Disputes have been a common phenomenon in the human history and they are part and parcel of life. Human beings have recognized the importance of settling these disputes peacefully rather than through wars. The amicablesettlement of these differences forms the premise of establishing and fortifying the societal fabric that enhances coexistence.
Whereas courts are the official state institutions for settling disputes, alternative dispute resolution (ADR) methods offer preferable avenues for cordial settlement of conflicts. Some scholars have noted that despite the existence of courts, most disputes are resolved before a court gives its final verdict or determination and therefore trial in courtrooms seem to be of last resort.
The current efforts to develop and promote ADR does not make these methods new but rather a technique used by their proponents to review and remodel them. Arbitration is one of the major methods of alternative dispute resolution.
What is Arbitration
Arbitration is a process which involves a hearing that is presided over by an arbitrator or an arbitral panel. The disputants present evidence to the arbiter in a formal hearing. The arbiter then makes a decision based on the evidenced tendered.
Normally, the arbitral panel is comprised of a lawyer and other two individuals who possess a tremendous erudition in the matter involved. Different states have different arbitration organizations, which offer arbitral services and set critical rules of arbitration.
For example, The US has the American Arbitration Association (AAA) while England has organizations such as the International Chamber of Commerce (ICC), London Maritime Arbitrators Association, and London Court of International Arbitration.
The decision reached by the arbitral panel is normally binding to the disputing parties with the exception of limited circumstances where the court may review or vacate the award given upon filing of a motion.
Why is Arbitration Popular and a Dispute Resolution Mechanism?
Arbitration is a panacea that receives tremendous approbation and accolade because its proceeding ensures privacy, has flexible rules, reduced costs, certainty in enforcement, and neutrality among others. However, despite the many advantages of arbitration, not all disputes are arbitrable.
An arbitration agreement is only valid to the extent that it covers arbitrable disputes. Arbitrability is a prerequisite for the substantive validity of an agreement reached through arbitration. Accordingly, the arbitral panel has the responsibility of determining the arbitrability of disputes before going into the substance of the conflict, lest the arbitral award will be set aside upon filing of a motion in a court if the arbiter is found to have acted ultra vires.
Additionally, the doctrine of Kompetenz-Kompetenz, which is enshrined in section 31 of the Arbitration Act 1996 requires the arbitrators to rule on their jurisdiction to handle the matter in the first instance.
Procedure of determining the Arbitrability of a dispute
There is no any single universally accepted procedure of determining the arbitrability of a dispute. The English Act merely refer to matters that are capable of settlement by arbitration. The rest of the issues as regard arbitrability are left to the English common law.
Normally, the arbitral tribunal determines the arbitrability of the issue at the preliminary stages of the proceedings. However, there are other two ways of determining arbitrability. One of such methods through application to the court by one of the parties where such a party may seek a declaration or an injunction to the effect that the tribunal lacks jurisdiction to hear the matter because of its non-arbitrability.
The other method of determining arbitrability is by commencing legal proceedings in which a party challenges the arbitrators’ award on the basis that the panel did not have jurisdiction to make such an award.
Subject Matter Arbitrability
The question of subject matter arbitrability concerns the substance that the dispute relates to. The essence of determining subject matter arbitrability is to establish whether an enacted statute or a regulation creates certain rights, which can only be determined in a state court. It occurs where there is a need to determine a public law, which is beyond the reach of private agreements.
The limitation could be as a result of express restriction by the national law, which forbids determination of certain claims or disputes in arbitration. Legal doctrines and court precedents have extended this question to cover the validity (that is the existence) as well as the scope of the agreement (that is the contractual arbitrability) in relation to the subject matter.
Accordingly, an arbitral tribunal should consider the arbitrability of the subject matter in determining those issues that can or cannot be addressed in arbitration. The tribunal has no jurisdiction over an issue whose subject matter is non-arbitrable.
The arbitration agreement in relation to such matters is invalid ab initio. The fact that all the disputing parties want to arbitrate cannot suffice in case of non-arbitrability of the subject matter. This issue settles the discrepancies between the personal autonomy of the parties and public policy.
Generally, marital disputes, adoption, guardianship, disputes concerning human rights, and administrative disputes are non-arbitrable.
The Arbitration Agreement
Courts are not to impose arbitration on parties that have not agreed to be subject to it. Accordingly, parties can only be compelled to arbitrate if they have agreed to do so. Arbitration is a matter of consent where parties are free to draft and structure their agreements as they deem fit without and coercion.
The foundation of arbitration is, therefore, the agreement between the disputants to submit for settlement any differences that arise between them to arbitration. The validity of an arbitration is dependent on the existence of a valid agreement to arbitrate.
Article 6 of the 1996 Arbitration Act defines an arbitration agreement as an agreement to submit to an arbitration tribunal any dispute that arises presently or in future, regardless of whether the dispute arises out of the contract or not.
Additionally, the agreement must necessarily be in writing. This particular requirement is accentuated by the New York Convention of 1958. In its article II, the convention stipulates mandatory requirements that must be in existence for a dispute to qualify for arbitration.
- The first and most fundamental are the existence of a legal relationship between the disputing parties.
- The second is that there has to be an agreement in writing, which contains an arbitral clause or an arbitration agreement.
- Finally, the dispute must be capable of settlement by arbitration.
The agreement to arbitrate may be spelled out in the main contract in the form of an arbitration clause. It may also be drafted in a different form referred to as “submission to arbitration.”
The LCIA Arbitration Rules give the arbitrators the powers to rule on its own jurisdiction to hear and determine the case. Additionally, the tribunal has the authority to rule on the validity or effectiveness of the arbitration clause should any party object or challenge its validity.
The tribunal has to consider whether or not the dispute is domestic or international to determine its arbitrability. This will be based on the jurisdiction or the laws that the contracting parties agreed to use in case of a dispute.
Subject to international treaties, a choice of foreign laws may not necessarily hinder a domestic court from taking jurisdiction. When construing the arbitrability of a dispute, the US legal practice requires the term to be given a broad interpretation when relating to international disputes compared to when dealing with domestic ones.
The United States Supreme Court, while focusing on disputes that arise in the context of international commerce, held that it was possible for claims to be arbitrated under international context even if such claims are not arbitrable under the domestic law.
Despite the fact that anti-trust claims are not arbitrable under the local law, the Supreme Court held that such disputes could be heard and settled by an international tribunal.
Judicial Precedence of Arbitrability of a Dispute
In considering the arbitrability of a dispute, a United States court opined that the question has to go through a two-stage inquiry.
- In the first stage, the court is meant to inquire into whether the parties agreed to submit such a dispute to an arbitration for settlement.
- The second stage is the evaluation of whether the subject matter of the dispute is encompassed or falls within the confines of such agreement.
However, the position taken by the courts in England is a little bit different. An English court in the case of Walkinshaw v Diniz. held that the agreement contained all the essential ingredients to refer the matter to arbitration despite the absence of the word “arbitration” in it.
In England, therefore, it will suffice to arbitrate a dispute if the agreement clause refers the matter to a private person, other than the state courts, even though the clause does not expressly refer the dispute to arbitration.
Wording of the Agreement
The wording of the agreement is critical in determining whether the present dispute falls within the agreement to arbitrate. The court accentuated the significance of the words used in the decision of Charles v. Cardiff Collieries Ltd. It does not follow that the mere existence of an arbitration clause means that every dispute arising out of the contract must be submitted to an arbitral tribunal.
However, if the arbitration clause is overly broad, the courts may compel an arbitration where they will ask the arbitrators to decide the arbitrability of the dispute. The general rule is that when parties agree to submit their disputes for arbitration, they intend to settle all the differences arising by the said panacea unless there is a contrary indication that expressly precludes some disputes.
An English court held that the use of the phrase “in connection with” the contract, when used in an arbitration clause, was sufficient to give the arbitration tribunal the powers to hear the matter and rectify the contract. Accordingly, when such words are used, they are construed to cover other related claims for negligent misrepresentation and rectification among others.
The same words were given a broad interpretation by a US court where it was held that the words give a tribunal broad powers to rule on a wide array of disputes arising from the contract. The court, therefore, stayed the proceedings in favor of the proceedings even though the claim related to a tort. The court held, in part, that when the words “all disputes arising in connection with the present contract” are used, they are to be given a broad interpretation so as to encompass a wide range of arbitrable disputes.”
Also, the wording “arising out of” have been given a wide interpretation in the English courts and will normally encompass all disputes that are arbitrable. In the contrary, the use of words such as “under this contract” is considered to exclude certain disputes, which are not contemplated by the agreement.
This was so held in the case of Heyman v. Darwins Limited where the court opined that when considering the words “arising out of” and “arising under” of a contract, the later should be given a narrower interpretation.
The UNCITRAL rules give an example of a model arbitration clause. The model clause derives most of its wording from the English common law and US legal practice. The model refers to claims “arising out of” or “relating to” the contract.
Concisely, the powers, jurisdiction, and limits of the arbitrators are determined by the arbitration agreement. It confers the mandate upon the concerned tribunal to decide such kinds of disputes that are contemplated in the agreement, which greatly depend on the wording.
Where the agreement is valid, a court will compel the parties to submit the dispute to arbitration.
Capacity to Arbitrate
The other factor to be considered by arbitrators is the capacity to arbitrate. The existence of freedom to arbitrate does not apply to parties as well. An agreement to arbitrate between individuals who do not have the capacity to enter into such an agreement will result into the incompetence of the concerned arbitral tribunal.
Contracting parties must have the requisite legal capacity to enter into such an agreement failing which the contract will be invalid. The general rule is that any party, be is a person of legal entity, which has the legal to enter into a valid contract can conclude an arbitration agreement.
The provision of the New York Convention can be invoked in the circumstances where a person lacking the requisite legal capacity enters an arbitration agreement. The invocation of the provisions can be done either at the beginning of the arbitration proceedings, where the complainant will be asking the concerned authority to end the process.
If the arbitrators do not recognize the lack of capacity of the parties before they begin deliberating on the issue, the complaining party may petition to a court to refuse recognition and enforcement of the award.
One of the factors to consider when determining the arbitrability of a dispute is whether there is a defined legal relationship. The problem arises in determining what constitute a defined legal relationship. The term is construed differently from one jurisdiction to another. In a nutshell, there has to be a clear legal agreement or contract between the parties for the issues to be arbitrable.
Generally, English courts will not enforce illegal agreements or those that have an illegal purpose. The courts will sever the illegal part of the contract and enforce the section of the agreement that has no defects. An arbitration clause may be impeached if the principle contract is overly illegal.
For example, in the case of Soleimany v. Soleimany, an English court of Appeal was of the opinion that there are some contracts whose object is so illegal or immoral so that they are not capable of being arbitrated. The court went on to hold that even the agreement to arbitrate such a contract is in itself illegal or against public policy under the law of England.
Where the very existence of a contract is in dispute, it is for a court to decide from the face value of evidence as to whether an agreement was reached. The decision in Will-Drill, reverberates the Supreme Court holding in the case of Chicago Inc. v. Kaplan where it was held that it would be unfair to compel a party to submit to an arbitration in the circumstances where there has never been a contract in the first place.
The doctrine of separabilityassumes that there is an underlying contractual agreement between the parties. In the circumstances where there is a challenge to the very underlying agreement, the matter should be left to the courts and not the arbitrators.
Courts have an ingrained propensity of enforcing arbitration agreements notwithstanding the circumstances surrounding their signing. The court limits its function in the cases where the parties have expressly agreed to submit all questions of contractual interpretation to the arbitrator.
This position was clear in the case of McMahon v. Shearson/ American Express Inc. According to the trial court, the argument that an arbitration clause was unfairly placed in an agreement is “wholly unconvincing.” The court stood by the principle that whoever signs a document is presumed to understand its content and to assent to them, not unless the signing was procured by fraud or misconduct of the other contracting party.
Further, courts may find that the arbitration clause is valid and enforceable despite the fact that the contract is in itself invalid. Parties are deemed to have concluded two, and not one, agreements when they conclude a contract with an arbitration agreement.
In an English case, a plaintiff submitted to the court that the arbitration proceedings were unnecessary because the entire contract was illegal. However, the Supreme Court opined that despite the illegality of the contract, the arbitration clause was still enforceable basing on the severability principle. The court held that when the challenge was directed to the contract as a whole, and the arbitration clause is not specifically attacked, an arbitration must be able to resolve the dispute.
In Vee Networks, the English High Court reviewed the nexus between the doctrine of separability and Kompetenz Kompetenz. The presiding judge held that an arbitration panel had the jurisdiction of determining the voidability of an underlying agreement so that they do not lose jurisdiction over the issue simply because the principal contract may be void or voidable.
If the arbiters determine that the underlying contract is void ab initio, and the validity of the arbitration agreement is not in issue, the arbitration may go ahead and exercise jurisdiction. However, the tribunal has no authority where the agreement to arbitrate is void.
The English position is that separability will not mean a complete insulation of the arbitration clause from the fate of the principal contract. The independence of the arbitration agreement from the main contract depends on two factors.
- The first consideration is the nature of the offensiveness of the illegality alleged. This assessment is based on the extent of social tolerance to the illegality.
- The second relates to the manner in which the tribunal weighed the illegality.
Application of Limitation Acts
The Arbitration Act 1996, under section 13, states to the effect that the limitation of actions act applies to arbitration proceedings in the same way it operates during legal proceedings in court. The limitation period applies to substantive claims that relate to arbitration the same way they operate in legal proceedings. The relevant limitations, in this case, are those that normally apply in contracts and in the law of tort.
The limitation period in the case of contracts is six years from the date of the accrual of the concerned course of action. The same period of six years applies in the cases of a tort from the date of the alleged infringement or damage.
Accordingly, the arbitrator should first decide whether the claim submitted for arbitration is time barred otherwise its award may be invalid if the claim is brought in contravention of the limitation Act.
Cases Involving Third Parties
Matters that involve third parties and those that entail the imposition of sanctions by a government on one of the disputing parties cannot be settled in an arbitration. This issue was considered by the English court of Appeal in the case of Fulham Football Club (1987) Ltd v Richards and another . In this case, the court was of the opinion that arbitrators should consider if the matter before them involves the rights of a third party or if there is an attempt to delegate to arbitration matters that are of significant public interest, which would not be possibly determined within the confines of a private contractual process.
The honorable court went further to explain that reference should be made on whether such an issue is prohibited from being dealt with in an arbitration as a matter of public policy or by a statute. Arbitrators are also discouraged from hearing employment claims arising from federal statutes.
The rationale behind excluding third parties from arbitration proceedings is premised on consent, which is a prerequisite for any arbitration agreement to subsist. Such agreements are required to be in writing and signed by both parties.
However, there are some exceptions where third parties have been held to be bound by an arbitration agreement. These circumstances include the operation of “group of companies.” Pursuant to this doctrine, benefits and duties arising out of an arbitration agreement can be extended to other members that belong to the same group. The second instance arises from the rules of private law, where a third party may stand to benefit for example in succession, agency, and assignment among others.
Accordingly, the affiliate of a signatory to an arbitration clause is likely to find itself taking part in arbitration proceedings. Additionally, an assignee of an insurance agreement, for example, has the capacity to commence arbitration proceedings against the company that insured the first policyholder even if the complainant is not privy to the contract. However, the doctrine of “group of companies” is not universal and some states are unwilling to adopt the legal practice.
Third parties may be subject to arbitration in agreements that were made for their benefit by other parties even if they are not privy to the contract. Where a contract expressly stipulates that a certain third party has the power to enforce the contract, the party may exercise such powers in an arbitration.
Public Policy Considerations
Generally, public policy limits the arbitrability of certain disputes. The notion of public policy is often too vague and hard to determine. The rationale behind this factor is that some disputes are of great public interests so that the government reserves it for determination by a state court.
Despite the flexibilities that have been witnessed in allowing arbitrators to handle some matters that involve public interest, it is still the position that criminal issues and regulatory matters are not arbitrable. This is in addition to those issues that have a bearing on the capacity of one party or his/her legal status. This includes, but not limited to, insolvency and bankruptcy issues.
In a similar way, disputes that arise out of property interests and rights related to real as well as intellectual property, where it is the state grants such rights, cannot be arbitrated. Such claims include title to land and intellectual property rights such as patent, trademarks, trade secrets, and copyrights.
The other claims that are not arbitrable are those that invoke statutory relief for example in consumer legislation and insurance law. If no amicable solution can be arrived at, the regulations will declare such a dispute non-arbitrable.
English courts have taken a more liberal approach to arbitrability so as to enhance international commerce. Some matters that were not subject to arbitration are now arbitrable. This was lucid in the case of Fiona Trust and Holding Corporation and Others v. Yuri Privalov and Others. The same liberal approach has been witnessed in the United States where courts have been reluctant to subscribe to the view that all statutory claims and disputes are not arbitrable.
The Supreme Court has held that the simple reason that a dispute is regulated by the Anti-trust legislation does not invalidate an agreement to arbitrate without proving that the arbitration clause is tainted.
The increase in the scope of arbitrability is an indication that the legal system no longer considers arbitration as a threat to the integrity of the law. In effect, the fact that a matter is of public policy does not in itself preclude it from arbitration proceedings.
The UNCITRAL model law on International Commercial Arbitration of 1985, the New York Convention, among other international agreements on arbitration considers the public policy as a legitimate ground for limiting international arbitration. However, such recognition should be applied restrictively. This is because a lenient interpretation is likely to jeopardize international commercial arbitrations.
The International public policy is a set of legal principles, which do not fall within the category of national laws of any particular state, but which may be applied by an arbitrator to bar the enforcement of an international commercial agreement. It may also bar application of state laws, which are normally applied to suck kind of disputes or contracts.
The International public policy is in most case intricately combined with other rules but may also exist independently and it transcends and even overrides national public policy. There exists a resolution pursuant to which all arbitrators are required to abide by the principles of international public policy. Arbitrators shall in no case violate such principles. Accordingly, this becomes an important consideration when determining the arbitrability of a dispute.
In a nutshell, an arbitral tribunal must first determine the arbitrability of a dispute before going into the substance of the claim. There are some claims and disputes that are non-arbitrable and therefore the arbitrators must first establish whether the issue concerned falls within the category of matters that cannot be submitted to an arbitration.
Firstly, there has to be an agreement that requires the parties to submit the relevant dispute to a tribunal. The wording of the agreement is important in deciding which types of claims are excluded. Matters of public policy are generally non-arbitrable. These include matters that concern human rights, those that relate to marital issues, adoption, and succession. Claims that relate to real property rights and intellectual property cannot be subject to an arbitration. A claim that is statute barred can also not be determined in an arbitration.
Traditionally, statutory claims are excluded from arbitral proceedings. However, the recent judicial practice, especially in the England and the US indicates that an arbitration can validly determine a statutory claim given that there is no challenge as to the validity of the arbitration clause.
Concisely, an arbitral tribunal lacks jurisdiction to hear and determine a claim which is non-arbitrable. An award given by a tribunal in a non-arbitral matter is invalid and can be set aside by a court of competent jurisdiction.