What is Arbitration?

Arbitration is an alternative to litigation. It is primarily used to resolve disputes arising from commercial contracts, especially contracts with an international element. Arbitration is also the designated default dispute resolution process in disputes between governments and companies under international trade or investment treaties. By agreement between the parties, an independent arbitrator, or a panel of three arbitrators, is appointed to hear the dispute and to produce a ruling (the award) on the merits. The tribunal may award damages or other relief against the losing party. Awards can be enforced in the 156 signatory countries to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. 

Arbitration shares some of the traits of litigation and mediation but has features that are distinct from both. Similar to litigation, the award made by the tribunal in the arbitration is binding on the parties. However, unlike going to court, the process is usually less formal and is confidential. Although mediation is informal, it requires both parties to reach an agreed settlement rather than having a decision imposed on them; this means that subject to an award being challenged in court, there is greater finality to the arbitration process. How and where to arbitrate is determined by the parties’ arbitration agreement, usually contained in the contract in dispute. The agreement sets out how many arbitrators are to be appointed, how they are to be appointed, where the arbitration will be held, in what language it will be conducted, and under which institutional rules (if any). It is also possible for both sides to agree to go to arbitration after the dispute has arisen, but this is much less common because the agreement of both parties is necessary. This is often not possible when a commercial relationship has already broken down.

There are a number of well-established organizations that administer international arbitrations and each has its own set of rules. Some well-known institutions include the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), and the Singapore International Arbitration Centre (SIAC). There is also a range of organizations specific to particular industries that administer arbitrations. Other administering bodies include the dispute resolution mechanisms attached to international trade and investment treaties such as the International Centre for the Settlement of Investment Disputes (ICSID). Although these organizations have fixed geographical bases (the ICC, for example, is based in Paris), many of these bodies will run arbitrations in any country chosen by the parties. It is far from compulsory, however, for arbitrations to be administered by one of these organizations. Ad hoc arbitrations can be established by agreement between the parties and these arbitrations are often run using the United Nations Commission on International Trade Law (UNCITRAL) rules. Arbitrations are also subject to the laws of the country which is the ‘seat’ of the arbitration, regardless of the governing law of the contract in dispute. Although many countries have implemented the UNCITRAL Model Law (which provides an arbitration-friendly legislative framework) into their national law, there can be significant differences between jurisdictions.