International Commercial Arbitration, its Application of the Law, and the Flexibility of its Process

By Dr Benjamin Hayward

Photo: Dennis Jarvis, Creative Commons

In a previous contribution to the ADRRN Blog, I argued in favour of taking a little bit of flexibility away from international commercial arbitration.

In my previous post, I noted that while arbitration is ADR, it remains a type of formal dispute resolution.  It also involves application of the law.  Still, where a contract doesn’t include a choice of law clause, arbitrators have to identify the law they will apply.  My doctoral research explored the significant discretion arbitrators have in this regard.

That discretion is a problem if parties chose to arbitrate because they want enhanced certainty about their legal rights.  It’s even more problematic in some particular categories of case where arbitrators have to identify the governing law even after the parties tried to agree on this issue themselves.

I’ve been thinking a bit more about this topic following a recent episode of The Arbitration Station podcast, which included a really great discussion about becoming an arbitrator.  Co-host Brian Kotick made some interesting observations about this issue, set in the context of how arbitrators decide their cases:

‘[I]t’s all discretionary at the end of the day and you can’t really predict universally what’s to be decided … I think it depends on how you approach being an arbitrator.  I know some arbitrators, their approach is “I’m only going to decide on the arguments – legal arguments and factual arguments – that are presented to me”.  And if you take that approach I think it’s much easier because your intellectual curiosity will not lead you in the wrong direction …

Another approach is finding justice – “capital J justice” – in which case you’re going to kind of take a more active role, do your own independent research perhaps … in which case it’s much more difficult of a task …”

So is arbitration about applying the law, or is it about more general notions of commercial justice?  Or is the true position somewhere in between?  Parties can specifically agree to give arbitrators the power to decide based on principles of equity and fairness, but this is extremely rare.  What, then, is the best view of arbitration’s decision-making process where they don’t do so?

In 2013, the High Court of Australia decided a constitutional challenge to the validity of an important part of Australia’s International Arbitration Act.  In upholding the legislation, it conceptualised the role of courts in enforcing arbitral awards as holding the parties to their initial agreement to arbitrate: rather than merely rubber-stamping arbitrators’ legal analyses.  The Court also held that there is no strict legal rule, in international commercial arbitration, that arbitrators must apply the law correctly.

This gets us part-way to the answer.  For a bit more, we can look to the grounds for challenging arbitral awards.

Under the Model Law and the New York Convention, both adopted in Australia, these grounds don’t include an error of law.  They do include public policy grounds.  Public policy doesn’t cover arbitrators’ ordinary legal errors, but it might cover very significant infringements of fundamental legal principles, such as the rule against double recovery.

Of more interest to me, however, is the ground relating to arbitrators not following the parties’ agreed procedure.  Application of the law is a matter of substance, but identifying what law to apply in the first place is a procedural question.  As I’ve discussed previously on this blog, arbitration laws and rules give arbitrators significant discretion in identifying the governing law.  However, they do still set out at least broad frameworks for making that decision.

While potential mistakes in the law’s application are just part and parcel of choosing arbitration as a form of ADR, in my view, parties remain protected against arbitrators violating the procedure required for identifying that law in the first place.

This is an idea I’ve been interested in for a while now.  What does it say about the exact nature of decision-making in international commercial arbitration?  I’m not yet sure, but I’m looking forward to exploring that question in my future research.