceedings.

5.3.2. REMEDIES THAT MAY BE INCLUDED IN AN AWARD:

There are no universal rules determining the remedies available in an international

arbitration. In the case of each dispute, the remedies to be included in an award need to
be considered in the light of –

a) The arbitration agreement, including any rules the parties have agreed should
apply to the arbitration;
b) The law applicable to the substance of the dispute; and
c) The law applicable to the arbitration proceedings.
The remedies available in an international arbitration award include those set out below,
although an order for the payment of money, declarations and interest are probably the
most common remedies.

ORDER FOR THE PAYMENT OF MONEY:

An order for payment of money by one party to another is the most common
remedy found in awards. The payment may represent compensation for losses suffered
(damages) or the payment of a debt. Generally speaking, an arbitral tribunal will not
make an award directing payment of money by way of instalments unless the parties have
expressly so agreed. Many states specifically provide for an arbitral tribunal to make its
award in a currency other than that of the state in which the arbitration takes place. In
the absence of such provisions the tribunal will need the consent of the parties.

DECLARATORY RELIEF:

Parties, particularly those in continuing relationships, may wish to have their legal
rights and obligations clearly established in an award. An arbitral tribunal may include a
declaration as to the parties’ rights and obligations or the meaning of a contract or part of
one in its award. A declaratory award is capable of recognition in proceedings
commenced in the same state as the arbitration, or elsewhere.
INTEREST:

The law and practice relating to the award of interest is a particularly difficult
area. The law of some (notably Islamic) states forbids the award of interest, the law of
some other states permits it and the law of a third group requires it. German law, for
example, specifically provides that an arbitral tribunal must award interest according to
defined rules. Accordingly there is no common international approach to the issue of
whether arbitrators should award interest and the principles to be followed if interest is to
be awarded.

To complicate matters further, the law of some states views the award of interest
as essentially a procedural matter, while others regard it as a substantive issue. This
distinction is important because it will impact on the determination of the law governing
the award of interest. For example, if the award of interest is viewed as substantive
matter by the arbitration law of the seat, then the provisions of the law applicable to the
substance of the dispute relating to the award of interest will apply. Provisions relating to
the award of interest may be found to the arbitration agreement itself (including any
institutional rules to be applied). This is the best point from which to start when trying to
establish whether or not, and in what manner, interest may be awarded. If forbidden to
award interest by the law applicable to the arbitration agreement, the arbitral tribunal
should not do it. If it were to do so, enforcement of the award, or at least that part of it
which deals with interest, could be resisted. Art V (1) (c) of the New York Convention.
If there is nothing in the arbitration agreement, provisions relating to the award of interest
may also be found in the law applicable to:

a) The substance of the dispute,

b) The arbitration proceedings (i.e. the arbitration law of the seat), and/or
c) The enforcement of an award made in another state.
The tribunal will have to consider the relevant conflict of law rules when deciding which,
if any, of the provisions on interest contained in the law applicable to the dispute or the
law of the seat of the arbitration will apply. It is also important to consider the impact of
the law of the state where enforcement of the award is sought. For example, if a
claimant attempts to enforce an award which includes interest in a country which
prohibits or treats as usurious the award of interest this may provide a ground for refusing
enforcement. (Art V (2) (b) of the New York Convention).

SPECIFIC PERFORMANCE:

A party to an arbitration may request that the arbitral tribunal order its opponent
to perform certain obligations. The difficulty with such an order is that it will depend, for
its enforcement, on the assistance of state courts. Courts in a number of states, such as
England, are prepared to provide such assistance, provided that the parties have not, in
their agreement, deprived the arbitral tribunal of the power to order specific performance.
Conversely, the courts of some other states will assist only if the parties have expressly
agreed to confer such a power on the arbitral tribunal.

INJUNCTION:

Under the laws of many states, an arbitral tribunal has the power to grant relief by
way of injunction. This power can, however, be illusory because any injunction can (in
most states) only be enforced with assistance of the state courts which can take time even
in urgent cases. Injunctions, particularly interim injunctions intended to prevent assets
from being dissipated or to preserve property, will often depend for their effect on being
obtained speedily. This may sometimes be without the opponent’s knowledge. It may
therefore be preferable to make such applications directly to a state court if that is
possible. The courts of most states will accept jurisdiction in respect of such
applications. The UNCITRAL Arbitration Rules and the rules of most arbitration
institutions permit such applications to state-courts, before or during the arbitration, by
providing that they are not to be deemed incompatible with the agreement to arbitrate,
and are not a waiver of that agreement.

RECTIFICATION:

Parties to an agreement sometimes fail accurately to record what has been agreed and one
of the parties subsequently attempts to exploit the discrepancy. An Arbitral Tribunal
may correct an agreement to reflect what was actually agreed and enforce the “rectified”
agreement, provided that the parties have given such a tribunal the power to do so.
Whether the parties have done so is a question of interpretation of the arbitration
agreement. In England, the power to rectify a contract is expressly conferred on a tribunal
by statute (Sec-48(5) of the Arbitration Act 1996.)

PUNITIVE DAMAGES:

These are damages awarded over and above the damages required to compensate
an injured party for its loss. They are particularly relevant in the context of arbitrations
conducted in the USA. In the U.S. case of Mastrobuono Vs. Shearson Lehman Hutton
Inc.393 (1995) it was held that the arbitrators were authorized to award punitive damages
unless the parties had explicitly withdrawn that power in the arbitration agreement
(although note that Article 28(5) of the AAA/ICDR International Arbitration Rules
expressly withdraws the power). By contrast, punitive damages are a much rarer
phenomenon in other states where, if they are available at all, it is only in circumstances
akin to fraud. Significant problems can arise in international arbitrations if enforcement
of an award containing punitive damages is sought in a state which for public policy
grounds does not permit punitive damages.

COSTS:

The word “costs” is used generally to describe all types of costs incurred in an
arbitration. However, a more precise distinction should be drawn between:

a) The costs of the arbitration : these include the arbitrator’s fees, the hire of the
venue and the administrative costs of any institution which might have been
involved; and
b) The costs of the parties: these include the fees and disbursements of the parties’
lawyers and experts, and witness expenses – which do not include the cost of the
time which a party, or the members of its staff, have had to devote to the
arbitration (though in some case this cost may be recoverable in the award as an
item of special damage).
When considering the rules regarding the costs of an arbitration there are two important
sources to consider: -

393
514 U.S- 52 (1995)
a) The provisions of the arbitration agreement (including any applicable rules
referred to in it) relating to costs; and
b) Since the award of costs is essentially a procedural matter, the provisions on costs
in the arbitration law of the seat.
The rules of the principal arbitration institutions such as the AAA/ICDR, the ICC and
LCIA, as well as the UNCITRAL Arbitration Rules, contain specific provisions requiring
the arbitral tribunal to fix the costs of the arbitration. They either require or empower a
tribunal to apportion the costs as between the parties. In apportioning costs the arbitral
tribunal has a broad discretion. There is no universally established practice as to the way
that discretion should be exercised, but the tribunal will be influenced by matters such as
the extent to which the parties have succeeded on the principal issues and the conduct of
the parties during the arbitration (i.e. if a party has been responsible for unnecessarily
complicating or extending the proceedings, that may be reflected in the award on costs).
Where the arbitration agreement (and any arbitration rules referred to in it) is silent on the
question of costs, one must look to the provisions of the law applicable to the arbitration
proceedings. Such provisions vary from state to state. A tribunal will usually have
discretion as to how costs are to be awarded, although there is little uniformity as to the
way in which the discretion is to be exercised.394

VALIDITY OF THE AWARD:

An Award which is not valid (i.e. at the seat of the arbitration) is not normally
capable of recognition or enforcement (save in the rather unusual circumstances of a case
such as the HILMARTON case in which the French Cour de Cassation recognized a
Swiss award which had been declared invalid by the Swiss courts). To be recognized
and enforced an award must be valid but this does not necessarily mean that all valid
awards will be recognized and enforced, particularly where recognition and enforcement
is sought in another state. The validity of an award depends on the provisions of: -
a) The arbitration agreement (including any applicable rules), and
b) The law of the seat of the arbitration
Such provision usually addresses both the form and content of the award. As to the
“Form”, most applicable arbitration laws and rules require that an award should, at least –

394
Phillip Capper, International Arbitration – A Hand Book, pp.112-118.
a) Be in writing;
b) State the reasons upon which it is based (unless the parties have agreed that it
should not);
c) State its date;
d) state the place where it was made, or deemed to be made, i.e. the seat of the
arbitration, and
e) Be signed by the members of the tribunal. If one member of a three-person
tribunal is not in agreement with the decision of the other two and refused to sign
the award, the rules of the principal arbitration institutions and the UNCITRAL
Arbitration Rules do not allow this to detract from the validity of the award. In
every case, the relevant provisions should be checked to see what is required.
As to “Content”, an award must: -

a) Be the product of an arbitration conducted in accordance with the requirements of

the arbitration agreement, the mandatory requirements of the law of the seat of the
arbitration and with due regard to the principle of equality of treatment of the
parties;
b) Deal only with those matters which the parties have agreed to refer to arbitration.
For example, if a submission to arbitration is expressly limited to the issue of
whether or not a buyer was entitled to reject allegedly defective goods, the award
should not include an award of damages. If it did, it would take the award
beyond the scope of the submission to arbitration;
c) Where it is a “final” award, it should deal with all the matters which have been
referred to arbitration except to the extent that they have already been finally dealt
with in any prior award;
d) Dispose of the issues finally, clearly and unambiguously;
e) Set out the reasons for the tribunal’s decision, unless:
i) The parties have agreed otherwise, or
ii) The award is a consent award, or
iii) The law of the seat of the arbitration does not require it.
The practice of arbitrators in giving reasons varies enormously and it is often
difficult to establish if the reasons given are sufficient. Some arbitrators make a virtue of
brevity, whilst others set out their reasoning in great detail. The essential feature of
reasons is that they should enable anyone reading the award to ascertain how the arbitral
tribunal has reached its decision. They should, therefore, at least include a reference to
all the issues raised by the parties, all findings of fact relevant to those issues and an
explanation of how the tribunal came to its decision on the legal issues. A further
requirement which may have to be complied with to achieve a valid award is to ensure
the award is made within any time limit provided for in the arbitration agreement or the
arbitration law of the seat. If the tribunal fails to make the award within a prescribed
time limit, its authority is terminated and it cannot make a valid award.
Whilst time limits for the making of awards are to be found in a number of state
arbitration laws and in the rules of institutions such as the ICC, they can usually be
extended by agreement of the parties or at the request of the arbitral tribunal. Parties
must give careful attention to the time limits and ensure that any extensions required are
obtained. There are some other requirements which may (and in the case of
communication to the parties, will) have to be observed before an award made by a
tribunal can be enforced.

REVIEW:

The rules of the ICC require that there be scrutiny of the draft award by the ICC’s
International Court of Arbitration so that it can ensure that the award is valid as to its
form an to give it the opportunity to draw to the attention of the tribunal and substantive
points which may be of concern. The AAA/ICDR and LCIA rules make no such
provision for scrutiny of the award.

COMMUNICATION:

The award must be communicated to the parties. In the case of institutional

arbitration, the communication of the award and the payment of the tribunal’s fees will be
dealt with in accordance with the institution’s rules.

In a non-institutional (i.e. ad hoc) arbitration, where all the tribunal’s fees have been paid
by the parties it will do this simply by sending a copy of the award to each of the parties.
If, however, the fees have not been paid at the time of the award the tribunal will notify
the parties that award is available for collection once the outstanding fees have been paid.
If a party anticipates an unfavourable award and refuses to pay its share of the tribunal’s
fees, the other party will have to pay them in order to obtain the award (the fees will
usually be recoverable under the award. The date on which the award is communicated is
important because it will generally determine the commencement of time limits for the
making of any available appeal. Communication is usually regarded as taking place
when the party receives a copy of the award, not when it is notified that it is available for
collection. If there is likely to any delay in collecting the award, the arbitration law of
the seat should be checked on this point.

REGISTRATION OR DEPOSIT:

The registration or deposit of an award is sometimes required as a condition for its

validity or as a necessary preliminary to its enforcement either in the state in which it has
been made or, in some cases, in a foreign state. The relevant laws should in each case be
checked.

CONSEQUENCES OF INVALIDITY:

Two important points have already been made:

a) An invalid award is not capable of recognition or enforcement.

b) A final award concludes the function of the arbitral tribunal (or, as it is sometimes
put, renders it functus officio), depriving it of any further jurisdiction over the dispute.
This might lead one to conclude that the making of an invalid final award could
be a catastrophe requiring the appointment of a new tribunal, and further hearings, to sort
out such things as calculation errors or accidental omission. But this will not always be
so. In each case the arbitration agreement (including the rules, if any, which the parties
have agreed should apply to the arbitration), as well as the arbitration law of the seat,
must be examined.

The rules of most institutions permit the correction of minor slips and errors of
computation. The rules of the LCIA and the UNCITRAL Arbitration Rules go further
by permitting the tribunal to make an additional award to deal with issues raised in the
arbitration but not dealt with in the award. The relevant arbitration law of the seat
applicable to the arbitration proceedings will also normally permit the correction of slips
and may, particularly in the case of laws based on the UNCITRAL Model Law, also
permit an additional award to be made to deal with an omitted issue. Where a state court
has found that an award suffers from a remediable defect, the Model Law allows the
court to remit the award to the arbitral tribunal to cure the defect.395

ARBITRATION AWARD AND RES JUDICATA:

A final and binding arbitral award has “Res Judicata”. Awards of costs and fees
in international commercial arbitration are often arbitrary and inconsistent.396 This means
that the same issues cannot be arbitrated or litigated again between the same parties, so
long as the award is not vacated. Once an award has been confirmed by a court, it
normally has the same res judicata effect as a court of judgment. Moreover, even
unconfirmed awards may be treated as res judicata. In the United States, not only will
courts preclude parties from litigating a claim that has already been decided in
arbitration397, they will also apply a res judicata bar to claims that could have been, but
were not, arbitrated in a prior proceeding,398 which held that a party whose claims have
been decided in arbitration may not them bring the same claims under new labels.
The point at which an award becomes res judicata may vary by jurisdiction. It
could occur when the award is made, or when it is communicated to the parties, or when
it can no longer be challenged.399 Res Judicata is also referred to as “claim preclusion”
because it precludes the same claims from being litigated again between the same parties.
But issues that have been previously determined in arbitration may also, under the
doctrine of collateral estoppels, be precluded in a subsequent action that is not between
the same parties, or does not involve the same cause of action. If a tribunal has
determined an issue of fact or law necessary to the final award, the decision as to that
issue may preclude re-litigation or re-arbitration of the issue as part of a different claim.

395
Ibid, pp. 119-120.
396
Y.Gotanda, Awarding costs and Attorneys Fees in International Commercial Arbitration, 21 Michigan
Journal of International Law, 1,2 (1999)
397
Schattner vs. Girard Inc. 668 F.2d 1366, 1369 (D.C.Cir. 1981)
398
Noris vs. Grosvenor Marketing Ltd. 803 F.2d 1281, 1286 (2nd.Cir. 1986).
399
Bernard Hanotiau, The Res Judicata Effect of Arbitral Awards, International Court of Arbitration
Bulletin: Complex Arbitrations – Special Supplement 2003, at p.47.
If however, the arbitral award is one where reasons are not given, some courts will not
apply collateral estoppels, since it may be unclear what particular issues were dispositive
of the claim.400

CONFIDENTIALITY OF THE AWARD:

How important is it to parties to keep the arbitral award confidential? There have
been cases where within hours of the award being announced, it appeared on the Internet.
When substantial amounts of money are at stake, this kind of disclosure could cause the
stock prices of parties involved to go up or down, depending on the result. If
confidentiality is important to the parties concerned, there are various ways to help ensure
the desired result. The parties can provide for confidentiality of the proceedings and the
award in the arbitration agreement. This is particularly necessary if the arbitration is ad
hoc, or if the parties have chosen arbitration rules which do not offer much protection.
Attorneys representing parties should be familiar with how confidentiality is treated in
the chosen rules before they draft the arbitration agreement. If parties chose the LCIA
Rules, for example, they would have broad protection of confidentiality of the
proceedings and the award.401

Their awards could not be published except with the consent of both the parties.
Parties would have less confidentiality protection if they chose the ICC Rules or the
ICDR Rules. Although the ICC Rules provide that the tribunal can “take measures for
protecting trade secrets and confidential information”, the Rules themselves do not
appear to impose upon the parties any obligation to keep confidential the award or any
evidence leading to the award. The ICDR Rules, on the other hand, provide that the
award may not be published without the consent of both parties, but do not impose on the
parties a confidentiality obligation as to information obtained during the arbitration.
Rather, this obligation is only imposed on the administrators and the arbitrators. If either
of these sets of rules is chosen for the arbitration, it would be prudent to draft additional
confidentiality protections in the arbitration agreement.

400
French vs. Jinright & Ryan, 735 F.2d 433 (II th. Cir. 1984)
401
Art-30 of ICA Rules; Art-34 of ICDR Rules; Art-32(5) of UNCITRAL Rules; and Art-73-76 of WIPO
Rules
 In the arbitral community, there are tensions between keeping awards private and
confidential, and making them generally available, to serve as guides, if not precedents.
If parties have information about how similar cases have been decided, it may make their
settlement discussions more fruitful. Thus the ICDR will permit the publication of
awards if identifying information has been removed, unless the parties have agreed
otherwise. The ICC has also made available abstracts of awards, without revealing
names of the parties. The WIPO Arbitration Rules will permit publication of the result of
arbitration in aggregate statistical data, so long as the parties or the particular
circumstances of the arbitration are not identifiable. In addition to the choice of rules, the
choice of place of arbitration will affect the extent of the confidentiality obligation. In
England, the courts have found an implied obligation of confidentiality in connection
with an arbitration clause, thereby creating a general rule of confidentiality even when the
arbitration agreement does not expressly provide for it.402 In the United States and
Australia, on the other hand, the courts have not placed any implied duty of
confidentiality on parties to arbitration, and with a few exceptions, require that parties
must specifically contract for confidentiality in order to protect confidential
information.403 In sum, the more important it is for parties to keep their award and the
underlying evidence confidential, the more diligent their attorneys must be to ensure that
if the laws and the rules do not adequately protect their client, the arbitration agreement
will do so.404

5.4. RECOGNITION AND ENFORCEMENT OF AWARDS.

Having received an award made in its favour, the ‘successful’ party in arbitration
can expect one of three things to happen:

1) The award is honoured – for example, the other party

(i) Pays the successful party the amounts awarded to it without delay or
(ii) Accepts any declarations made in the award and acts in accordance with
them; or

402
(Ali Shipping Corp vs. Shipyard Trogir (1997) E.W.J. No. 1781.
403
Esso Australia Resources Ltd. Vs. Hon.Sydney James Ploughman (1995), 128 ALR 391
404
Margaret L Moses, The Principles and Practice of International Commercial Arbitration, Cambridge
University Press, New York (2008), P-188-190
 2) The other party effectively ignores the award but takes no active steps to resist it;
or
3) The other party actively challenges the award and/or resists any attempt by the
‘successful’ party to have the award recognized or enforced.

5.4.1. RECOGNITION OR ENFORCEMENT:

Faced with a recalcitrant opponent, a ‘successful’ party may seek the assistance of
the state court to compel its opponent to give effect to the award. In doing so, the
successful party will ask the courts either to “recognize” or “to recognize and enforce”
the award. “Recognition” without subsequent enforcement may be sought a a defensive
measure when a party wishes to rely on the award to defeat claims brought against it in
other proceedings (whether actual or anticipated) which are unconnected to the
arbitration – for example, if the award has already finally determined an issue raised in
the other proceedings, the state court may be asked to accept the award of the tribunal as
binding on the parties with regard to the issues covered by its, and to render a judgment
which is consistent with the arbitral award. An award is enforced when a state court
assists in compelling the recalcitrant party to comply with the terms of the award, for
example, by seizing that party’s assets. However, before a court can enforce an award,
the award may need to be “recognized” by the court in the sense that the court needs to
accept that the decision of the tribunal is valid and that it is binding on the parties. In
this way, “recognition” of an award is often a necessary precursor to commencing
enforcement proceedings.

DOMESTIC AND FOREIGN AWARDS:

Different (through perhaps overlapping) procedures are available for the

recognition and /or enforcement of “domestic” and “foreign” awards. For present
purpose, a domestic award is one which is to be recognized and/or enforced in the state in
which it was made whereas a ‘foreign’ award is one in respect of which recognition
and/or enforcement is sought in a state other than that in which it was made. This begs
the question: “Where is the award made?” This must be considered in the light of the
law applicable in the state in which the application for recognition and/or enforcement is
made, together with any rules which the parties have agreed should apply to the
arbitration. A number of states treat an award as having been made in the country in
which it was signed by the arbitrator. Thus in an English case Hiscox Vs. Outhwaite405
(1991) the effect of which has now been reversed by the Arbitration Act 1996, the
English courts treated as ‘foreign’ an award which had been signed in Paris, even though
the entirety of arbitration proceedings themselves had been conducted in England. In
order to avoid such a haphazard result, some arbitration rules specify where the award is
to be made. For Example: -

a) The AAA/ICDR International Arbitration Rules provide that an award is made in

the place specified in the award. That place must be the place of the arbitration
itself. (Art-25(3); and
b) The ICC Arbitration Rules provide that the award shall be deemed to be made at
the place of the arbitration proceedings (Art-25(3) i.e. the seat, even though
meetings, hearings and deliberations may have taken place at other locations.

5.4.2. WHERE TO APPLY FOR RECOGNITION OR ENFORCEMENT:

An application for recognition alone (i.e. without enforcement proceedings) will

necessarily be brought in the courts of the state where the other proceedings have been
commenced against the party who wishes to rely on the award as part of its defence.
Occasionally, a party may include an application for recognition in proceedings for a pre-
emptive declaration designed to frustrate any subsequent attempts by the other party to
enforce an award dealing with related issues. In the case of applications for enforcement,
however, the successful party may have a choice of state courts. In such a case, the
primary consideration will usually be the location of the assets against which
enforcement is sought because a state court can assist only with the enforcement of an
award against assets which are within the jurisdiction of that state court. Also,
enforcement in one state may be easier and quicker than in another. Accordingly, before
commencing any enforcement proceedings, it is worth the ‘successful’ party investing
some time and costs tracing the whereabouts of the recalcitrant party’s assets in order to
identify whether one or more states is likely to prove to be a more favourable (and
effective) forum for enforcement.

405
1992 1 A.C 562 at p.594
 Where assets are found in a number of separate states, a separate application for
enforcement will be required for each state in which there are assets needed to meet the
award. There are some countries, such the United Kingdom and the U.S.A. which are
made up of a number of separate legal jurisdictions. Thus for example, if the assets
which are needed to satisfy the award are spread across both England and Scotland, the
successful party will need to make two separate applications for enforcement, to the
courts in England and to the courts in Scotland. The location of assets is not, however,
the only relevant factor. An application for the enforcement of a foreign award will not
progress very far if the law of the State in which the assets are found does not provide for
the enforcement of awards made in the state in which the award was made. Pressing
ahead with such an application will simply be a waste of time and money. Thus, before
making an application for enforcement of an award the ‘successful’ party must:

a) Establish whether the state in which enforcement is sought is a party to the New
York Convention. It will not be necessary that the state in which the award was made
should also be a party to the Convention, provided that the state in which enforcement is
sought has not availed itself of the “reciprocity reservation.406
b) Where the New York Convention cannot be relied upon, find out whether there
are any other conventions or bilateral treaties which may provide a remedy;
c) In the event that there are no conventions or treaties that may be relied upon, look
to the law of the state in which enforcement is sought to see whether, nevertheless, it
provides for the enforcement of foreign awards. For example, in England, a foreign
award may, with the permission of the High Court, be enforced in the same manner as a
judgment of the courts (Sec-66 of the Arbitration Act, 1996), or it may constitute the
basis of an ordinary action in the English courts brought to enforce the obligations arising
under the award. Whether or not an enforcement convention or treaty applies, “public
policy” considerations in the proposed state in which enforcement is sought can be a
critical factor in choosing a forum for enforcement proceedings
For example --- In France, a foreign award is enforceable, or will be recognized,
if its existence is proved by the party relying on it and its enforcement, or recognition, is
not manifestly contrary to international public policy (Art-1498 of the code of Civil

406
(Col.1 of Appendix 1) of New York convention
Procedure). As was demonstrated in the Hilmarton Case407, the recognition of an
award that has been set aside in the state courts of the seat of arbitration does not run
counter to French notions of international public policy. In this respect the French
regime for recognition and enforcement is even more favourable for the successful party
than that of the New York Convention. Similarly, in the USA, provided the award
conforms to certain legal criteria in the state of enforcement, the courts are willing to
exercise their discretion in favour of enforcing an award even if it has been annulled
elsewhere. Thus in The Chromalloy case408 (1999), US courts recognized and enforced
an award that had been made in Egypt but annulled by the Egyptian courts, on the basis
that it was valid and enforceable under the relevant US domestic law and the Egyptian
annulment was contrary to “US public policy in favour of final and binding arbitration of
commercial disputes”. However, in the Baker Marine case409 (1999) the US courts
refused to enforce an award that had been made in Nigeria and annulled by the Nigerian
courts, on the basis that the parties had agreed that their disputes and any associated
arbitration would be governed by Nigerian law. As, US recognition of an award annulled
in the country of origin is not automatic and it seems will be heavily influenced by US
public policy of upholding party autonomy.
---Although Russia is a party to the New York Convention, in practical terms,
successful parties may find a Russian court outside Moscow reluctant to enforce a foreign
award against a recalcitrant Russian entity based in the provinces, particularly if
enforcement is sought against real (as opposed to monetary) assets and could have an
adverse effect on the economy of a local Russian town or area. In every case, advice
should be taken at an early stage from lawyers with expertise in the state in which
enforcement is likely to be sought. They should know whether or not a foreign award
will be enforceable, and in what manner. They should also be able to advise on the
current attitude of the local courts towards requests for enforcement of “foreign” arbitral
awards and any particular features in the legal system of the state in question. For
example, notwithstanding the fact that Bangladesh is a party to the New York

407
Hilmarton, 123 J.D.I. 120 (1996), and E. Gaillard's note; 1995 REV. ARB. 639, and ...5622)
408
Chromalloy Aeroservices Inc. v. Ministry of Defence of the Republic of Egypt[1]
409
Baker marine nig Ltd. Vs chevron (nig)Ltd.191 F.3d 194.(2nd cir.1999) at 197
Convention, it has yet to implement the legislation for obtaining enforcement of an award
pursuant to that Convention.
5.4.3. PROCEDURE FOR RECOGNITION OR ENFORCEMENT:

The procedure for the recognition and/or enforcement of an award is to be found

in the detailed provisions of the law of the state in question. If the arbitral award is a
‘domestic’ award, clearly no international conventions or treaties will be relevant.
However, in some jurisdictions, such as France, special procedural rules may apply to the
recognition and/or enforcement of awards that are made in arbitrations which are
regarded as ‘international’. As the procedure for the recognition and/or enforcement of a
foreign award turns on the requirements of the law of the particular state in which the
application is made it is inappropriate to attempt to deal with it in a detail. However in
general terms, where a state is a party to the New York Convention it undertakes:

a) To recognize arbitral awards as binding and to enforce them in accordance with

its rules of procedure, under the conditions laid in the rest of the Convention, and
b) Not to impose substantially more onerous conditions or higher fees or charges for
recognition or enforcement of awards covered by the Convention than are imposed on the
recognition or enforcement of domestic awards. (Art-III). In fact, on a more positive
note, the Convention allows the successful party to avail itself of any more favourable
regime for recognition or enforcement which may exist in the state in which the
application is made (Art-VII).
Furthermore, the requirements of the New York Convention for obtaining recognition
and/or enforcement have been kept to the minimum. The party applying for recognition
and/or enforcement merely has to supply the appropriate court with:

(a) The authenticated original award, or a certified copy of it, and

(b) The original arbitration agreement or a certified copy of it. (Art-IV (1).
Documents which have not been prepared in an official language of the state in which the
application is made must be translated into that language.

TIME LIMITS:

The law of the place where recognition and/or enforcement of an award is sought
(or occasionally, the enforcement convention or treaty relied upon) may contain time
limits for the commencement of such proceedings. These require early attention with the
assistance of lawyers having expertise in the relevant state.410

5.5. CHALLENGING OR RESISTING ENFORCEMENT OF AWARDS:

A party that has lost before an arbitral tribunal faces an uphill battle if it wishes to
set aside or vacate the award. Courts rarely overturn an arbitral award, because arbitral
awards are considered to be final and binding, for the most part they cannot be challenged
on the merits, but only on procedural grounds or grounds of arbitrator misconduct or bias.
One of the touted advantages of an arbitration is the finality of the award, and arbitration
laws and rules support finality by making it difficult to set aside an award. Nonetheless,
there are steps that can be taken by a determined party that believes the award was
improperly made.411 A dissatisfied party has a number of options:-

Where the rules applicable to the arbitration provide for it, to make an appeal to the
appellate authority specified in the rules; and/or

a) To challenge the award in the courts of the place where it was made i.e. the seat
of the arbitration (to the extent permitted by the local law); and / or
b) To resist recognition or enforcement of the award in a state other than that in
which it was made; and/or
c) Using the threat of one or more of options (a), (b) and (c), to attempt to negotiate
a settlement on more favourable terms than the arbitral award; and/or
d) To accept the award and comply with it.
These options should not be regarded as mutually exclusive. Whereas options (d) and
(e) are essentially driven by commercial considerations, for example, a continuing trade
relationship; options (a), (b) and (c) are more likely to depend on a complicated
interaction of commercial, practical and legal considerations.412

410
Phillips Capper, International Arbitration – A Hand Book, Third Edition, P-121-125.
411
Margaret L Moses,The Principles and Practice of International Commercial Arbitration, Cambridge
University Press (2008) P-193.
412
Phillips Capper, International Arbitration-A Hand Book, P-127.
5.5.1. METHODS OF CHALLENGE:

The most common method of challenge is to bring an action to annul, set aside or
vacate the award (the terms differ in different jurisdictions) in the court at the situs of the
arbitration.413 This is the appropriate place to challenge the award, because the court at
the situs is considered to have supervisory jurisdiction over the arbitral process to ensure
that it was conducted in a fair and non-corrupt manner. The law that will govern the
action will be the ‘Lex Arbitri’, or the curial law, which governs the arbitration
proceedings at the situs. In over 50 jurisdictions, the procedural law for challenging an
award will based upon the UNCITRAL Model Law, which will provide the grounds on
which an award can be challenged.414 As for methods of challenge, however, actions
other than court challenges are available in particular kinds of arbitrations. In the
Maritime Industry and in certain trade associations, for example a challenge to an
arbitration award may be brought to another arbitration panel or to a Board of Appeal.415
Moreover, a party to an award under the ICSID Convention can only appeal to another
ICSID arbitral tribunal.416 If the second panel annuls the original award, either party can
request yet another tribunal to render an award.417 In most commercial arbitrations arising
out of an international contract, however, any challenge to an award will be directed to a
court. A losing party can bring an action to set aside an award on procedural or public
policy grounds. If it loses in the local court, or if it does not bring an action to set aside,
the losing party has still another opportunity to resist enforcement. It can oppose the
prevailing party’s efforts to enforce the award in a different jurisdiction, where the losing
party’s assets are located. Thus, the losing party has two opportunities to challenge an
award: first, in the court of the situs and second, in the court where the prevailing party is
attempting to enforce the award against the assets of the losing party. Courts have
sometimes confused the two actions – an action to vacate and action to enforce. It is
possible, in some instances, to bring both actions in the same court.

413
The court at the seat of the arbitration is the proper court under UNCITRAL Model Law, Art-34, and
under most arbitration laws.
414
Margaret L Moses, The Principles and Practice of International Commercial Arbitration Law,
Cambridge University Press (2008) p.193
415
The Grain and Feed Association (GAFTA) for example, provides for an appeal to a Board of Appeal,
consisting of either three or five members of the Association.
416
Art-52 of ICSID Arbitration Rules.
417
Art-55 of ICSID Arbitration Rules
 If, for example, the arbitration was held in the U.S., and the losing party’s assets
were also in the U.S., the U.S. court could hear both a motion to vacate and a motion to
enforce. Normally, however, the parties will have chosen a neutral situs for the
arbitration, so the losing party’s assets are likely to be in a jurisdiction other than the one
where the arbitration is held. Thus, the motion to vacate will take place in the court of
the situs, but the motion to enforce will be in the jurisdiction where the relevant assets are
located. Although awards are from time to time vacated by the court of the arbitral situs,
and enforcement is sometimes refused in the jurisdiction where it is sought, for the most
part, a challenging party is not likely to succeed because the grounds for challenging an
award are quite narrow.

5.5.2. GROUNDS OF CHALLENGE:

As arbitrations are meant to be final and binding, in most jurisdictions there is no right to
appeal if the arbitrators made a mistake of law or of fact. Rather, there are only a few
grounds on which a party can base a motion to set aside the award. The applicable law
in the jurisdiction where the challenge is brought defines the grounds that can be used. In
most jurisdictions, the grounds for a challenge tend to fall into two broad categories i.e.

(1) Jurisdictional and

(2) Procedural.
JURISDICTIONAL CHALLENGES:

Jurisdictional challenges may be made to an award, but they are more usually
made at the beginning of the arbitration, rather than after the award is rendered. Under
many laws, if a party does not challenge the jurisdiction at the beginning of the
arbitration, it may lose the right to object.418 It is obviously more efficient to determine
whether jurisdiction is proper at the beginning of an arbitral procedure, rather than after
parties have expended time, effort, and resources to reach the final award. Thus if a party
waits until the award is handed down before it objects to the tribunal’s jurisdiction, it may
well have lost its opportunity to challenge beginning of the arbitration, and if the
challenge fails, then participate in the arbitration. On the other hand, if it has boycotted

418
Sec-31, 73 of the English Arbitration Act of 1996; Cour de Appeal de Paris decision in ‘S.A.Caissse
Federale de Credit Mutuel du Nord de la France vs. Banque Delubac er Compagnie, 2001 Revue d’
Arbitrage 918 (R&H)
the proceedings completely, it may be permitted to make the challenge.419 If it loses the
challenge, however, the award will be enforced against it. For that reason as well, in most
cases it would be better to test the jurisdictional question at the A jurisdictional challenge
to the award, however, may be based on a claim that the tribunal exceeded its powers. A
tribunal may have had jurisdiction under the arbitration agreement, but nonetheless
rendered an award that it was not entitled to make. For example, if a party only claimed
a certain quantum of damages, and the tribunal awarded more than that amount, the
tribunal may have exceeded its jurisdiction.420

The award may also be challenged if the tribunal either fails to consider all of the
issues before it, or if it decides certain issues that were not before it. In some instances,
if a court finds that the tribunal has exceeded its powers, the issues that were improperly
decided may be severed, leaving the award as to other issues intact.

PROCEDURAL CHALLENGES:

Awards are most often challenged on procedural grounds. Most arbitration laws
provide that certain standards of due process must be met. Under the UNCITRAL
Model Law, for example, there are four grounds on which a party can challenge, all of
which relate to some process.(Art-34). They include –

1. A party must not be under any incapacity, and the agreement must be valid;
2. A party must have been given proper notice of both the appointment of arbitrator
and the scheduling of the proceedings, and
3. The subject matter has to be within the scope of the arbitration agreement; and
4. The arbitral tribunal must be constituted in accordance with the agreement of the
parties.
On each of these grounds, the party making the challenge bears the burden of proof. Two
other grounds may be raised and determined by the national court SUA SPONTE:

I) Whether the subject matter is arbitrable, and

II) Whether the award conflicts with the public policy of the state.

419
Redfern & Hunter et al., Law and Practice of Commercial Arbitration, 259, Sec-5-55 (2004);
Tweeddale & Tweeddale, Arbitration of Commercial Disputes, 698-99, 789 (2005).
420
Paris Lapeyre vs. Sauvate (2001) Rev. Arb. 806.
The arbitrability ground will not cause many awards to be vacated, because there are very
few matters today that are not considered arbitrable. The second ground that a court
could raise is a violation of public policy. Public Policy is defined differently in
different jurisdictions, but in most, an award could be vacated if it was not consistent
with fundamental notions of justice, honesty, and fairness. Thus corruption, fraud, or
lack of integrity in the process would be considered a violation of public policy, requiring
the award to be annulled. In most Model Law jurisdictions, fraud or corruption would
probably be considered a proper ground for challenging an award as a violation of public
policy. The U.S.Federal Arbitration Act (FAA) is more explicit. It provides specifically
that grounds for vacating an award include the following:-

i) The award was procured by corruption, fraud or undue means;

ii) There was evidence partiality or corruption in the arbitrators;
iii) The arbitrators were guilty of misconduct …or… other misbehaviour by which
the rights of any party have been prejudiced. (US Federal Arbitration Act, 9 U.S.C. Sec-
10(a).
Similarly, the English Arbitration Act provides that a party may challenge an award
based on ‘serious irregularity affecting the tribunal, the proceedings or the award. (Sec-
68(1) of the English Arbitration Act, 1996. Sec34 (6) of the Swedish Arbitration Act also
permits a challenge based on “an irregularity… which probably influenced the outcome
of the case.)

CHALLENGES BASED ON MERITS:

There are exceptions to the general rule in arbitration that the only grounds for
challenging an award are based upon jurisdiction, procedural irregularities, arbitrability,
or public policy. These exceptions are found generally in common law legal systems.
In England, for example, a party may appeal an arbitral award on a point of law, unless
the parties have agreed otherwise.(Sec-69(1). This right of appeal, however, is subject to
substantial limitations. The appeal cannot be brought unless all the parties agree, or
unless the court grants leave to appeal. The court should only grant leave if the tribunal
was obviously wrong on the point of law or the question if of general public importance
and the decision of the tribunal is open to doubt. Moreover, case law has established that
only a point of English law can be appealed.421 (Appeal not granted because issues
related Indian Law, not English law) In the United States, courts have created some non-
statutory grounds for challenging an award on the law. In some courts, “manifest
disregard of the law” is a ground for setting aside the award.422 This standard requires
that a party show that the arbitrator knew and understood the law, but deliberately
disregarded it.423 This standard is rarely met. Moreover, some U.S. courts refuse to
recognize the doctrine as valid.424 Another non-statutory ground in the United States is
that an award can be vacated if it violates public policy.425

– Many courts recognize public policy as a potential ground for setting aside an award.
Nonetheless, attempts to set aside an award on this usually do not succeed.426
But here again, it is rare that a court will set aside an award on this ground, generally
finding that “vacatur” on the grounds of ‘public policy’ requires more than a mistake or
misunderstanding of the law by the arbitrator Courts differ as to whether the ground of
public policy requires the court to inquire into the merits of the arbitration award. In U.S.
there is also the possibility in some judicial circuits that parties can determine in their
arbitration agreements to have any arbitral award reviewed by a court on the merits.
Parties who fear that an idiosyncratic arbitrator may render a decision, wrong on the facts
and the law, which would not be appealable in the normal course, have drafted arbitration
clauses that provide for expanded judicial review. The Circuit court has split on whether
or not such review is permissible under the FAA. However, the U.S.Supreme court has
accepted ‘Certiorari’ in a case that should resolve this issue, with a decision likely to
come down some time in 2008.427 Courts that permit expanded judicial review take the
position that the narrow grounds for judicial review under the FAA are simply default
grounds that the parties can contract around, and that parties have the right to have their
arbitration agreements enforced, just like any other contract.428 Courts that prohibit
expanded judicial review assert that the narrow grounds stated in the FAA are mandatory

421
Reliance Industries Ltd. Vs. Enron Oil & Gas India Ltd. (2002), 1 All ER (Comm) (QBD)
422
Bowen vs. Amoco Pipeline Co. 254 F.3d 925, 932 (10th. Cir. 2001)
423
Prudential-Bache, 72 F 3d, at 240.
424
Judge Posner’ in Baravati vs. Josephthal, Lyon & Ross, Inc. 28 F 3d 704, 706 (7th Cir. 1994)
425
The doctrine apparently originated in the contet of labor arbitrations and collective bargaining. – United
Paperworkers International Union Vs. Misco Inc. 484 U>S 29, 49, (1987)
426
Seymour vs. Blue Cross/Blue Shield, 988 F 2d. 1020, 1023 (10th. Cir. 1993)
427
Hall Street Assoc. vs. Mattel Inc. 196 Fed. Appx. 476 (9th. Circ. Court 2006).
428
Gateway Techs, Inc. vs. MCI Telecomm. Corp., 64 F.3d. 993 (5th. Cir.1995)
and exclusive, and that parties cannot tell courts what to do.429 Curiously, the courts that
hold that the FAA grounds are mandatory and exclusive, nonetheless appear to see no
inconsistency in the use of judge-created grounds like manifest disregard of the law, or
arbitrary and capricious decisions, to vacate an award.430

Courts in the U.S. also have different views on whether the arbitration award must
itself be invalidated if a court refused to provide expanded judicial review. The view in
favour of invalidation of the award is that if the parties’ consent to arbitration was
contingent on any arbitration award being subject to judicial review on merits (facts and
law), then denying such review would mean the parties’ consent to arbitration was no
longer valid.
The aggrieved party’s position would be that it would not have agreed to arbitrate
without an agreement to have judicial review on the merits. Expanded judicial review
could cause serious problems of enforcement internationally. If judicial review of the
merits resulted in the court setting aside the award, the losing party might nonetheless
attempt to, and possibly succeed in enforcing the award in a jurisdiction which only
considers narrow grounds appropriate for setting aside an award. These issues, and the
current uncertainty in the United States as to whether courts will provide expanded
review, should persuade prudent parties not to opt for expanded review at the present
time.

TIME LIMITATIONS:
Challenges to an award must be brought promptly. Failure to act within the time
limitations may preclude the challenge. Time periods range from 28 days in England
(Sec-70(3) of the English Arbitration Act, 1996) or a month in France (Art-1505 of
French Code of Civil Procedure) to about six months in China. Art-59 of China
Arbitration Law. In the Model Law jurisdictions and in the U, S., the period is three
months.(Art-34(3) UNCITRAL Model Law and Sec-12 of U.S. Federal Arbitration Act,
9 USC). The Model Law however, arguably permits the court some discretion, since it
provides that “an application for setting aside may not be made after three months (from
receipt of the award). The U.S. Law on the other hand, requires that notice must be

429
Kyocera vs. Prudential-Bache Trade Services, Inc., 341 F.3d. 987 (9th.Cir.2003)
430
Bowen vs. Amoco Pipeline Co., 254 F.3d 925, 932(10th.Circ.Court-2001
served on the opposing party or counsel within three months from the date when the
award was delivered or filed. This does not appear to permit any flexibility.
5.5.3. EFFECTS OF A SUCCESSFUL CHALLENGE:

Assume that a party persuades the local court to vacate the arbitration award. At that
point, with some few exceptions, the award is null and void, having no further legal
effect. What happens next? If the award was vacated because the court held that the
arbitration agreement itself was invalid, then assuming there is no time bar, the prevailing
party should be able to initiate a court action. Dutch law explicitly states that when a
decision setting aside an award becomes final, the jurisdiction of the court shall revive.431

The provision appears to apply to all awards, not just those set aside on
jurisdictional grounds. If however, the award is vacated because of some major
procedural irregularity, the question is whether case will be remitted to the arbitrators,
and if so, whether it will be to the same tribunal, or to a different one. Courts are likely
to favour some kind of remission, so that the parties will not have wasted the entire
arbitration effort. If the problem with the award can be resolved short of declaring it null
and void, most courts will try to choose a solution that will not require the parties to start
all over again. A substantial duplication of effort, time, and resources would not benefit
either party. The English Arbitration Act, for example, specifically provides that a court
shall not ‘set aside or … declare an award to be of no effect, in whole or in part, unless it
is satisfied that it would be inappropriate to remit the matters in question to the tribunal
for reconsideration.” (Sec-68(3) (c).
If an award needs to be corrected or interpreted, the court will generally remit the
case to the same tribunal. German law provides that a court may “where appropriate, set
aside the award and remit the case to the arbitral tribunal.” (Art.1059 (4) of German
Arbitration Act) German law also provides that absent any indication to the contrary, the
setting aside of the award will “result in the arbitration agreement becoming operative
again in respect of the subject-matter of the dispute”. (Art-1059(5). This suggests the
possibility that if the court does not specifically remit to the prior tribunal, the parties
could start over again with a new tribunal.

431
Art-1067 of Netherlands Arbitration L
 It would be logical, if the problem with the award was related to the integrity of
the process, such as bias by the arbitrator, or some kind of misconduct, that the court
would not remit the case to the same tribunal. The Uniform Arbitration Act in the United
States, which has been adopted in 49 U.S. jurisdictions, was revised in 2000 to spell out
more clearly what should happen after a court vacates an arbitral award. Under the
Revised Uniform Arbitration Act (RUAA), if the court vacates an award other than on
the ground that the arbitration agreement was invalid, “it may order a rehearing.”(Sec-
23(c)of RUAA).

However, if the award was vacated on grounds of corruption, fraud, or arbitrator

misconduct partiality, “the rehearing must be before a new arbitrator”. If the ground
concerned a failure of procedure, or an arbitrator acting in excess of her powers, then the
rehearing “may be before the arbitrator who made the award or the arbitrator’s
successor.” Presumably, in this latter case, the parties themselves, if they agreed, could
have some ability to help determine whether the prior tribunal or a newly constituted one
would conduct the rehearing. Although this revised version of the Uniform Arbitration
Act has not yet been adopted in many states, it provides reasonable guidelines for how
remissions or remands should be handled. Ultimately, whether a case is remitted to a
prior tribunal, or the parties start over with a new tribunal, will depend upon the law of
the jurisdiction, the reasons the award is vacated, and possibly upon what the parties want
to do, and whether they can agree.432 Thus, a party which has successfully resisted an
application for recognition and/or enforcement might think that that is the end of the
matter. However, that may not be correct if there are assets in any other state. Such a
party should bear in mind the following points:-

1. The decision of the state court refusing the application for recognition or
enforcement does not have the effect of setting aside or otherwise invalidating the award.
The award remains valid and, even though it may not be recognized or enforced in the
country in which the application has been refused, it remains possible (subject to the
defences which may be established in the relevant court) that the award will be
recognized and/or enforced in another jurisdiction where assets may be located.

432
Margaret L Moses, The Principles and Practice of International Commercial Arbitration, Cambridge
University Press (2008) pp.195-201)
2. The decision of the court refusing the application for recognition and/or
enforcement is not binding on the courts of any other jurisdiction in which such an
application may be made.
3. Where successful resistance was based on a ‘public policy’ defence under Art-V
(2) of the New York Convention that defence may not be available in other jurisdictions.

SECURITY PENDING THE OUTCOME OF A CHALLENGE:

Once an arbitral award has been issued, there is normally no reason why the
successful party cannot proceed immediately with an application to have it enforced even
if the unsuccessful party has lodged an application to set aside. The law of the state in
which the application for enforcement is made may, however, permit a stay of the
enforcement proceedings pending the outcome of the application to set aside. The stay
may be made subject to the condition that the applicant gives security for the amount of
award. ( for example, under Art-VI of the New York Convention.)

STATE IMMUNITY:

State immunity is not so much a defence as an obstacle to the enforcement of an

award against a state. More precisely, it prevents the enforcement of an arbitral award
against the assets of the state or state agency. In every case, the law of the state in which
enforcement is sought must be considered to establish the extent to which it is an
obstacle. The law of some states provides the foreign state with absolute immunity from
enforcement against its property, whereas the law of other states does, for example,
permit enforcement against the commercial assets of a state. Where the successful party
has had sufficient foresight, it will have attempted to include in the arbitration agreement
a waiver of the state’s immunity from execution. The effect of such waiver should
nevertheless be carefully checked under the law of the state in which enforcement is
sought.433

This Chapter thus presents a synoptic version of the concept of ‘arbitrability’ and
its utility in international commercial arbitration since the process of arbitration cannot be
conducted in a vacuum and it has to be regulated by some procedure or rules or law. It

433
Phillips Capper, International Arbitration – A Hand Book, p.133.
has dealt with not only the procedure part but also the substantive part of the law of
arbitration and the search for the applicable law when there is no ‘given Choice of Law’
and the conflict of Law rules etc. including the Indian Perspective on the subject.