Transnational Construction Arbitration

Renato Nazzini

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CHAPTER 4 The rise of arbitral institutions and their role in private dispute resolution

Origin of institutions

4.1 There are currently some dozens of arbitral institutions of differing sizes and importance throughout the world, located in virtually every significant commercial centre. Their constitutions vary greatly. Some, such as the International Chamber of Commerce (ICC) in Paris are part of a much larger business and commercial organisation. Others, such as the London Court of International Arbitration (LCIA) are substantially autonomous. All arbitration institutions including the ICC, operate from a ‘home’ base where they are subject to the local domestic law in regard to their form and constitution. This may have important consequences as regards financial matters such as (in the case of UK law) acquiring charitable status. Equally, all arbitration institutions operate or aim to operate on an international basis and thus provide what may be important contractual rules to supplement the local law applicable as the procedural law of the arbitration. 4.2 The ICC in Paris, which probably remains the largest and most representative business organisation in the world, was founded in only 1919, with its own distinctive approach to arbitration containing provisions based on French law.1 The founding of the ICC thus occurred in the immediate aftermath of the First World War and in anticipation of a wider movement that embraced the League of Nations and, subsequently, the Geneva Conventions, sharing the common aim of providing an alternative to armed conflict including, crucially, the promotion of international trade. Yet the advent of arbitration institutions predates these developments by a considerable margin. In London, the Corn Trade Association started its operations in 1878, bringing together existing trade groups whose interests included arbitration of disputes. After various reorganisations the modern association known as GAFTA emerged with its own arbitration system geared to that particular trade and involving a number of individual features such as a board of appeal where challenges were dealt with ‘in house’. A similar London-based organisation is the London Maritime Arbitrators Association (LMAA) which, although founded in its modern form only in 1960, claims roots and traditions that stretch back over 300 years when disputes were dealt with before members of the shipbroking fraternity associated with the Baltic Exchange in London. 4.3 Many more such organisations could be cited and it is clear that London in particular has a long history of trade associations promulgating their own rules and procedures for dispute resolution, sometimes peculiar to particular trades, but all embraced within the

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succession of English Arbitration Acts from 1889 onwards and all with procedures falling within the now generally accepted parameters of arbitration. It may be noted that, while such trade disputes were at the time thought of as domestic, being governed exclusively by English law as to both substance and procedure, a large proportion of the arbitrations coming through London were truly international in the modern sense, being disputes between parties from different states with London as the common hub. 4.4 All of these London trade bodies became embraced within the City of London Chamber of Arbitration, set up in 1891 following the new Arbitration Act of 1889. This body migrated into the London Court of Arbitration in 1903, being the same body that, in 1981, expanded its title to become the London Court of International Arbitration, a change that simply reflected the fact that much of its commerce, as already noted, had been concerned with international disputes. London as a centre for arbitration was further marked out by the formation in 1915 of the Institute of Arbitrators, now the Chartered Institute of Arbitrators. This body now has worldwide coverage and uniquely offers training and qualification for dispute resolvers in all the different disciplines. 4.5 Thus it can be concluded that, in an era dominated by the assumptions of free trade and laissez-faire, there was a demand for institutional involvement in dispute resolution. This served to provide both the basic requirements of tailored rules and a pool of experienced arbitrators, and also provided for special procedures suited to particular disputes. Among the special procedures may be mentioned the reference of disputes (particularly in the commodities field) to two arbitrators with provision for an umpire to be appointed only upon the arbitrators’ disagreeing; and the equally special procedure under the GAFTA Rules for ‘string’ arbitrations to be conducted between the first and last parties involved in a series of identical transactions involving the same subject matter, typically a cargo at sea.

Arbitration in the modern era

4.6 The start of the modern era can conveniently be taken as the end of the Second World War. At this stage, even before the end of the colonial system on which much of world trade was based, it was clear that the idea of promoting international trade as an incentive to peaceful coexistence had not worked, at least in the form attempted in the 1920s and 1930s. The United Nations was established within months of the end of the war and, by 1958, had published what was to become the most far-reaching and influential instrument in the promotion of international arbitration, the New York Convention. Building on the foundations of the Geneva Conventions, the 1958 Convention has substantially succeeded in achieving universal international recognition and enforcement, subject to surprisingly limited exceptions, of both arbitration agreements and awards. Having achieved this goal, the United Nations logically turned its attention to the process of arbitration through the United Nations Commission on International Trade Law (UNCITRAL), established in 1966. In addition to promoting a series of measures for unifying international trade, UNCITRAL published its own Arbitration Rules in 1976 (UNCITRAL Rules),2 significantly at a time when the ICC Rules of Arbitration (ICC Rules) were universally known and in operation.

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4.7 Both UNCITRAL, ICC and other rules require to be incorporated into an arbitration agreement, which may be ad hoc or, more usually, contained in a commercial contract. The adoption of ICC or other institutional rules involves acceptance also of the governing and regulating powers of the institution whose rules are to be adopted. The UNCITRAL Rules, conversely, are no more than rules with no accompanying institution. However, they necessarily acknowledge the need for some body empowered to carry out certain essential functions such as (where there is a vacancy) appointing tribunal members and (when invoked) deciding on challenges. Under the UNCITRAL Rules this is ascribed to an ‘appointing authority’, which is to be either agreed or designated by the Permanent Court of Arbitration (PCA) at The Hague. Today virtually all arbitration institutions3 offer to administer arbitrations subject to the UNCITRAL Rules; and in the great majority of cases parties using these rules will agree, after a dispute has arisen, to one of the existing institutions being empowered to perform these functions and others besides, such as fund-holding. 4.8 It is significant that the UNCITRAL Rules, while taking account of existing international institutions and rules, decided to establish its own standard for procedural propriety and fairness. The rules were, in 1985, to be followed by an even more far-reaching unifying measure, the Model Law on International Commercial Arbitration (the Model Law). It is worth recalling the preamble to the launch of UNCITRAL itself and to the successive editions of the rules as set out within the 2010 rules:

(a) Recalling its resolution … of 17 December 1966 which established the UNCITRAL with the purpose of furthering the progressive harmonisation and unification of the law of International Trade in the interests of all peoples, in particular those of developing countries.
(b) Also recalling its resolution …. of 15 December 1976 recommending the use of the Arbitration Rules of UNCITRAL.
(c) Recognising the value of arbitration as a method of settling disputes that may arise in the context of international commercial relations.
(d) Noting that the Arbitration Rules are recognised as a very successful text and are used in a wide variety of circumstances covering a broad range of disputes including disputes between private commercial parties, investor-state disputes, state to state disputes and commercial disputes administered by arbitral institutions, in all parts of the world.

4.9 Thus, it can be concluded that, if the ‘private’ arbitral institutions had not existed previously, they would need to be invented or at least there would need to be created some body fulfilling such essential functions in international arbitration. It is also of note that, since the advent of the European Union in particular, virtually every sphere of commercial and professional activity has come under scrutiny in the search for harmonisation and regulation. National courts are required to act in harmony in applying European law alongside their own national laws.4 Even the process of mediation now comes within the purview of the European Commission in the form of the EU Mediation Directive,5 which has already led to various statutory amendments to UK law. It is somewhat remarkable

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that, given the enormous commercial importance of arbitration, no attempt at regulation has yet gathered pace either within the EU or elsewhere. The arbitration world should be grateful to the United Nations and UNCITRAL for having, it seems, headed off the regulators, having had the foresight and the political muscle to achieve major advances in international law and procedure. The result has been to establish a surprisingly modern mix of public and private influences through, respectively, UNCITRAL and the modern breed of arbitral institutions throughout the world. 4.10 It should not be forgotten, however, that one of the founding principles of commercial arbitration, deeply embodied in both the Model Law and all successive legislation based upon it, is the principle of party autonomy. Indeed, the widespread use of institutions has been criticised as being not entirely in keeping the principle of the primacy of the parties’ intentions.6 While all institutions maintain the universal principle of parties being free to select their own tribunal, the UNCITRAL Rules themselves demonstrate that international arbitration cannot function effectively without external support and regulation. Such support and regulation will be provided by whatever national court has a supervisory jurisdiction unless it is to be provided through an institution. Thus, the existence of institutions can also be seen as consonant with the second fundamental principle of international arbitration, that no court should intervene in the process of arbitration except as provided by the law.7 4.11 Having thus sought to justify the existence of the international institutions, it remains the case that each of them exercises considerable powers in relation to individual cases and in relation to both the general approach to arbitration and its function within the commercial contract. Whether this is to be regarded as a criticism of the institutions, generally or particularly, it is right that the existence of such considerable powers should be examined and should be the subject of healthy debate and this is now the function of this chapter. In order to avoid presenting a comparison of different rules it is proposed to refer only to the current UNCITRAL, ICC and LCIA rules where citation of texts is necessary.

Conduct of arbitration

4.12 The extent to which institutional rules affect the form and conduct of arbitrations can hardly be overstated. At the outset, all arbitration rules empower the tribunal to decide, in the absence of the parties’ agreement, (1) the procedural rules to be applied, in addition to any contracted rules, (2) the language and (3) place of the arbitration and (4) the law applicable to the merits. While each of these matters can be of fundamental importance and, in the absence of agreement would otherwise be determined by the court having supervisory jurisdiction, there is clearly merit in having such matters decided by the tribunal itself. At least the empowerment of the tribunal avoids the potential derailment of the arbitration at the outset where there are different potential national courts having supervisory jurisdiction, with the possibility of conflicting decisions.

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4.13 With regard to the procedural rules to be applied, while tribunals (and national courts) can differ widely in their approach to procedure, the Model Law and all the various national derivatives have at least in common the two basic requirements set out and re-interpreted in section 33 of the English Arbitration Act, that the tribunal is required to

(a) act fairly and impartially as between the parties
(b) giving each party a reasonable opportunity of putting his case and dealing with that of his opponent.

4.14 There is a debate, not to be pursued here, about the use of the word ‘reasonable’ in section 33 in contrast to the word ‘full’ appearing in Article 18 of the Model Law. In context, the two words have the same meaning. It may be concluded that procedural fairness has a universal context in which similar if not identical standards are to be recognised, irrespective of the particular rules or procedural law. 4.15 All institutional rules set out a list of discretionary powers that the tribunal may exercise, covering all aspects of procedure from the exchange of statements of cases to the award of interest, disposition of costs and delivery of the award. These are generally based on provision of the Model Law augmented where necessary and will usually, but not invariably, be found reflected in the applicable procedural law. Such rules are generally subject to an overriding provision typically providing that the tribunal ‘shall be in full charge of the hearings’.8 It has been observed that such general rules ‘still leave many important matters in a state of uncertainty, for example the extent to which a tribunal will order disclosure of documents or the way in which costs will be apportioned’.9 However, it is open to parties to reach agreement on all such matters. The first procedural conference or terms of reference meeting (see paras 4.20–4.23) offer the appropriate opportunity to settle such additional rules as the parties are able to agree, with the tribunal’s assistance.

Fund holding

4.16 One of the significant commercial functions of arbitral institutions is the holding of advanced funds for the payment of arbitrators’ fees and expenses and indeed the institution’s own fees and expenses. The levels of fees requiring to be deposited have always been high and have increased dramatically in recent years with deposits in ICC cases regularly reaching or exceeding US$1 million. From the number of ongoing cases at any point it is not difficult to estimate the total funds that an institution is likely to be holding at any particular time. The question of what the institution does with these funds is a matter of commercial as well as ethical interest both to parties and others involved in arbitration. This was the subject of a somewhat outspoken article contributed by the late Dr J Gillis Wetter to a conference at the Centre of Construction Law at King’s College in 1989 in which he pointed out the level of fees being held by the ICC and relating

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back several years. Since interest on the deposits was not credited to the parties, he concluded that ‘a very substantial proportion of the total income of the ICC is derived from arbitration activities’.10 In effect, parties to ICC arbitrations are, without their consent or authorisation, subsidising other activities of the Institution, however well-intended those activities might be. 4.17 A number of other arbitral institutions throughout the world adopt a similar practice of not accounting interest on deposits, from which the same conclusion can be drawn. However, most institutions will, as an alternative to cash deposits, accept bank guarantees. This of course imposes an additional burden on the party through the cost of providing the guarantee. The LCIA, in contrast to other institutions, does account to the parties for accrued interest on funds deposited. However, as with any client account, additional income is derived from higher rates of interest earned through the accumulation of deposits and this is not credited to the parties.

Arbitrator’s fees

4.18 An important issue in the management of an arbitration is the way in which the arbitral tribunal is to be remunerated. The long-standing tradition of English lawyers and arbitrators has been to charge on a time basis. Even the long-standing tradition of ‘brief fees’ for barristers is loosely based on anticipated preparation time. This has arguably resulted in or at least contributed, over the last two or three decades, to the relentless expansion of commercial arbitrations, which have consequently become longer, more complex and more costly. Tribunals have had little incentive in seeking to curtail the process, especially if being paid for all the time used. It therefore came as a shock to English practitioners, from about 1980 onwards, when undertaking ICC cases as arbitrators, to find that their fees were not only capped, but so structured as to promote speed in bringing the case to a conclusion, with the adoption of greater efficiency in dealing with the case. It is no coincidence that the Arbitration Act 1996 now expressly requires the tribunal to adopt procedures so as to avoid unnecessary delay or expense,11 a requirement that was absent from any earlier arbitration ordinance and not necessarily to be implied therein. 4.19 Now that the obligation to conduct arbitrations efficiently is universal, and such that it hardly requires to be mentioned, it can be noted that arbitration institutions internationally are now divided into two camps – those that follow the ICC example of capping fees, including the Dubai International Arbitration Centre (DIAC) and Singapore International Arbitration Centre (SIAC) and those that continue to operate by payment on the basis of time, notably the LCIA and the American Arbitration Association (AAA). Even here, however, the hourly fee rates are set at a maximum rate somewhat lower than those currently earned for comparable commercial work; so that it can be said that all arbitral institutions seek to incentivise tribunals to achieve efficiency and the adoption of cost-effective measures.

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Terms of reference

4.20 The ICC Rules have, from the outset, required the tribunal to draw up terms of reference setting out a prescribed list of matters identifying the dispute of the parties and the basic framework of the arbitration including a ‘list of issues to be determined’, although the latter is expressed to be optional in the latest version of the rules.12 It is easy to criticise the requirement, especially given that the rules themselves provide a timetable of two months, which in practice can easily become extended, necessarily delaying the effective start of the arbitration. It is also to be observed that the matters to be set out in the terms of reference substantially mirror what is required to have been included in the ‘request for arbitration’ and in the ‘answer to the request’.13 In defence, it may be noted that Article 24 of the ICC Rules now requires the tribunal, when drawing up the terms of reference or as soon as possible thereafter, to convene a case management conference with a view to establishing the procedural timetable for the case; and in practice tribunals will usually combine the two processes so that expensive meeting time is used as productively as possible. 4.21 The origin of the terms of reference is a requirement of French law that formerly (but no longer) required all arbitration agreements to be executed after the dispute in question had arisen. It is curious that a provision peculiar to French law should appear with such prominence in an instrument designed for international use. However, it has been said on many occasions that the terms of reference represent a useful opportunity for the parties and the tribunal to meet and for the arbitral proceedings to be formally ‘launched’ by the combination of the terms of reference and procedural timetable. On this basis, the ICC has steadfastly resisted attempts to make the terms of reference optional. Indeed, it might be observed that, while most arbitral institutions will allow, or even encourage, parties to agree amendments to the procedure, the ICC has a longstanding reputation for not permitting what it regards as any fundamental deviation from the rules, including the provisions for terms of reference as well scrutiny of draft awards by the ICC. 4.22 One of the serious drawbacks of the ICC terms of reference procedure was the fact that, under earlier versions of the ICC Rules, there was a strict embargo on amendments to the case of either party after the terms of reference had been signed. Apart from the obvious inconvenience, this also led to parties introducing amendments after the initial exchange of pleadings and often immediately before the terms of reference meeting, often leading to objection and request for re-pleading by the other party. The rules expressly require that the terms of reference are drawn up ‘in the light of [the parties’] most recent submissions’14 so that the tribunal could not refuse to take late amendments into account. These difficulties have now been substantially overcome by giving the tribunal discretion to admit new claims upon terms, now substantially similar to the ordinary jurisdiction of common law tribunals to allow amendments provided they fall within the tribunal’s jurisdiction. However, it is fair to conclude that the topic of terms of reference has occupied an amount of time and energy out of proportion to their value, and that this has been the result of the ICC’s insistence on maintaining a procedure of questionable value and relevance.

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4.23 Interestingly, in recent years a line of authority has developed through laws and court decisions in the United Arab Emirates, particularly the state of Dubai, to the effect that an agreement to arbitrate is not valid unless made by a person having specific legal authority on behalf of the party concerned to surrender or qualify the legal right to bring disputes before the courts.15 This has resulted in a number of cases in which arbitral tribunals, appointed, typically under the rules of the DIAC (DIAC Rules), have delivered awards declaring that the tribunal has no jurisdiction because the arbitration agreement, contained typically in a commercial contract, was not specifically authorised in accordance with the law. As a result, parties embarking on such arbitrations are now advised to draw up a document formally confirming the agreement of the parties to refer the dispute to arbitration. The document can also conveniently set out other powers that the tribunal is to exercise and that have been doubted by court decisions in the absence of specific authorisation, including the power to award party costs.16 While the DIAC Rules currently contain no rule requiring the drawing up of such a document, if considered appropriate in future revisions of the rules, the document might well be designated ‘terms of reference’, for which the ICC Rules would act as a useful model.

Challenges to arbitrators

4.24 As noted, the UNCITRAL Rules provide for challenge to arbitrators on the ground that ‘circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence’. This wording is followed very closely by the LCIA Arbitration Rules (LCIA Rules)17 and by the ICC Rules,18 although also allowing for challenges on wider grounds, as do other sets of rules. Such grounds of challenge are generally mirrored in legislation, for example, under the English Arbitration Act 199619 or under the Model Law.20 These provisions are generally accompanied by supportive measures requiring (1) that the challenge is brought in a timely manner21 and (2) that other remedies such as those under an arbitral institution are first exhausted.22 The challenge, if not accepted, is to be decided, under the relevant rules, by some representative body of the institution. Under the UNCITRAL Rules the decision is to be made by the ‘appointing authority, either already designated or to be designated’.23 4.25 Thus the grounds and procedure for challenge are well established, including measures found both in the rules and in the governing law to avoid ‘after the event’ challenges that could have been brought earlier. What is an increasing problem, in an era of more frequent challenges to tribunals, is to establish predictable grounds on which challenges are likely to be accepted or rejected by the institutions. This process should be assisted by decisions of the courts. However, in most or many jurisdictions, courts

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entertaining challenges do not give detailed reasons for their decisions; and even where available, decisions from one jurisdiction are likely to be given little weight in other jurisdictions. Additionally, most challenges are dealt with by the institutions themselves and not pursued further, so that there is no sufficient body of court decisions from which general principles could be reliably formulated. 4.26 As regards the institutions themselves, the usual practice is for the challenged arbitrator to be invited to respond to the matters put forward; and responses may also be invited from the other party to the arbitration and from other members of the arbitral tribunal. The institution will therefore build up a file on the challenge that is to be considered, in the case of the ICC Rules by ‘the court’ when deciding on the challenge.24 But the decision handed down is generally either to accept or to reject the challenge. There is no requirement to give detailed or any reasons for the decision.25 4.27 This unsatisfactory situation was addressed in 2011 by the LCIA, upon the proposal of two members of the LCIA Board. The proposal was to publish, in summary form, a series of decisions on challenge to tribunals that had been handed down by the LCIA Court. The proposal was accepted by the board and resulted in publication of a background commentary together with the summarised decisions on 28 challenges dealt with between 1996 and 2010, many of which involved multiple challenges to the same tribunal and multiple divisions of the court being appointed to adjudicate the challenges. The decisions are published in a special volume of Arbitration International 26 and, while the decisions have no binding effect, they provide valuable and, so far, unique material for any panel dealing with similar challenges. As might be predicted, most of the challenges were dismissed after detailed consideration of the issues, but some challenges were upheld. Since publication of these decisions, no other institution has sought to follow suit. However, now that this material is available, parties in challenges before other institutions will be entitled to use it to support their arguments.

Ethics and conduct of advocates

4.28 As already noted the trends towards regulations have, for various reasons, not yet reached international arbitration. Individual lawyers and other professionals involved in arbitration, notably experts, would generally be subject to individual professional codes of conduct and rules. These may impose serious and enforceable sanctions against individuals. However, there is a major problem in that there are no ‘international’ rules applying to lawyers and individual national codes are known to vary very substantially, both in terms of content and enforcement. There is also another dimension to the problem, in that numbers of individual professionals involved in international arbitration may not be lawyers. In the case of experts, they are likely to be registered with their own professional institution, which, however, is unlikely to provide any specific rules dealing with expert evidence. While there are professional bodies dealing with experts,27

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membership is voluntary and thus whilst some experts may be regulated, others will not be. The problem becomes more acute when it is considered that the role of advocacy and case management is now routinely undertaken by professionals who are not lawyers, in the UK being typically engineers or quantity surveyors. Their professional codes will be silent as regards the conduct of arbitration business and they will not be bound by codes of conduct applicable to lawyers.28 4.29 In sum, the potential for ethical problems being generated by international arbitration is immense and there is no doubt that these problems are real and not fanciful.29 As is now well known, the LCIA in 2014 decided to take the initiative and become the first international institution to grapple with such problems through specific and enforceable measures introduced into arbitration rules. The rules become binding upon the parties and thereby their counsel as a matter of contract, thus empowering the tribunal to impose sanctions that may impinge both on the party and on the advocate concerned through sanctions, which may include a written reprimand or caution as to future conduct or ‘any other measure necessary’.30 4.30 This is not the occasion to embark upon a commentary or analysis of the new rules. It is sufficient to note that the operative rules are contained within an annex and include prohibitions on activities intended unfairly to obstruct the arbitration or jeopardise the finality of the award.31 The provisions expressly prohibit a legal representative knowingly making a false statement to the tribunal or knowingly procuring or assisting in the preparation of or reliance upon false evidence. The annex also prohibits concealing or assisting in the concealment of any document and having undisclosed contact with a member of the tribunal or the LCIA Court. There are separate provisions within the rules requiring notification of the parties’ legal representatives and for any changes to be subject to approval of the tribunal so as to avoid the problem of a party, intentionally or otherwise, creating a conflict and thereby potentially affecting the award.32 4.31 These rules are, and are likely to remain, controversial. It is interesting to speculate how the new rules will affect the conduct of arbitrations and whether other international institutions will choose to follow suit. The practical implications of the new rules and particularly their application and enforcement, will await the judgment of time.

Scrutiny of awards

4.32 The final step in the arbitration is the drawing up of the award and its delivery to the parties. Institutions invariably require that awards are submitted to them and are then transmitted to the parties by the institution, bearing its imprimatur. This can be useful in checking that the award does not contain patent defects or omissions. However, there is a significant disparity between the practices of different institutions in regard to

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what the institution does and how far the award will be examined for errors that may be less than patent. 4.33 Most institutions do not prescribe any specific process of examination. The LCIA Rules state that the award, after submission by the tribunal, will be transmitted to the parties ‘authenticated by the Registrar as an LCIA Award’.33 There is no further definition of the process of authentication but in practice it will include checking for patent errors and ensuring that the award responds to the issues in the arbitration. The DIAC Rules provide only that the original award is to be formally communicated to each party by the institution34 necessarily implying that the tribunals sends its completed award to the institution already signed for onward transmission. Institutions that merely communicate or transmit the award are nevertheless generally available on an informal basis to check draft awards for obvious errors or omissions but significantly do not purport to check or comment on the award. 4.34 The exception to this trend is the ICC which has, for many years, operated a process referred to in the rules as ‘scrutiny’. Before signing the award, a draft is to be submitted to the court which has the following powers:35

The court may lay down modifications as to the form of the award and, without affecting the arbitral tribunal’s liberty of decision, may also draw its attention to points of substance. No award shall be rendered by the arbitral tribunal until it has been approved by the court as to its form.

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