Is an arbitration agreement binding?
Dispute resolution through the courts suits some people better than others.
In arbitration, a form of alternative dispute resolution, a neutral third party is responsible for resolving the dispute. There are many situations where this concept would be indispensable, the comment sections of certain social media posts, or Twitter threads, spring to mind.
However, in commercial disputes, it is a highly desirable way to resolve problems.
Arbitration proceedings are held in private and settled out of court. The result is a legally binding decision, referred to as an award, made by an independent adjudicator (the arbitrator), appointed by agreement of the parties.
What is arbitration?
Arbitration is one of the three basic forms of resolving disputes. The other two options for resolving a problem in commercial disputes are mediation and litigation.
Parties agree to settle a problem out of court through arbitration, as the process is less costly and much more private than litigation.
The decision (or award) is legally binding, unlike mediation where no binding decision is made by an adjudicator.
What is an arbitration agreement?
An arbitration agreement is where parties agree to settle all (or certain) disputes out of court, through the arbitration process.
It is possible to agree on almost any aspect of the arbitration process. An arbitration agreement is used to define how an arbitration will be carried out and what the terms are.
Sometimes it is agreed as part of a larger contract, or as a separate agreement. An agreement to arbitrate is usually reached before signing, by both (or all) parties involved.
In addition to the parties agreeing to settle out of court, an arbitration agreement also provides answers to some or all of the following questions:
- Who will be the arbitrators?
- How will the arbitrators be selected?
- Will lawyers be present?
- What standards of evidence will be used?
- Where will the arbitration take place?
- Under the laws of which State will the arbitration be conducted? (this can be different from where the arbitration itself takes place, particularly in international cases)
- Will institutional or ad hoc rules apply?
The arbitration agreement can have a huge effect on the length and cost of the arbitration, so it is best to seek expert legal advice in the early stages.
Otherwise, it may begin to appear that costly and public litigation was, in fact, the better option...
Is an arbitration agreement binding?
An arbitration agreement is generally binding on the parties to the extent that they cannot proceed through the courts contrary to the terms of the agreement and/or without the consent of the other parties to that agreement. However, only the final decision made by an arbitrator as part of the arbitration proceedings is legally binding as to the rights in dispute between the parties. This is called the arbitration award.
Side note: It may feel less like an award if you are the losing party!
Arbitration clauses vs arbitration agreements
An arbitration clause does not always constitute a comprehensive arbitration agreement. In other words, parties are not restricted to the contents of clauses in contracts when agreeing to arbitrate.
For a clause to be considered an agreement to arbitrate, it usually needs to satisfy the following conditions:
- Both parties must agree that any (or particular) disputes arising through their defined legal relationship must be submitted to arbitration (whether under a contract or not);
- There is either an arbitration clause, or a separate agreement/exchange of correspondence in writing; and
- It must be in writing in England, if the provisions of Part I of the Arbitration Act 1996 are to apply, such as a right to require a stay of legal proceedings and the right to summary enforcement of the award.
If the arbitration clause does not define the forum and process for conducting the arbitration, it may invalidate it as the agreement to arbitrate.
Signing away rights to a judicial adjudication must be subject to both parties knowing and understanding what the alternative is.
Expert legal advice must be sought to define the most appropriate arbitration terms from the start.
Arbitration process
After a dispute arises and the arbitration process begins, that process can be broken down into six main steps:
- An arbitrator is appointed. The arbitrator is a neutral, independent adjudicator, often an established barrister or other appointed professional;
- The arbitrator presents the ground rules of the arbitration, previously agreed as part of the arbitration agreement;
- Each party (or their lawyer) makes an opening statement;
- Each party presents evidence, including witnesses and expert witnesses, if necessary;
- Each party makes a closing statement;
- The arbitrator makes an award (a legally binding decision).
International arbitration
The process of settling disputes between companies or individuals located in different countries is referred to as international arbitration.
Key benefits of international arbitration include:
- Arbitration is highly confidential. This is particularly key for high-profile parties who do not want to risk their exposure to public scrutiny that may accompany litigation through the courts
- Arbitrators can be chosen from both (or multiple) nationalities by the parties who enter international arbitration, which adds further neutrality to the award
- The choice to submit disputes to arbitration requires consent from both parties
- Over 160 countries have signed a treaty agreeing to the reciprocal enforcement of arbitration awards
- Arbitrators can be chosen from among those who have a specialist area of knowledge, indispensable in technical cases where expert understanding is required
- There are very limited ways in which an award can be challenged
Challenging/appealing an award
Disgruntled losing parties cannot challenge or appeal an award as of right.
Leave to appeal or a challenge may be sought, if the arbitrator or tribunal has not conducted itself properly, serious irregularities have taken place, or a question of law arises.
In English courts, the three ways in which an arbitration can be challenged or appealed are detailed in Sections 67, 68 and 69 (s. 67-69) of the Arbitration Act 1996 (“the Act”):
- S.67: Challenge because the arbitrator did not have substantive jurisdiction (this can also include disputes concerning arbitration agreements)
- S.68: Challenge on the grounds of serious irregularity affecting the arbitration process itself or the award
- S.69: Appeal on a point of law
If the appeal is successful, the appellant can ask for the award to be set aside, or for the case to go back to the arbitrator for review.
In commercial disputes, one of the advantages of arbitration is the finality of the award. As such, s.69 also allows the parties to agree at an earlier stage to exclude such an appeal.
Carlsons Solicitors’ in-house barrister, Lawrence Jacobson, has over 30 years experience at the Bar and as an In-House Barrister, and now represents Carlsons Solicitors’ clients both domestically and internationally. Get in touch to find out more.