Too Much of a Good Thing? Certainty, Flexibility, and the Law, in International Commercial Arbitration

By Dr Benjamin Hayward

The very attraction of alternative dispute resolution is that it takes place outside of the courts.  Because of this, ADR processes aren’t bound by the strict procedures that apply in litigation.  ADR options are more flexible options.  But how flexible is too flexible?  Where is the line drawn?  And when it comes to flexibility in ADR, is it possible to have too much of a good thing?

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Photo: Roger McLassus, Creative Commons

 

This blog post is about international commercial arbitration (‘ICA’).  As far as ADR goes, arbitration is a relatively formal option.  In ICA, commercial parties choose to submit their dispute to one or more arbitrators, for determination according to law – and forego access to the courts.

That ICA is a preferred means for resolving cross-border commercial disputes has been consistently shown by empirical studies carried out at the School of International Arbitration.  Of ICA’s many advantages – including its procedural neutrality, confidentiality, and the international enforceability of arbitral awards – flexibility is quite important.

Parties can tailor an arbitration’s procedure to their own requirements.  They can choose where their arbitration is held.  They can choose the language to be used.  They can choose whether their arbitrators require any particular qualifications or expertise – and can even choose the arbitrators themselves.  They can also agree on how their arbitration will be conducted.

In addition, parties can choose the law that the arbitrators will apply in resolving their dispute.  For example, parties might include a choice of law clause in their contract, alongside their arbitration agreement.  Most parties do – around 83%, according to data from the International Chamber of Commerce (‘ICC’).  Where they don’t, the task falls to the arbitrators.  Even if the parties don’t choose a governing law, arbitrators must still apply the law.  Here, the virtues of flexibility become a little more difficult to accept.

Arbitrators’ powers to identify the governing law are set out in the laws and rules governing the arbitration itself.  Typically, arbitrators are granted very wide discretion.

In research that I conducted for Conflict of Laws and Arbitral Discretion, I reviewed over 130 (current and superseded) arbitration laws and sets of arbitral rules.  The most common approach – appearing 60 times – grants arbitrators the power to simply apply whatever law they feel is ‘appropriate’ or ‘applicable’.  A good example is seen in the ICC Arbitration Rules, now in their 2017 edition (emphasis added):

Article 21: Applicable Rules of Law

(1)  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.

My research critiques the desirability of granting arbitrators these wide (and effectively unreviewable) discretions to identify the governing law.  While flexibility is undoubtedly a key advantage of arbitration, this kind of flexibility carries too far – flexibility in choosing between different laws, that may lead to different outcomes, effectively becomes flexibility in the end result.[1]

Without any kind of criteria required for the exercise of these discretions, how can they be justified when the outcome of the case is at stake?  For example, an arbitration may be initiated after three years, the statute of limitations in the claimant’s country might allow for four years, but the respondent’s country might only allow for two – selecting between these laws will determine if the claim can proceed, or whether it can’t even be argued at all.

This particular kind of flexibility may not be consistent with the interests of companies that are the ultimate users of ICA.  They may choose arbitration, as an ADR process, specifically because they want enhanced certainty regarding their substantive legal rights.[2]

Flexibility is a good thing in ADR, and it is a good thing in arbitration.  However, like all good things, it has its limits.  In Conflict of Laws and Arbitral Discretion, I argue that arbitrators should instead be required to apply a more specific rule to identify the governing law.

Though limiting flexibility, this may actually support the interests of arbitration’s users – improving their ability to foresee the law that they are ultimately bound by.  Uncertainty over the identity of that law leads to uncertainty over the parties’ rights and obligations.  Parties need to know how to perform their contracts; they need to know how to conduct their cases in an arbitration; and they need to be able to make sensible decisions about settlement.

All of these objectives would be furthered by taking just a little bit of flexibility out of arbitration.  When it comes to flexibility, and its impact upon the legal rights and obligations of parties, there might just be too much of a good thing.

[1] Simon Greenberg, ‘The Law Applicable to the Merits in International Arbitration’ (2004) 8 Vindobona Journal of International Commercial Law and Arbitration 315, 335.

[2] Gary Born, International Commercial Arbitration (Kluwer, 2nd ed, 2014) 2616.

About Dr Benjamin Hayward

Dr Benjamin Hayward is a Senior Lecturer in the Department of Business Law and Taxation, at the Monash Business School, Monash University.  His research interests span international commercial arbitration, the international sale of goods, private international law, and Australian contract, commercial, sales, and consumer law.  Dr Hayward has a particular interest in how the applicable law is identified in international commercial arbitration, and the implications of this for arbitration as a dispute resolution mechanism.  He is the author of Conflict of Laws and Arbitral Discretion – The Closest Connection Test (Oxford University Press, 2017)

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