Arbitration is a confidential means of resolving dispute outside of the court system with an outcome that is binding on the parties that agreed to it equally as a court judgment would. So how does it work?
What is arbitration?
Arbitration is one of the alternative methods of resolving disputes. It is a private process in which parties agree to submit their disputes to an arbitral tribunal instead of going to court. The arbitral tribunal has the power to issue a decision, known as an award, resolving the parties’ controversy. The decision is made after reviewing the submissions and evidence presented by both sides. Such an award is binding on the parties. In most countries, upon enforcement or recognition of the award in the relevant court, the award will be equal to a court judgment. Arbitration is often used in commercial, international, and cross-border disputes.
Types of arbitration
There are three main types of arbitration—ad hoc arbitration, administered arbitration and institutional arbitration. The table below discusses the main differences between these types of proceedings.
| Feature | Ad Hoc Arbitration | Administered Arbitration | Institutional Arbitration |
| Description | Arbitration conducted independently without an arbitral institution | Arbitration managed with the support of an institution but without applying its rules | Arbitration conducted under the auspices and rules of an arbitral institution |
| Procedure | Parties set up their own procedural rules or use established ones, such as UNCITRAL Arbitration Rules | Parties set up their own procedural rules or use established ones, such as UNCITRAL Arbitration Rules, but choose an institution to help administer the case | Parties choose the rules of a specified arbitration institution and the case is administered by this institution. |
| Administration | Tribunal manages all procedural aspects, taking into account the Parties’ agreements | Institution handles only the issues that the Parties chose to refer to it. This may include maintaining the custody of the case documents, facilitating communications between the tribunal and the Parties, administering the finances or other general secretarial services. | Institution oversees case management, appointment of arbitrators, and ensures adherence to arbitration rules. |
| Flexibility | High flexibility; parties decide on the process, timing, and costs. Tribunal fees and costs will be negotiated with the tribunal. | Moderate flexibility; costs and timing include the administering institution’s rules and costs. Tribunal fees and costs will be negotiated with the tribunal. | Less flexibility; parties follow institution’s set procedures, as well as the fees and costs schedules, including the schedules for arbitrators’ fees and costs |
| Costs | Generally lower, no administrative fees | Moderate; includes institution’s administrative fees | Generally higher, as institutions charge fees based typically on case complexity or claim size. However, some institutions also cap the maximum arbitrators’ fees and costs, which makes the costs of the entire proceedings more foreseeable. |
What types of disputes can be resolved in arbitration?
The answer to this question will depend on the law applicable to the arbitration agreement. This is because every country (and state) regulates what disputes may be referred to arbitration. This is called the arbitrability of the dispute.
In the United States, the Federal Arbitration Act (“FAA”) provides that disputes pertaining to a maritime transaction or contracts involving interstate or foreign commerce may be referred to arbitration.[1] At the same time, the FAA does not allow to refer to disputes contracts of employment of seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce.[2] This prohibition also applies to independent contractors.[3] The parties have to be mindful that each state has enacted its own arbitration act, which may be applicable to the arbitrations seated in that state (when the FAA does not preempt the state law).
In the EU, agreements to refer disputes to arbitration included in consumer contracts will be considered unfair terms and will often be unenforceable. In some countries, such as Poland, in consumer disputes, only arbitration agreements entered into after the specific dispute between the parties arose will be enforceable. A similar rule applies to employment disputes in Poland.
As such, before considering referring a dispute to arbitration, a party should confirm that under the relevant law the dispute may be resolved in arbitration.
How to refer a dispute to arbitration?
Consent is the cornerstone of arbitration. As such, the parties need to conclude an agreement to arbitrate their disputes.
Under the FAA, the arbitration agreement must be in writing either as part of a contract or as a stand-alone agreement. The agreement must demonstrate that the parties intend to arbitrate their disputes. The wording of the agreement will determine the scope of the tribunal’s power. Once the parties conclude a valid arbitration agreement, it binds them. This means that the neither party can pursue the claims covered by the agreement in litigation. If it does so, the other party may request the court to compel arbitration proceedings and stay the litigation.
In international cases, the requirements for a valid arbitration agreement are also determined by the relevant treaty.
For example, the Panama Convention[4], requires a valid arbitration agreement is:
- An agreement submitting to arbitral decision any differences that may arise or have arisen between parties;
- with respect to a commercial transaction; and
- concluded in an instrument signed by the parties, or in the form of an exchange of letters, telegrams, or telex communications.[5]
The Panama Convention applies to arbitrations between parties originating from Member States of the Organization of American States.
Under the New York Convention,[6] a valid arbitration agreement between international parties is an agreement which is:
- signed by the parties or included in an exchange of letters of telegrams,
- referring all or some disputes arising in respect of a defined legal relationship, whether contractual or not, and
- concerning a subject matter capable of settlement by arbitration.[7]
The New York Convention applies to arbitrations involving the Contracting States. There are currently 172 signatories of the New York Convention.
The above are general requirements for a valid arbitration agreement. These requirements may vary depending on the specific jurisdiction. Parties wanting to conclude an arbitration agreement should consult with a lawyer specializing in the field of arbitration, who will be able to prepare a solution suitable to their needs.
Why to refer disputes to arbitration?
There are multiple reasons why to choose arbitration. For example, parties may wish to benefit from the confidentiality or flexibility of the arbitration proceedings. For a discussion of what are the top eight considerations to take into account when making the decision whether to arbitrate or not, see this post.
[1] 9 U.S.C. § 1.
[2] 9 Id.
[3] See New Prime Inc. v. Oliveira, 586 U.S. ___ (2019).
[4] Inter-American Convention on International Commercial Arbitration, Jan. 30, 1975, O.A.S.T.S. No. 42, 1438 U.N.T.S. 245 (Panama Convention).
[5] Panama Convention, Art. 1
[6] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 U.N.T.S. 3 (New York Convention).
[7] New York Convention, Art. II.
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