Arbitration Clauses and the Development of the Law

The Lord Chief Justice of the UK believed that arbitration clauses hamper common law's growth due to domestic courts' minimal involvement in arbitration hearings and their outcomes. This, the Lord Chief Justice asserted, was due to the exclusionary nature of arbitral rules under the Arbitration Act of 1996 , which reduced the case flow in courts due to the imposition of finality and certainty of arbitral awards. This paper will analyze and critique the arbitration process and laws to determine if arbitration clauses are the actual cause of the declining number of commercial cases heard in domestic courts and if this decline has any effect on the evolution of the common law. 

The Nature of the Common Law 

The common law was developed in Britain and became a source of law for countries using the adversarial system. The common law is developed by precedents of higher courts, which become binding on lower courts through the principle of stare decisis . This system works in the following way; when a case comes to court, the judges review the case's issues then interpret relevant laws to solve those issues. Their interpretation and the procedures they set out as requirements or tests for determining various factors in each case become the rules that future courts will follow when similar cases are presented to courts. The views of dissenting judges may become obiter dicta, which may be used to guide future judges. Only courts at the same hierarchical level or higher can overrule laid out precedents when cases on similar law issues arise in the future. Therefore, this system works on the premise that many cases are presented to judges so the precedents can be applied and reviewed to reflect societal changes from time to time. Cases that introduce more complicated issues of facts and issues of law, also expose shortcomings of available laws and force judges to distinguish the facts from existing precedents or overrule altogether. When arbitration becomes the preferred method of international or domestic dispute resolution, it reduces the flow of cases in domestic courts and, subsequently, the chances to review, analyze, and develop commercial law. This is also exacerbated by the limitation of domestic courts' interference in arbitration proceedings and the confidential nature of such hearings. 

The Preference for, Broad Jurisdiction of and Confidentiality of Arbitration 

Arbitration is a flexible dispute resolution method that has become preferred by most large corporations. There has been a trend of the biggest and most complex cases proceeding to this system instead of domestic courts. Its attractions, such as choosing the applicable law, language to be used, the arbitrators, among other agreements, make it a preference over litigation. This, therefore, reduces the number of cases and types of issues that domestic courts could have deliberated on. Article VII of UNCITRAL Model Law 1 , which operates in 72 nations, states that, an arbitration agreement may apply to both contractual and non-contractual disputes and arbitration could be used for both ongoing and future disputes. This Article extends the purview of arbitration to disputes that arise from and those that do not from the parties’ contract and those that could have already arisen or those that could arise in the future. This means parties can extend the jurisdiction of matters beyond those in their contracts. The UK is yet to adopt Model Law, but its Arbitration Act was influenced by it and other international best practices in arbitration law. This is also reflected in the ICC model clause 2 on arbitration which also stipulates not only for all contractual disputes but also others related to the contract. This stipulation gives the parties a choice to let other non-contractual matters be subject to arbitration instead of the ordinary litigation in domestic courts. They can also choose to stop ongoing litigation and pursue recourse in arbitration. These broad choices for parties and wide jurisdiction conferred on arbitration, therefore, robs domestic courts the opportunity to deliberate many varied points of law. As a result, the judge's input in such matters is lost, thus stagnating common law. 

Private institutions oversee the arbitration and, thus, are outside the public sphere. Most parties prefer arbitration due to its private nature and insert confidentiality clauses in their arbitration agreements. Santens and Zamour state that this confidential nature results to reduction of new precedents being made which ultimately causes common law countries to grow anxious of arbitration and thus not only fear it but also oppose its broad and rapid growth. 3 In Emmott v Michael Wilson and Partners 4 , the court held that even though not explicitly stated in the Arbitration Act, there was case law duty providing confidentiality. This has exceptions such as; a court order, agreement by the parties, public interest, or interest of justice, and it is necessary to protect a party's rights. However, in a recent case; UMS Holding Ltd and others v Great Station Properties SA 5 , despite that the trial court had warranted the disclosure because of successful public enforcement challenge hearing, the Commercial Court prohibited divulgence of the award. 

The Exclusionary Nature of Arbitration Process 

Arbitration decisions exclude judges' input into the hearing process and their interference in the final award delivered by arbitrators. 

Historical Background 

The history of arbitration shows that the ICC wanted to keep arbitrator's decisions from judges' clutches. This was achieved by the imposition of the doctrine of equity as the guiding principle of the arbitration process rather than substantive law. Such was because equity allowed the arbitrators to base their award/decision on their sense of justice and fairness. Judges could not review the awards of an equitable nature, and this made them final. This trend prevented the development of precedents on how to determine the merits of an award. Ultimately, through trade usages and international commercial rules as guiding principles, modern arbitration came under the scope of statutory rules. However, the finality of arbitral awards is still embodied in these rules, and equity is still used through the doctrines of amiable composition and relevant trade usage. 

Current Stance in the UK 

Article 1 of the Arbitration Act 6 sets general principles that are to guide arbitration in the United Kingdom. One of them is the non-interference of courts unless as provided by the Act. Parties are also flexible in incorporating terms of their arbitration agreement and can only be restricted by safeguards necessary for the public interest. Article 6 provides a definition of arbitration agreements, which is similar to that of the ICC. It covers all current or future disputes and those that are contractual and those not contractual. This was upheld in Fiona Trust & Holding Corporation v Privalov 7 . According to The House of Lords , as reasonable businessmen, the parties should be assumed to have intended all disputes to be decided by the same arbitration tribunal. However, the courts should determine arbitral agreements on case to case basis. There are some exceptions to the rule, such as criminal matters and third parties' involvement outside the contractual agreement. This brings many contractual and commercial law disputes under arbitration; hence, increasing the possibility of abandoning litigation for most disputes. Article 7 introduces the doctrine of separability, which seeks to validate arbitration agreements that are part of contracts or other agreements that fail. This echoes Article 16 of the UNCITRAL Law Model. The doctrine was meant to prevent parties from removing arbitrators from a tribunal or delaying the hearing of the agreement's validity or jurisdiction by the mere defense or claim of an invalid contract. This was the case in NetSys Technology Group AB v. Open Text Corp . 8 The two companies were in the process of agreements when those agreements broke down. NetSys, a Swedish company, began litigation in Ontario against Open Text, an Ontario company. Open Text commenced arbitration proceedings and sought a stay of proceedings. NetSys claimed that since Open Text denied the agreements' validity in its arbitration hearings, they had no case since the arbitration agreement was also legally void. The Ontario court rejected that argument since the Model Law applied in Canada and, thus, the arbitrators were left to determine the agreement's jurisdiction. In the UK, the matter was also addressed in the Fiona Trust Case . However, this doctrine widens the immense powers of arbitration clauses and prevents litigation of various issues in courts since would-be litigants will be prevented from litigating disputes and fragrant violations by companies even under failed or invalidated contracts. 

A party that is subject to an arbitration clause can apply to stop litigation that falls within an arbitration agreement as under Article 9. Article 9 (4) mandates the court to grant the application save for cases where the arbitration agreement is inoperative, is inapplicable or is invalid. Art. 45 allows an issue of law that arises from the arbitration proceedings, to be examined by the courts. However, this authority rests on the other parties' requirements being informed by the plaintiff, agreeing, and the issue being considerable enough to affect all involved parties' rights. This section also bestows on the sides the powers to collectively deny courts from determining any arising questions of law, and where parties decide not to ask for reasons for an arbitration award, the court's jurisdiction in such hearing is automatically disqualified. The court has to grant leave once it is satisfied the matter is of general importance or is of a special nature to proceed through the court of appeal, thus appeal a judgment delivered on issues falling under Article 45. The stringent requirements for courts’ intervention or appeal, further deny courts’ jurisdiction to determine points of law to be considered and hence create new laws. The powers conferred to parties to exclude court jurisdiction also bar this vital intervention by courts and prevent deliberation and improvement of existing case laws. 

Parties can challenge an award via Art. 67 if there are issues of substantive jurisdiction by the arbitration tribunal. Where a serious irregularity affects the tribunal, award, or the proceedings, a party can challenge the award under Art. 68. The party challenging the award under these two Articles must have informed the tribunal and the other parties. Leave to appeal is also required before a party can appeal to any judgments under these sections. Even though not common elsewhere, an appeal application may also be made on the point of law emanating from an award given by the tribunal under Art. 69. However, the same grounds apply, i.e., leave of the court and notification and agreement of all parties. An application for leave to appeal the decision under this Article rests on the court being satisfied of the existence and importance of the issue to the parties, public interest, public policy, questionable or faulty deliberation by the tribunal. 

The question for determination and the grounds for granting leave to appeal must be clearly stated in grant of leave application to appeal in Art. 69 (4). Art. 70 (2) also sets further limitations for applications for appealing or challenging awards. The plaintiff must exhaust all arbitral processes of review/appeal or correction/addition of awards as set in Art. 57. These rules are very stringent and make appealing awards or applications for leave to appeal those initial award appeals difficult to satisfy. This section reflects the stipulations of The Nema Case 9 which provided only under very rare circumstances would leave to appeal an arbitrator's award to be granted. This, in turn, ensures the finality of awards and reduces court interference with arbitral awards. 

Other Common law Jurisdictions 

Even though English Law is independent of foreign laws, other countries' case precedents may be persuasive for English courts when reviewing existing precedents. International arbitration also exposes corporations to foreign jurisdictions when they are the seat of arbitration. Hence, a review of arbitration in other common law countries offers insights into its ongoing limitations on the general international common law. 

In the US, federal and international arbitration is under the scope of the Federal Arbitration Act (FAA). 10 The Act gives a wide range of scope and authority to arbitration agreements. Unlike in the UK where small claims below 5,000 pounds can be litigated, the high costs of litigation discourage parties from litigating when the amount is less than the arbitration costs 11 . In the US mandatory arbitration clauses are common. Most of them ban class-action suits by requiring the parties to arbitrate individually, making it harder for smaller parties to litigate or hold a company responsible for repeated fragrant misconduct. Research by EPI shows that the punitive nature of these arbitration clauses and how they are imposed means that weaker parties are disadvantaged since they usually get lower awards than they could have gotten had they litigated. This is made worse by the fact that they cannot appeal. 12 This limits consumers' growth, labor rights, and commercial law since judges are not allowed to intervene in such cases. 

According to Corrs Westgarth, there existed a right to appeal or challenge arbitral awards if a party felt there was an error of law. A more stringent condition for the right to appeal was introduced in 1984 by the new arbitration law. 13 The right was ultimately restricted by statutory limits laid out in The Nema by the House of Lords. This was to reduce the number of arbitration cases being reviewed by courts. The courts used to grant leave to appeal but, over time, also restricted this trend to match the limitations in the laws. Thus, the finality of arbitral awards was in full swing across most major common law countries, as is reflected in international arbitration. 

The Federal IAA of Australia , which incorporated the New York Convention, the ICSID Convention, and the Model Law on International Commercial Arbitration, make a stay of proceedings for cases where parties have an arbitration agreement mandatory. Therefore, this lack of judicial discretion means cases are automatically reverted to arbitration whenever the parties had an arbitration agreement even if litigation has already commenced. These laws have also respected and upheld the confidentiality of arbitration processes. This is because parties are given the right to choose to keep the cases and arbitration outcomes confidential. Therefore, this presumption of confidentiality means that there will be no publication of such proceedings as is the case in most other countries, such as the US. Public legal debates and opinions that would have been spurred by such cases are therefore absent. 

Although arbitration is popular, there still remains enough cases for which precedent can still be made. However, most researchers and lawyers agree that arbitration has reduced the number of cases making it to the courts. In turn, this tends to reduce the litigation and case law that would arise from such litigations reinforcing the Lord Chief Justice's sentiments. However, some believe that disclosing arbitration hearings or reducing the confidentiality of proceedings will allow judges to discuss those issues and make new case laws. 14 Santens and Zamour propose judges and lawyers to employ the methods used by arbitrators such as referencing treatises and scholarly works, reasoning from abstract principles, relying on industry practice, and comparative approach. Westgarth also says that respected arbitrators may offer principles and judgments which may be influential for judges. 

Bibliography 

Table of Cases 

UK Cases 

Emmott v Michael Wilson and Partners, [2008] EWCA Civ 184 

Fiona Trust & Holding Corporation v Privalov, [2007] UKHL 40 

Pioneer Shipping Ltd. V. B.T.P. Tioxide Ltd , [1981] 3 WLR 292, [1982] AC 724 

UMS Holding Ltd and others v Great Station Properties SA , [2017] EWHC 2473 

Foreign Cases 

NetSys Technology Group AB v. Open Text Corp, Case 367, O.J. No. 3134, 1 B.L.R. (3d) 307 

Table of Statutes 

UK Statutes 

Arbitration Act 1996, chapter 23 

Foreign Statutes 

Federal IAA of Australia 

US Federal Arbitration Act, 1925 

International Statutes 

UNCITRAL Model Law on International Commercial Arbitration, 2006 

ICC Arbitration Rules 

Secondary Sources 

Journal Articles 

Nehf J P, ‘The Impact of Mandatory Arbitration on the Common Law Regulation of Standard Terms in Consumer Contracts’ November 2018 The George Washington Law Review . Vol 85 no. 6 . < https://www.gwlr.org/wp-content/uploads/2018/03/85-Geo.-Wash.-L.-Rev.-1692.pdf > accessed 14 Oct. 2020. 

Pislevik S., ‘Precedent and development of law: Is it time for greater transparency in international commercial arbitration?’ 5 April 2018 Arbitration International, Vol 34, 2, 241-260< https://academic.oup.com/arbitration/article-abstract/34/2/241/4962121 > accessed 14 Oct. 2020. 

Santens A & Zamour R, ‘Dreaded Dearth of Precedent in the Wake of International Arbitration - Could the Cause also Bring the Cure?’ Arbitration Law Review , 7 (10). < https://elibrary.law.psu.edu/cgi/viewcontent.cgi?article=1032&context=arbitrationlawreview > accessed 15 Oct. 2020. 

Research Paper 

Stone K.V.W & Colvin A.J.S., ‘The arbitration epidemic: Mandatory arbitration deprives workers and consumers of their rights’ 2015 Economic Policy Institute, paper no. 414< https://www.epi.org/publication/the-arbitration-epidemic/ > accessed 15 Oct. 2020. 

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