International Trade Law & Finance I

LAW 538

Alternative Dispute
Resolution
(ADR)
 Introduction
• As far as traders are concerned there are two forms of dispute
resolution methods available, which are, the litigation process and
ADR.

• The term “ADR” refers to the various forms of ad hoc/institutional

procedures which are consensual and not subject to any coercive
powers of the court, except in the enforcement of the resolution
(arbitral awards).

• ADR procedures are necessarily informal or at least less formal than

the litigation process.
• The chief concern is the amicable settlement of disputes between two
parties; although the extent to which this is achieved depends on the type of
ADR procedure chosen.

• On the one hand, there is negotiation or conciliation where the informality of

the process is self evident but the parties are free to withdraw anytime.

• There are no formal structures to ensure that some conclusion or result be

arrived at.

• On the other hand, the arbitral process is more formal in that the parties go
before an arbitral tribunal or panel whereby rules of evidence will be adhered
to, legal principles be referred to and applied and a binding award is
envisaged.
 Arbitration
• Mediation and conciliation as ADR procedures my be roughly termed
“diplomatic means of dispute resolution.”

• The approach is entirely informal and the parties are entitled to back out and
refuse to carry on.

• The parties retain substantial control over the means and process of
settlement.
• Arbitration, on the other hand, is more akin to judicial settlement.

• Once the parties have agreed to set up the arbitration for the resolution of
their dispute, their right to withdraw will be construed as a breach of the
arbitration agreement.

• International commercial disputes are particularly suitable for resolution by

arbitration.

• The technical issues and trade customs involved are not easily accessible
to the non-specialist judge.
• An arbitrator who has substantial experience in the trade or industry in question
will make a splendid umpire in disputes about reasonable conduct in business,
the presumed contractual intention of the parties and other similar issues.

• In cases which hinge on the facts and specific customs, it is preferable that they
be decided by arbitration.

• Where intricate questions of law are involved they are better referred to the
courts of law.
• In general, it is assumed that arbitration has the following benefits:

(a) confidentiality and privacy

(b) informality of the proceedings

(c) lower costs

(d) efficiency

(e) technical specialism

(f) a final award which could be enforced at the courts.

• An international arbitration may be effected by four different laws:

(a) the law governing the contract between the parties;

(b) the law governing the arbitration agreement;

(c) the law governing the arbitration proceedings (the procedural law); and

(d) the law governing the reference to arbitration.

• Both the procedural and applicable law to the underlying contract and/or the arbitration agreement may be
expressly nominated by the parties.

• While the procedural law of the arbitration may be chosen by the parties, for the sake of convenience the
procedural law will usually follow that of the seat of the arbitration.

• Section 3 of the 1996 Arbitration Act recognizes this:

The seat of the arbitration.

In this Part “the seat of the arbitration” means the juridical seat of the arbitration designated—

(a) by the parties to the arbitration agreement, or

(b) by any arbitral or other institution or person vested by the parties with powers in that regard, or

(c) by the arbitral tribunal if so authorized by the parties,

or determined, in the absence of any such designation, having regard to the parties’ agreement and all the
relevant circumstances.
 Terminologies
• Arbitration- a method of settling private dispute between two or more
parties by the reference of the dispute to some neutral third party of their
choosing, for that third party’s final and binding decision in the form of an
arbitral award by which the disputing parties have previously contracted to
abide.

• Arbitrability- the ability of a matter to be arbitrated.

• Arbitration agreement- an agreement between the parties that provides

for all disputes to be submitted to arbitration.

• Arbitration clause- a clause in an agreement that provides for arbitration

of disputes between the parties.
• Award- decision of the arbitral tribunal.

• Kompetenz-kompetenz- a principle that provides the arbitral tribunal with

power to determine its own jurisdiction over matters in issue.

• Severability- a doctrine that permits the severance of the arbitration

agreement from the underlying agreement.

• Arbitral institution- an institution that provides services to parties and

arbitrators and administers the process of arbitration.
 Sources of law

(1) UNCITRAL Arbitration Rules (revised in 2010)

• Are selected by parties either as part of their contract, or after a dispute

arises, to govern the conduct of an arbitration intended to resolve a
dispute or disputes between themselves. Put simply, the Model Law is
directed at States, while the Arbitration Rules are directed at potential
(or actual) parties to a dispute.

(2) UNCITRAL Model Law for International Commercial Arbitration (1985)

• The UNCITRAL Model Law provides a pattern that law-makers in national

governments can adopt as part of their domestic legislation on arbitration.
 (3) New York Convention

• The Convention on the Recognition and Enforcement of Foreign Arbitral Awards,

also known as the "New York Arbitration Convention" or the "New York
Convention," is one of the key instruments in international arbitration.

• The New York Convention applies to the recognition and enforcement of foreign
arbitral awards and the referral by a court to arbitration.
 Statutory Approaches in the Asia-
Pacific Region

(1) Australia

• The key statute in Australian law relating to international commercial

arbitration is the International Arbitration Act 1974 (Cth).

• ACICA Rules.

(2) Malaysia

• Arbitration Act 2005

• AIAC Rules
 (3) Hong Kong

• Arbitration Ordinance (HK)

• HKIAC Rules

(4) China

• Arbitration Law of the PRC 1994 (CN)

• CIETAC Rules
 (3) Singapore

• International Arbitration Act (Sing)

• SIAC Rules

(4) England

• Arbitration Act 1996

• LCIA Rules
 Seat of Arbitration

• In Dubai Islamic Bank PJSC v Paymentech Merchant Services Inc [2001] 1

Lloyd’s Rep 65, the parties’ arbitration had been conducted entirely on
paper (the exchange of documents).

• Unhappy with the decision, the Islamic Bank appealed to an appeals

arbitration body and the matter was heard in London. That appeal was
dismissed.

• The Islamic Bank then instituted action in England challenging the award on
the basis of certain alleged defects under s 68 of the Arbitration Act 1996.

• Paymentech argued that the English court had no jurisdiction over the
arbitration because the arbitration did not have its seat in England and
Wales within the terms of ss 2 and 3 of the Act.
• Aitkens J made it plain that unless the arbitration had its seat in England and
Wales, the English court would have no power to review the award made.

• Section 3 stated that the seat of arbitration meant the juridical seat of the
arbitration; it was clear the section intended to refer to some state or territory
which was associated with a recognizable and distinct system of law.

• The juridical seat had to mean the state or territory where for legal reasons
the arbitration was to be regarded as situated.

• In this instance, the circumstances pointed to California as having the

closest connection with the transaction.
• Although the appeals arbitration was heard in London, that is not an
obligation under the agreement.

• Indeed, it was not contemplated by anyone in the bank, Paymentech and

other relevant parties, that the appeal would necessarily be heard in London.

• All the preparatory work of the appeals was made in California. The seat
was therefore not in England and Wales.

• It was also held that the relevant time at which the juridical seat is to be
determined is the time when the relevant arbitration begins.
• Section 3 refers to the designation of the juridical seat but commercial
parties are not always so informed that their arbitration agreement will
specify explicitly where the juridical seat is.

• In such cases, the court will need to assess the factual circumstances and
the underlying contractual relationship and terms to see whether there is a
designation which can be ascertained with sufficient clarity and certainty.

• In Roger Shashoua v Mukesh Sharma [2009] EWHC 957, the court held that
although the arbitration clause had provided for the arbitration to be
conducted in accordance with the ICC Arbitration Rules, the fact that it
provided with the “venue” of the arbitration would be London, that was
enough to indicate a designation of a juridical seat in London.
• The court was persuaded by the fact that the parties had not simply provided
for the location of hearings to be in London for the sake of convenience;
despite the fact that the underlying shareholders agreement was governed
by Indian law, and any disputes were likely to be associated with the new
venture in India, they had nevertheless wanted the arbitration to take place
in London.

• That must surely have meant that their intention was to use England as the
juridical seat.
• The seat will designate the procedural law for the arbitration proceedings
and the court of that place will have supervisory jurisdiction.

• This means that an arbitration must have a seat at the time the arbitration
commences.

• Once arbitration starts and it has a “seat”, it will not normally change unless
one of the mechanism envisaged in s 3 operates.

• Arbitral seat is referred to the national law that gives the arbitration and the
award a juridical home.
 Applicable law
• Where the arbitration involves a cross-border element, issues of applicable
law are likely to arise.

• The applicable law of the substantive dispute in contractual matters is

usually the applicable law of the underlying contract.

• Applicable law refers to the relevant law that applies to the issues in dispute
or the arbitration agreement.

• Party autonomy should prevail but where there is no choice of law made by
the parties, the tribunal will decide according to what it considers
appropriate.
• This approach is reflected in the London Court of International Arbitration (LCIA)
Rules:

22.3 The Arbitral Tribunal shall decide the parties' dispute in accordance with
the law(s) or rules of law chosen by the parties as applicable to the merits of their
dispute. If and to the extent that the Arbitral Tribunal decides that the parties have
made no such choice, the Arbitral Tribunal shall apply the law(s) or rules of law
which it considers appropriate.
• Similarly, the ICC Rules 2012 provide in Article 21.1 that:

Article 21: Applicable Rules of Law

The parties shall be free to agree upon the rules of law to be applied by
the arbitral tribunal to the merits of the dispute. In the absence of any
such agreement, the arbitral tribunal shall apply the rules of law which it
determines to be appropriate.
• So too in Article 35 of the UNCITRAL Arbitration Rules:

The arbitral shall apply the rules of law designated by the parties as
applicable to the substance of the dispute. Failing such designation by the
parties, the tribunal shall apply the law which it determines to be
appropriate.
• The term “appropriate” is open to interpretation and could result in
uncertainty and arbitrariness.

• The expectation usually amongst English arbitrators seems to be that it

should mirror closely the proper law doctrine-namely what is the law of the
country most closely connected to the dispute.

• However this is not articulated in international arbitration rules.

 The lex arbitri or curial law (law
that governs the arbitration)
• Lex arbitri is the law governing the procedure of the arbitration.

• Lex arbitri provides for:

(a) protective measures to support, enforce and supervise the arbitration

(b) procedural provisions such as statement of case, evidence, hearings

(c) rules about arbitrability

(d) rules about the constitution of the tribunal, challenges to arbitrators, and the
entitlement of the tribunal to rule on its own jurisdiciton; and

(e) procedural safeguards such as rules about equal treatment of parties.

 Law governing the arbitration
agreement
• It is the law under which the merits of a dispute will be determined-also
known as “substantive law” and the “proper law” of the contract.

• Why does it matter?

• Any questions as to the validity, scope and interpretation of the

agreement to arbitrate will be determined in accordance with its
governing law. The governing law of the arbitration agreement can thus
be determinative of a number of significant issues, including:
• Questions regarding the formation of the arbitration agreement;

• The validity and scope of the arbitration agreement will determine whether
an arbitrator may assume jurisdiction in respect of a particular dispute;

• The scope of the arbitration agreement (i.e. whether it is wide enough to

cover a particular dispute) is a question of interpretation and will therefore
also depend on the governing law of the arbitration agreement. If a
reference proceeds on the basis of an arbitration agreement which is invalid
and/or ineffective, or if the tribunal exceeds its remit, the resulting award
may be subject to challenge and/or unenforceable;

• Whether the courts are obliged to impose a stay on proceedings; and

• Whether the arbitration clause remains binding in circumstances where the
substantive contract is deemed inoperative.
• Accordingly the governing law of an arbitration agreement will be determined by
the usual conflict of law rules under English common law, namely on the basis of:

(a) The law expressly or impliedly chosen by the parties, or;

(b) In the absence of such choice, the law which is most closely connected with
the arbitration agreement.
• In Sulamerica, the court was required to determine whether the
arbitration agreement should be governed by the governing law of the
contract or the law of the seat.

• The dispute concerned a claim by the insured under an insurance

policy covering the construction of a Hydro Project in Brazil.

• The policy contained an express choice of Brazilian law as the

governing law of the contract, as well as a London arbitration clause.

• A dispute arose as to whether the arbitration agreement should be

governed by Brazilian or English law, both of which would lead to
very different outcomes.
• On the insured’s case, the arbitration agreement would not be
enforceable against them under Brazilian law without their
consent. The insured contended that the parties had impliedly
chosen the law of Brazil to govern the arbitration agreement,
relying primarily on the express choice of Brazilian law to govern
the underlying contract. The insurers, on the other hand, relied
heavily on the separability of the arbitration agreement and the
choice of London as the seat of the arbitration. On this basis the
Judge in the court below had determined that the proper law of
the arbitration agreement was English law.
• Moore-Bick LJ reviewed the earlier decisions that had considered
this issue (albeit observing that the comments made were
essentially obiter dicta, and were therefore not binding on him),
and also took into account the views of leading commentators in
the field. Moore-Bick LJ appeared to express concern with the
reasoning of Longmore LJ in C v D, on the basis that having
decided that there was no express choice of law to govern the
arbitration agreement, Longmore LJ then went directly to the
question of which law had the closest and most real connection
with it. Moore-Bick LJ underlined that, before reaching that stage,
any implied choice of governing law must also be considered.
• Moore-Bick LJ commended the use of a 3 stage test in order to
determine the governing law of an arbitration agreement,
requiring separate consideration of the following, and in this
order:

(a) Express choice;

(b) Implied choice;

(c ) Closest and most real connection.

• Moore-Bick LJ observed that in practice stage 2 would often merge
into stage 3, in that identifying the system of law with which the
arbitration agreement has its closest and most real connection is
likely to be an important factor in determining whether parties have
made an implied choice of law. Nevertheless Moore-Bick LJ
stressed that the question of implied choice must not be overlooked.
Moore-Bick LJ went on to say that where the arbitration agreement
forms part of a substantive contract, an express choice of law to
govern that contract is an important factor to be taken into account,
and, absent any indication to the contrary, such express choice
would constitute a strong indication of the parties’ intention in
relation to the agreement to arbitrate. A search for an implied choice
of proper law is therefore likely to lead to the conclusion that the
parties intended the arbitration agreement to be governed by the
same system of law as the substantive contract, unless there are
“other factors” present which point to a different conclusion.
• Moore-Bick LJ’s decision in Sulamerica was informed by the
existence of such “other factors”, namely (i) the choice of seat of
the arbitrations, coupled with the “inevitable acceptance” of
English law to govern the conduct and supervision of those
arbitrations (see XL Insurance), and (ii) (by reference to the
insured’s case) the improbability that the parties intended for the
arbitration agreement to be governed by a system of law which
would render it so one-sided. Moore-Bick LJ concluded that
these factors outweighed the “powerful factors in favour of an
implied choice of Brazilian law as the governing law of the
arbitration agreement”.
• On this basis, Moore-Bick LJ concluded that the express choice
of Brazilian law to govern the underlying contract did not
constitute sufficient evidence of an implied choice of Brazilian
law to govern the arbitration agreement. Moving on to consider
the “closest and most real connection” stage, Moore-Bick LJ
concluded that the arbitration agreement should be governed by
English law, on the basis that the arbitration agreement had its
closest and most real connection with the law of the seat (i.e.
England).

• In the recent decision in Arsanovia, Smith J applied the three

stage Sulamerica test in order to determine the proper law of the
arbitration agreement in the absence of an express choice by the
parties.
 The law governing the award
• The general principle is that the law governing the award shall be the
law of the seat.

• In C v D [2007] EWCA Civ 1282, the underlying contract was a

“Bermuda Form” insurance policy in the usual terms, referring disputes
to arbitration in London, and applying New York law to issues arising
under the policy.

• The defendant had argued that as the arbitration agreement was silent
as to its proper law, it should not follow the seat of the arbitration
(namely London) but should follow the proper law of the contract (New
York law) thus allowing challenges to the award in the New York courts.
• The CoA dismissed the appeal.

• The CoA found that by choosing London as the seat of arbitration, the
parties must be taken as having agreed that proceedings on the award
should only be those permitted under English law.

• To allow the remedies available under New York law would invite more
litigation and inconvenience.

• An express choice of seat for arbitration proceedings is frequently

regarded as indicating the forum in which the parties may seek
remedies to challenge an award.
 Challenging the arbitration award
• When the proceedings are governed by English law, the award may be
challenged by a party to the arbitration on any of the following grounds:

(a) failure of substantive jurisdiction (s. 67)

(b) serious irregularity (s. 68)

(c) appeal on point of law (s. 69)

• The effect of challenging or appealing against an award may result in
the following:

(a) a confirmation of the award by the court

(b) a variation of the award

(c) the setting aside of the award either in whole or in part

 Grounds for Refusing
Recognition and Enforcement
• Article V of the New York Convention 1958:

(a) Incapacity or invalidity of the agreement

(b) Procedural fairness grounds

(c) Jurisdictional grounds based on the scope of arbitration agreement

(d) Composition of arbitral authority not in accordance with the agreement

(e) The award is not yet binding

• Article V (2) recognition and enforcement of arbitral award may
also be refused if:

(a) the subject matter is not capable of settlement by

arbitration

(b) contrary to the public policy of that country

 Thank You

shahrizalzin@uitm.edu.my