Why litigate when you can arbitrate?

Arbitration
and beyond…
Principle of Party Autonomy in
Commercial Arbitration

Magno, Emely R.
MLQU School of Law

Submitted to:
Judge Carlo Villarama
Introduction

Arbitration is a way to resolve disputes outside the judiciary courts. It is a form

of alternative dispute resolution wherein the dispute will be decided by one or more

persons known as the arbitrators which render the 'arbitration award'. An arbitration

decision or award is legally binding on both sides and enforceable in the courts, unless

all parties stipulate that the arbitration process and decision are non-binding. In the

international commercial transactions perspective, arbitration is frequently used the

resolution of business disputes. 1

As a general principle, the authority to adjudicate is a matter entrusted to state

courts by constitutions. Yet, in private law, parties to a dispute may elect to resolve their

dispute by arbitration, provided that the subject matter of the dispute is considered an

arbitrable dispute by the related applicable law. Hence, arbitration is deemed to be an

exception to state courts’ constitutional power to adjudicate disputes. Since private law is

based on the supremacy of the will of parties the dispute between parties may resolved

by arbitrators appointed by them if and when parties carry out an arbitration agreement.

A person who is appointed by parties to resolve a dispute is called an “arbitrator”.2

History of Arbitration

When and where did arbitration originated? Who is the first arbitrator? Why is there

a need for arbitration? How arbitration worked in the earlier days?

1
https://en.wikipedia.org/wiki/Arbitration
2
https://dergipark.org.tr/tr/download/article-file/7079

1
 According to Emerson, arbitration can be traced back in King Solomon’s time. In

fact, one of the earliest arbitrators was Solomon. The procedure used by Solomon was

analogous to that used by arbitrators nowadays. An account of one of Solomon's

arbitrations in the Old Testament is found in I Kings, chapter 3, verses 16-28, and reads:3

“16. Then came two women, that were harlots, unto the King, and stood before

him.

17. And the one woman said, 0 my lord, I and this woman dwell in one house; and

I was delivered of a child with her in the house.

18. And it came to pass the third day after that I was delivered, that this woman

was delivered also; and we were together; there was no stranger with us in the house,

save we two in the house.

19. And this woman's child died in the night; because she overlaid it.

20. And she arose at midnight, and took my son from beside me, while thine

handmaid slept, and laid it in her bosom, and laid her dead child in my bosom.

21. And when I arose in the morning to give my child suck, behold, it was dead;

but when I considered it in the morning, behold, it was not my son, which I did bear.

22. And the other woman said, Nay, but the living is my son, and the dead is thy

son. And this said, No; but the dead is thy son, and the living is my son. Thus they spake

before the king.

3
https://core.ac.uk/download/pdf/216936738.pdf

2
 23. Then said the king, The one saith, This is my son that liveth, and thy son is the

dead; and the other saith, Nay; but thy son is the dead, and my son is the living.

24. And the king said, Bring me a sword. And they brought a sword before the king.

25. And the king said, Divide the living child in two, and give half to the one, and

half to the other.

26. Then spake the woman whose the living child was unto the king, for her bowels

yearned upon her son, and she said, 0 my lord, give her the living child, and in no wise

slay it. But the other said, Let it be neither mine nor thine, but divide it.

27. Then the king answered and said, Give her the living child, and in no wise slay

it; she is the mother thereof.

28. And all Israel heard of the judgment which the king had judged; and they feared

the king; for they saw that the wisdom of God was in him, to do judgment.”4

The course of arbitration is found in the most primitive as well as in modern society.

Commercial arbitration was known to the desert caravans in Marco Polo's time and was

a common practice among Phoenician and Greek traders. Civil arbitration likewise

boomed in the Homeric Period. During this time, chiefs and elders held more or less

regular sittings, in places of assembly, to settle the disputes of all persons who chose to

appear before them. In the middle of the sixth century B.C., Peisistratus, the Athenian

tyrant, furthered his policy of keeping people out of the city by appointing justices to go

4
Ibid.

3
on circuit throughout village communities. If they failed to effect a friendly settlement, they

were authorized to make binding arbitration decisions.5

In the ancient world, international arbitration was also established. Numerous

political disputes seemed to have been settled in such a manner. In a dispute between

Athens and Megara for the possession of the island of Salamis, about 600 B.C., the matter

was referred to five Spartan judges who, by arbitration, allotted the island to Athens. A

disagreement between Corinth and Corcyra for the possession of Leucas (480 B.C.) was

settled by Themistocles, as arbitrator. A boundary line in dispute between the Genoese

and Viturians was settled by arbitration (117 B.C.), this decision having been recorded

upon a bronze tablet unearthed near Genoa. There are also instances in which a third

strong power compelled other powers to resort to arbitration. Sometimes the arbitrator

was an individual like Themistocles, or an institution such as the Areopagus at Athens, or

a state such as Athens.6

Commercial controversy was also arbitrated in ancient times as regards matters

such as master and servant relations, terms of employment, working conditions and

wages. One of the first disputes submitted to the earliest known American arbitration

tribunal, organized in 1786 by the Chamber of Commerce of New York, involved the

wages of seamen.7

As elaborated by Wolaver, Aristotle urged the benefits of conciliation. Further, he

cited Heraldus' Animadversiones which described a court of reconcilement that existed

5
Ibid.
6
Ibid.
7
Ibid.

4
among the Greeks. It was ordinary among the Romans "to put an end to litigation" by

means of arbitration. He also quoted Bell - "this amicable private tribunal is of an earlier

date than the public courts." Also, he claimed that in the earliest forms of society, disputes

were tried by the heads of families whereby patriarchal tribunal now given to the office of

arbitrator. 8

Although arbitration perhaps antedates all the former legal systems, it has not

developed any code of substantive principles with very few exceptions. A matter of free

decision each case being examined in the light of rational suitability and decided in

accordance with the ethical or economic norms of some particular group. One case is not

authority for another since the decisions are in terms of persons and practices and not in

accord with prescribed rules and doctrines.9

In his paper entitled “The Historical Background of Commercial Arbitration” (1934),

Wolaver also discussed the two heads origins of commercial arbitration, namely: (1) The

methods used by the gilds and the merchants in the dispatch of their affairs, and (2) The

examination of the cases in the law of contracts that contained arbitration agreements

and the reaction of courts to them.10

The gild was a part of the borough government "whose duty was to maintain and

regulate the trade monopoly. This was the raison d'etre of the gild merchant of the twelfth

https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=8693&context=p
enn_law_review

9
Ibid.
10
Ibid.

5
and thirteenth centuries." A man was required to pay an initiation fee, furnish sureties who

would be responsible for the carrying out of his obligations, and take an oath of fealty to

the gild to maintain its laws and obey the wardens in order to become a member. The

gilds also took part in regulating and settling difficulties that occurred among its members.

Carter regarded this as an arbitration. 11

Prevalent also during the early times was that of the medieval Courts Merchant for

informal decision of disputes. The ancient merchants were itinerants who peddled their

goods in all the continental markets and fairs. Traveling together for protection, they

carried their wares from one fair to another, bartering and selling. The disputes of these

traders were settled by "fair law" which was in accord with the universal customs of

merchants, and had no reference to the courts of the domain.12 Mr. Cohen, in his book

on commercial arbitration, is inclined to view these courts as business men's tribunals,

and Mr. Birdseye regards the merchant courts as boards of arbitrators. 13

Strengths and weaknesses of Party Autonomy in Commercial Arbitration

Arbitration is prevalent method used for resolving international commercial

disputes today. The parties to an international commercial contract do not want to resolve

their disputes through litigation, since the court which is national for a party may be foreign

for another party. Further, the parties do not want to deal with procedural formalities.14

11
Ibid.
12
Ibid.
13
Ibid.
14
https://www.ijser.org/researchpaper/Parties-autonomy-in-international-commercial-arbitration.pdf

6
 There are several strengths of arbitration over judicial proceedings, to wit;

❖ In contrast to litigation, where one cannot "choose the judge", arbitration allows the

parties to choose their own tribunal. This is especially useful when the subject

matter of the dispute is highly technical: arbitrators with an appropriate degree of

expertise (for example, quantity surveying expertise, in the case of a construction

dispute, or expertise in commercial property law, in the case of a real estate

dispute) can be chosen.15

❖ Arbitration is often faster than litigation in court. 16

❖ Arbitral proceedings and an arbitral award are generally non-public and can be

made confidential. 17

❖ In arbitral proceedings the language of arbitration may be chosen, whereas in

judicial proceedings the official language of the country of the competent court will

be automatically applied.18

❖ Because of the provisions of the New York Convention 1958, arbitration awards

are generally easier to enforce in other nations than court verdicts.19

❖ In most legal systems there are very limited avenues for appeal of an arbitral

award, which is sometimes an advantage because it limits the duration of the

dispute and any associated liability.20

15
https://en.wikipedia.org/wiki/Arbitration#Advantages_and_disadvantages
16
Ibid.
17
Ibid.
18
Ibid.
19
Ibid.
20
Ibid.

7
Upon the other hand, some of its weaknesses include:

❖ Arbitration agreements are sometimes contained in ancillary agreements, or in

small print in other agreements, and consumers and employees often do not know

in advance that they have agreed to mandatory binding pre-dispute arbitration by

purchasing a product or taking a job.21

❖ If the arbitration is mandatory and binding, the parties waive their rights to access

the courts and to have a judge or jury decide the case.22

❖ There is sometimes a disconnect between the presumption of confidentiality and

the realities of disclosure and publicity imposed by the courts, arbitrators, and even

the parties themselves.23

❖ If the arbitrator or the arbitration forum depends on the corporation for repeat

business, there may be an inherent incentive to rule against the consumer or

employee.24

❖ There are very limited avenues for appeal, which means that an erroneous

decision cannot be easily overturned.25

21
Ibid.
22
Ibid.
23
Ibid.
24
Ibid.
25
Ibid.

8
 ❖ Although usually thought to be speedier, when there are multiple arbitrators on the

panel, juggling their schedules for hearing dates in long cases can lead to delays.26

❖ In some legal systems, arbitration awards have fewer enforcement options than

judgments; although in the United States arbitration awards are enforced in the

same manner as court judgments and have the same effect.27

❖ Arbitrators are generally unable to enforce interlocutory measures against a party,

making it easier for a party to take steps to avoid enforcement of member or a

small group of members in arbitration due to increasing legal fees, without

explaining to the members the adverse consequences of an unfavorable ruling.28

❖ Discovery may be more limited in arbitration or entirely nonexistent.29

❖ The potential to generate billings by attorneys may be less than pursuing the

dispute through trial.30

26
Ibid.
27
Ibid.
28
Ibid.
29
Ibid.
30
Ibid.

9
 ❖ Unlike court judgments, arbitration awards themselves are not directly

enforceable. A party seeking to enforce an arbitration award must resort to judicial

remedies, called an action to "confirm" an award.31

Party Autonomy in Commercial Arbitration

The Principle of Party Autonomy has been recognized throughout the world.

International conventions, UNCITRAL Model Law, New York Convention, Rules of

International Chamber of Commerce (ICC), English Arbitration Act 1996 established such

principle. The fundamental theory regarding parties’ autonomy is that “the parties should

be free to agree how their disputes are resolved, subject only to such safeguards as are

necessary in the public interest.” The principle of parties’ autonomy started in the

nineteenth century. Parties autonomy is based on choice of law in a contract. The parties

to the arbitration agreement are free not only to choose laws but also to conduct the

arbitration proceedings. 32

As Dursun pointed out, the parties to an arbitration agreement waive the right to

bring an action in court and exclude the jurisdiction of courts by this arbitration agreement.

This agreement is accepted as a primacy resource of arbitration. It is a guideline of the

parties and arbitral tribunal during the whole arbitration process. The arbitration

agreement is the strongest evidence of party autonomy because the parties choose the

law and conduct the arbitration process independently by an arbitration agreement.

31
Ibid.
32
https://www.ijser.org/researchpaper/Parties-autonomy-in-international-commercial-arbitration.pdf

10
However, it should not be overlooked that the principle of party autonomy is not always a

rule in international commercial arbitration. In some circumstances, it may subject to

some restrictions. 33

Arbitration owes its character to the principle of party autonomy which involves

flexibility and confidentiality. Flexibility is one of the strengths of arbitration. The parties to

an international commercial contract do not want to resolve their disputes through

litigation, since the court which is national for a party may be foreign for another party. In

addition to this, the parties do not want to deal with procedural formalities. Consequently,

the parties choose arbitration as a private dispute settlement and thus, they can conduct

all proceedings of arbitration by taking into account their needs and desires such as they

can arrange timetable of hearings, choose anyone as an arbitrator who have relevant

expertise on specific requirements of the dispute. 34

Another strength of arbitration is confidentiality. The subjects of arbitration are

international companies with huge budgets who may have important trade secrets. When

these companies make an international commercial contract, this contract usually

contains an arbitration clause for future disputes. The main reason for this clause is to

protect trade secrets because all proceedings are confidential in arbitration process unlike

proceedings in a court. The parties likewise can add express provision in order to

reinforce this confidentiality. 35

33
https://www.yalova.edu.tr/Files/UserFiles/83/8_Dursun.pdf

34
Ibid.
35
Ibid.

11
 The main difference between litigation and arbitration is that arbitration is a private

dispute settlement based on the will of the parties. In accordance with party autonomy,

the parties are free to choose applicable laws and conduct the arbitration process in

consideration of the requirements of the dispute hence the parties can control all details

of arbitration. Arbitration is rooted in the principle of freedom of contract because the

parties can exclude the jurisdiction of courts and choose arbitration as dispute settlement

method by means of arbitration agreement. Furthermore, the freedom of contract enables

the parties to plan all aspects of arbitration. 36

The principle of party autonomy also allows the parties choose applicable law to

substance and arbitration, to conduct the arbitration process such as appointment of

arbitrator, arrangement of timetable, choice of place and language of arbitration.

Correlatedly, party autonomy ensures that arbitration will proceed in accordance with the

aspirations of the parties. 37

A well-drafted arbitration agreement is the key to obtain the best result from

arbitration. As such, the parties should reflect their aspirations in arbitration agreement

and this agreement should meet some validity requirements, to wit;38

❖ Arbitration agreement shall be in writing. The reason behind this

requirement is self-evident. According to Model Law, arbitration agreement

is regarded as being in writing if the content of agreement is recorded in

any form; for instance, electronic data interchange (EDI), electronic mail,

36
Ibid.
37
Ibid.
38
Ibid.

12
 telegram, telex or telecopy. New York Convention requires that arbitration

agreement must be in writing and signed by the parties. As to being in

writing requirement, exchange of letters or telegrams is acceptable.

However, if the modern communication devices are considered, this

requirement should be interpreted in terms of Model Law. As to signature

requirement, “the UNCITRAL Model Law could be used as a tool

interpretation of the New York Convention”. 39

❖ The dispute must arise out of a legal relationship whether contractual or

not. There must be a contractual relationship between parties as a basis of

arbitration. However, the dispute may sometimes be based on tort liability.

The problem of whether arbitration agreement covers tort liability or not

should be solved by taking into account intention of parties and content of

arbitration agreement. 40

❖ The subject matter of arbitration agreement must be capable of being

settled by arbitration. The rationale behind this requirement is that

arbitration is a private method with public consequence. Some disputes

cannot be resolved by arbitration because of “national legislation or judicial

authority” merely national courts. According to reference of the courts, the

issue of arbitrability is based on public policy. Public policy of a country

depends on social, political and economic situations of the country, thus

39
Ibid.
40
Ibid.

13
 public policy varies from country to country. In general, the disputes about

family law and criminal law are regarded as a matter of public policy; hence

these are not capable of settlement by arbitration. 41

The issue of arbitrability is discussed in the case of intellectual property

disputes. In general, a dispute regarding grant and validity of intellectual

property right is regarded as a matter of public policy; they are outside of

the scope of arbitration. However, a license agreement may be subject

matter of arbitration agreement. In essence, the intellectual property

disputes should be resolved by arbitration, because arbitration is a

confidential and flexible way. Moreover, the parties can choose arbitrators

who have relevant experience. Another issue about arbitrability is antitrust

and competition disputes. 42

❖ The parties to the agreement must have legal capacity to enter into the

agreement. 43

❖ Arbitration agreement must not be null and void, inoperative and incapable

of being performed. 44

❖ The arbitration agreement should contain some basic elements in order to

obtain best result from arbitration. The parties should agree upon number

41
Ibid.
42
Ibid.
43
Ibid.
44
Ibid

14
 of arbitrators and composition of arbitral tribunal, place and language of

arbitration, the applicable law to the substance and arbitration, type of

arbitration such as ad hoc or institutional arbitration. It should not be

overlooked that only a well drafted arbitration agreement can reflect the

aspirations of the parties. 45

❖ The last thing to be mentioned in this part is the doctrine of separability.

Apparently, arbitration agreement is a part of main commercial contract.

However, according to this doctrine, arbitration clause is separate

agreement. Conversely, main commercial contract is the primary contract

and the arbitration clause is just a secondary contract. However the

invalidity of the main contract does not affect the validity of arbitration

clause. The main aim of this doctrine is to provide sustainability of

arbitration of clause. 46

Thus, the doctrine of separability preserves the autonomy of the parties.

This doctrine is accepted by international rules such as UNCITRAL Rules,

UNCITRAL Model Law as well as the English Law. 47

Apart from the Arbitration Agreement, the law governing the arbitration agreement

is one of the crucial points in determination of the extent of the party autonomy. Basically,

when the parties choose a law applicable to arbitration agreement, this law will be applied.

45
Ibid.
46
Ibid.
47
Ibid.

15
Nevertheless, in some circumstances, the law of the place of arbitration (lex arbitri) has

a dominant role because each country wants to govern the conduct of arbitration within

its boundary.48 For instance, when a dispute arise from the issue of arbitrability, form and

validity of the arbitration agreement, the arbitral procedure (i.e. hearings, court

assistance, equal treatment of the parties etc.), in general, lex arbitri has a significant

effect on the parties’ choice of law. Other than these, when there is a dispute about

capacity of the parties, in general, the dispute resolved by “the law of the country where

the party has its residence, domicile or permit”.49

Furthermore, one of the attractive points of the arbitration in consonance with the

principle of party autonomy is that it allows the parties to design arbitration process

however they want. The parties to international arbitration expect by choosing arbitration

as the dispute settlement method that they would not subject to formal and strict

requirements of national courts. Otherwise stated, they want to resolve their disputes

through flexible method and thus, they choose arbitration. 50

The principle of party autonomy similarly enables the parties to choose any place

as the seat of arbitration. Each country wants to control the conduct arbitration within its

territory and thus, in some situations, the law of the place of arbitration, lex arbitri, has

some mandatory rules. Even if the parties have express choice of law, the law governing

the arbitration should be analyzed by taking into account the choice of the parties and lex

arbitri together.51

48
Ibid.
49
Ibid.
50
Ibid.
51
Ibid.

16
 Lex arbitri is the law of the place of arbitration. It is a body of rules external to the

wishes of the parties. Thus, it determines the extent of party autonomy. For illustration,

even if the parties have an express choice of law governing the arbitration, this choice

may subject to mandatory rules of lex arbitri. In other words, the choice of the parties is

applicable as far as lex arbitri permits. For instance, the Model law states that “subject to

the provisions of this Law, the parties are free to agree on the procedure to be followed

by the arbitral tribunal in conducting the proceedings”.52 In English Arbitration Act, there

are also some mandatory and non-mandatory provisions and these rules are applicable

where the seat of arbitration is England and Wales or Northern Ireland.53

In general, the parties do not choose lex arbitri directly. They choose lex arbitri

indirectly by choosing the place of arbitration. Recently, however, the parties choose the

place of arbitration by taking into account the law of this country since lex arbitri has

significant role in every stage of arbitration. For example, arbitration agreement binds only

the parties of this agreement, thus the arbitral tribunal has no power to order and compel

the attendance of third party as a witness. Hence, the arbitral tribunal needs the

assistance of the court of place of arbitration. Even if the parties confer such powers on

the arbitral tribunal, the arbitrators may not exercise this power unless lex arbitri allows.54

The lex arbitri largely deals with general issues of equal treatment, fair dealing,

arbitrability, court intervention, the constitution of the arbitral tribunal. It occasionally

contains some detailed procedural law. Even if the lex arbitri includes some detailed

procedural provisions, it should not be confused with procedural rules. The arbitrators can

52
Ibid.
53
Ibid.
54
Ibid.

17
conduct the arbitration in terms of some detailed procedural rules during the arbitration.

The parties need to know these rules to defend themselves better.55 The parties, for

example, need to know when they must submit their written statements, how they can

submit their evidence, which rules to be applied to evidence of the witness, etc.. It is

apparent then that the lex arbitri should be distinguished from procedural rules for the

latter contain which rules to be followed during the course of arbitration. When the parties

agree on institutional arbitration, the rules of the institution are applied procedural rules.56

Generally, the place of arbitration is one of the fundamental elements of the arbitration,

since once the parties choose the place of arbitration, at the same time they choose the

law of this country indirectly as lex arbitri.57

Another attractive point of the Principle of Party Autonomy is that the parties can

choose any law which meet the specific requirements of the dispute. The parties can

choose any national law, mandatory law, public international law and general principles

of law, concurrent law, combined laws and the tronc commune doctrine, and transnational

law as the applicable law to the substance. The principle of party autonomy is recognized

by Model Law and UNCITRAL Rules. Additionally. English Arbitration Act provides that

the arbitral tribunal shall apply the law chosen by parties as applicable to substance of

the dispute.58

Thus, the parties are free to choose the law applicable to the substance. However,

this freedom is not always a rule. In some circumstances, it may be restricted. In general,

55
Ibid.
56
Ibid.
57
Ibid.
58
Ibid.

18
the autonomy of the parties is subject to some restrictions on the ground of bona fide and

public policy, but these grounds are not clear; hence these should be assessed case by

case and by taking into account the applicable laws.59

Another significant advantage of the arbitration is that the parties can choose the

arbitrators. In litigation, the parties have no chance to select the judges, thus an

international commercial dispute may be resolved as a usual compensation case in a

national court.60

Conclusion and Recommendation

Arbitration is a dispute resolution mechanism over which a legal dispute which is

based on a contractual or non-contractual relationship, is resolved by arbitrators

according to the parties’ agreement. Through arbitration, a dispute which is normally

resolved in a court of law, is resolved by an arbitrator instead.

There are similarities and difference between litigation and arbitration. First, parties

to litigation cannot choose the judge whereas parties to an arbitration can choose the

arbitrator or arbitrators because arbitration procedure gives the parties autonomy.

Second, in litigation, parties do not have the authority to determine the applicable

procedure as contrary to arbitration proceedings, parties may agree on the applicable

procedure. Third, in litigation, the rules of substantive law, which will be applied, are

59
Ibid.
60
Ibid.

19
predetermined while parties to in arbitration, may freely choose the rules of substantive

law.

Most of the advantages of arbitration can be attributed to the Principle of Party

Autonomy. These positive impacts of the freedom of the parties enable dispute settlement

in a speedy, inexpensive disposition of cases in international commerce. However, it is

recommended that policies and laws governing arbitration should be further strengthen

by developing a code of substantive principles, save the UNICITRAL Model Law and the

like, as additional authority of arbitration proceedings in the international commerce.

If conflicting parties can sit down and talk without going to the court to settle their

disputes, why litigate when you can arbitrate?

20