Commercial arbitration is a means of settling disputes by referring them to a neutral person, an arbitrator, selected by the parties for a decision based on the evidence and arguments presented to the arbitration tribunal. The parties agree in advance that the decision will be accepted as final and binding.
Historically, commercial arbitration was used in resolving controversies between medieval merchants in fairs and marketplaces in England and on the European continent and in the Mediterranean and Baltic sea trade. The increased use of commercial arbitration became possible after courts were empowered to enforce the parties’ agreement to arbitrate. The first such statute was the English Arbitration Act of 1889, which was later consolidated into an act of 1950 and adopted by arbitration statutes in most countries of the British Commonwealth. It was followed in the United States by an arbitration statute of the state of New York in 1920 and the Federal Arbitration Act of 1925. The latter dealt with the enforcement in federal courts of arbitration agreements and awards in maritime transactions and those involving interstate and foreign commerce. Most U.S. states adopted, sometimes with minor changes, the Uniform Arbitration Act of 1955, as amended in 1956, which had been promoted by the Commissioners on Uniform State Laws and recommended by the American Bar Association. This act provided for the judicial enforcement of an agreement to arbitrate existing and future disputes and thereby made the arbitration agreement no longer revocable, as it had been under common law. It also provided for the substitution of arbitrators in the event of a party’s failing to select an arbitrator and for a suspension of any court action instituted in contravention of a voluntary arbitration agreement. The courts thereby play an important role in implementing arbitration agreements and making judicial assistance available against a recalcitrant party. This concept of modern arbitration law, which recognizes the irrevocability of arbitration agreements and the enforceability of awards, also prevails in the arbitration statutes of nearly all countries.
Function and Scope
- criminal justice
- canon law
- labour law
- transitional justice
- natural resources law
- constitutional law
Arbitration customarily has been used for the settlement of disputes between members of trade associations and between different exchanges in the securities and commodities trade. Form contracts often contain a standard arbitration clause referring to specific arbitration rules. Numerous arrangements between parties in industry and commerce also provide for the arbitration of controversies arising out of contracts for the sale of manufactured goods, for terms of service of employment, for construction and engineering projects, for financial operations, for agency and distribution arrangements, and for many other undertakings.
The usefulness and significance of arbitration are demonstrated by its increasing use by the business community and the legal profession in many countries of the world. An advantage of arbitration can be the speed with which controversies can be resolved by arbitration, compared with the long delays of ordinary court procedure. The expert knowledge of arbitrators of the customs and usages of a specific trade makes testimony by others and much documentation unnecessary and thereby eliminates some expenses generally associated with court procedures. The privacy of the arbitration procedure also is much valued by parties to the controversy; situations unfavourable to the party’s credit or deficiencies in manufactured goods revealed in arbitration proceedings do not become known to outsiders. There are, however, disadvantages in the arbitration process. Because in Anglo-American practice abitrators generally do not have to provide any reason to accompany an award, it has been difficult to develop guidelines for the conduct of business relations. Moreover, this uncertainty makes the arbitral decision less predictable. Further obstacles to the wider use of commercial arbitration are the divergences in municipal laws and court decisions that result in different interpretations of similar arbitration questions and the
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Under the law and arbitration practice of most countries, an award is valid and binding upon the parties when rendered by a majority of the arbitrators unless the parties expressly request a unanimous decision of the arbitrators. The statutory law of various countries and the rules of agencies administering commercial arbitration contain provisions on the form, certification, notification, and delivery of the award, with which requirements the arbitrator has to comply.
A much-disputed question in commercial arbitration concerns the law to be applied by the arbitrators. Generally, the award must be based upon the law as determined by the parties in their agreement. This failing, the arbitrator must apply the law he considers proper in accordance with the principles of the conflict of laws. In both cases, the arbitrator must take into consideration the terms of the contract and the usage of the specific trade. If a compromise is reached by the parties during any arbitration proceeding, that compromise may be recorded as an award by the arbitrator.
Appeals to the courts from the award cannot be excluded by agreement of the parties, since the fairness of the arbitration process as a quasi-judicial procedure has to be maintained. However, any court control is confined to specific matters, usually enumerated in the arbitration statutes, such as misconduct of the arbitrator in denying a party the full presentation of its claim or refusing a postponement of the hearing for good cause. A review of the award by a court generally does not address the arbitrator’s decisions as to facts or his application of the law. The competence of the courts usually is restricted so as not to make the arbitration process the beginning of litigation instead of its end. Recognition of an award and its enforcement will be denied when it appears to be contrary to public policy. An arbitration award has the authority of a court decision and may be enforced by summary court action according to the procedural law of the country in which execution is being sought.
International commercial arbitration
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International commercial arbitration between traders of different countries has long been recognized by the business community and the legal profession as a suitable means of settling trade controversies out of court. The procedure in international commercial arbitration is basically the same as in domestic arbitration. In the mid-1960s, in order to establish more uniformity in procedure and to make access to arbitration facilities more easily available, the United Nations economic commissions published new rules applying to international arbitration for Europe and Asia.
The development of international commercial arbitration was furthered by uniform arbitration legislation prepared by the UN Conference on International Commercial Arbitration in 1958 and by the Council of Europe and the Inter-American Juridical Committee of the Organization of American States. One particularly difficult problem of international commercial arbitration is the enforcement of awards in a country other than the one in which they were rendered. Statutory municipal laws usually do not contain provisions for the enforcement of foreign awards, and parties are faced with uncertainty about the law and practice of enforcement procedure in a country other than their own.
International agreements facilitate the enforcement of foreign awards to the extent that no further action is necessary in the country in which the award was rendered; the opposing debtor must establish that the award has been set aside or that its effects have been suspended by a competent authority, which thus shifts the burden of proof of the nonbinding character of the award to the losing party. Further development of international commercial arbitration has been encouraged by the UN Commission on International Trade Law, which aims at promoting the harmonization and unification of laws in the field of international commercial arbitration.