How Does Arbitration Work

WHAT IS ARBITRATION?
In an arbitration, the parties agree to have their dispute decided by arbitrators they choose themselves (one or more arbitrators) instead of by a court.  The parties can agree to arbitrate before any dispute arises by including an “arbitration clause” in their contract or after a dispute arises between them in a so-called “submission agreement.”

The arbitration clause sets forth when, how, where, and under what rules the parties will “arbitrate” their dispute.  It can also determine a number of other important issues, such as how many arbitrators there will be. As a result, it is important to pay close attention to the arbitration clause.  Unfortunately, the arbitration clause is often neglected because at the time of the contract nobody wants to think about disputes or simply because people are unfamiliar with how to draft a solid arbitration clause.  Often, a standard arbitration clause is inserted, which is unwise because if things go wrong it will matter a great deal how the dispute will be resolved.  Moreover, a properly drafted arbitration clause can often prevent potential disputes from growing into real ones by including “preventative measures,” such as a cooling-off period or other dispute prevention methods.  The same way you may ask tax counsel for an opinion or input when you negotiate a contract even if you are already being assisted by your regular in-house or outside counsel, it often makes sense to ask specialized advice when drafting an arbitration clause.

WHAT KIND OF ARBITRATION?
There are two different kinds of arbitration:  “institutional” and “ad hoc” arbitrations.  The difference between the two types are whether the arbitration is “administered” by an arbitration organization (the institution) or not.  If not, the parties themselves take care of all administrative duties and it is called an “ad hoc” arbitration.

In an “institutional” arbitration, an arbitration organization such as the LCIA, ICC or ICDR takes care of the administration of the arbitration, such as receiving the documents and filings, distributing them to the arbitrator(s), maintaining files and records, providing lists of potential arbitrators if requested by the parties, selecting the arbitrator if the parties cannot agree, and a score of other useful administrative duties.  In a “non-administered” arbitration, called “ad hoc,” the parties are responsible for the administration of the arbitration.  Almost all arbitrations are “administered” because assuming such cumbersome and time-consuming duties detracts from the efficiencies gained in choosing arbitration, especially since parties are already preoccupied and focused on far more important matters.

WHAT RULES APPLY TO ARBITRATION?
This question often leads to confusion because the rules that govern the “arbitration process” – in other words, how the actual arbitration works – are not the same as the law that governs the contract or the laws and rules that may apply to various other aspects of the arbitration, such as the enforcement of the arbitration award.  When it comes to the rules that determine how the arbitration itself will work, the parties are free to agree on any set of rules.  In practice, this means that the parties choose the rules formulated by one of the well-known arbitration organizations (such as the LCIA, ICC, or ICDR) or the rules formulated by the United Nations (such as the UNCITRAL Arbitration Rules).

Far too often, parties choose a set of arbitration rules based on the general reputation of the organization that formulated them, without paying close attention to whether the specific rules satisfy their special needs and requirements in resolving the dispute.  To do so is a mistake, as virtually all organizations’ rules allow the parties to modify the rules as they wish. Moreover, sometimes a knowledgeable discussion and review of the available rules, in light of the particular facts of a specific case or situation, can be of great advantage to a party.  The rules determine how the arbitration proceeding will be conducted, and there may be aspects that may be particularly helpful or undesirable. While depositions are virtually unheard of in arbitrations, some rules allow for them.  Similarly, some rules allow the parties to come up with “terms of reference” determining the scope of the dispute, while others permit limited review of the award after it is rendered – all aspects that may or may not be desirable depending on a party’s situation and views.  To ensure that proceedings do not go against you, it is best to arbitrate your dispute under rules that suit you by planning ahead and obtaining specialized advice at the outset, in the same manner that one would review a transaction with tax counsel to structure the deal as best as possible to avoid future liabilities.  There are many good arbitration rules (see the tab “Arbitration Rules”), but determining which one to pick depends on many factors

HOW DO I FIND AN ARBITRATOR?
Finding the “right” arbitrator for your case is as important as choosing a jury or, if you were able to, choosing a judge to decide your case. While many arbitration institutions will provide lists of potential arbitrators if asked, sophisticated clients rely on experienced arbitration counsel who are familiar with the leading arbitrators and can sit down with the client to review who is best suited to resolve their dispute.  Each case, each situation, and indeed each client, may be better served by some arbitrators than others depending on their expertise, experience, legal background, industry knowledge, and a score of other relevant factors.
 
IS THERE GOING TO BE A TRIAL?
Yes, there is but it will be called a “hearing” and will differ in many respects from what happens in court. Then again, that is not surprising since the parties are likely from different countries and trials differ from country to country.  Arbitration hearings incorporate the best aspects of the various legal systems to make the hearing most efficient.

Unlike in court where your case may be just one of many that is being heard by the judge, the arbitrators are focused on just your case. As a result, delays are far less likely and the risk of it being called off and postponed at the last minute for reasons unrelated to the case are virtually non-existent.  Moreover, the parties themselves may agree where the hearing will be held and, to a large extent, how long it will last.  The atmosphere is often far less formal than in court.  And while courts are responsible for seeing that numerous cases run on time and are handled appropriately, which means that often an individual party’s requirements will have to make room for the greater good, arbitration hearings are tailored as much as possible to accommodate the parties’s needs.  The parties are usually represented by experienced arbitration lawyers, just as they would be in court by a trial lawyer, who are familiar with not only the arbitration rules but also the customs of each specialized arbitration.

WHAT RULES OF EVIDENCE APPLY?
The short answer is none, unless the parties agree otherwise to include evidentiary rules.  Generally speaking, arbitration organizations’ rules do not include rules of evidence.  Instead, parties are free to choose their own rules of evidence, such as the new “IBA Rules on the Taking of Evidence in International Arbitration.”

IS THERE AN APPEAL?
There is no “appeal” in the traditional sense of the word. Arbitration awards can be set aside – “vacated” – only on limited statutory grounds in legal proceedings brought in court.  However, some arbitration rules allow for the award to be “corrected” for specific reasons (such as calculation errors), and there are rare instances where the award can be changed through a process called “revision.”  But as a general rule, arbitration awards are final.

IN WHAT COUNTRIES CAN I ENFORCE THE AWARD?
Unlike most court judgments that are only enforceable in the country where they were given or a limited number of countries, most arbitration awards are enforceable in virtually any country in the world.  However, enforcement entails use of the courts and various other technical aspects, for which clients should consult an experienced arbitration lawyer.​​​​