Introduction
The expansion of globalization and cross-border trade and investment has led to complex interactions between businesses, financial institutions, investors, and governments. At times, relationships may break down, and parties have to consider the best means of resolving disputes, which in most cases is arbitration. International arbitration is common if it implicates international commercial interests and at the time of the conclusion of the agreement, their origin is in different states. This paper discusses the two primary approaches to international commercial arbitration, seat theory and delocalization theory, in the context of the New York Convention 1958 and other relevant provisions guiding contemporary arbitration procedures.
Seat Theory
The seat theory is based on the concept that an arbitration is overseen by the legislation of the location where it is held, known as the ‘seat’ or forum of the arbitration, which is the underlying legal focus point of the dispute. This is the established practice of international commercial arbitration, influencing major international conventions such as the 1923 Geneva Protocol and the New York Convention 1958. As stated in the New York Convention 1958, an award can be challenged “The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place”. The seat of arbitration is undoubtedly critical as it establishes the governing law which is crucial for the protection of an arbitral award and its enforceability. The seat theory ultimately equates the lex arbitri to local law, and often there is no room of choice of law for parties or the tribunal.
The economic and legal importance of the seat is stemmed from the point of interaction between the jurisdiction of the seat country and the arbitration. Commonly, arbitration procedures are decided beforehand in agreements, and by establishing a tribunal in a specific region with an existing private jurisdiction, the parties agree that the law and authority to govern lex arbitri are allocated to the local sovereign. Meanwhile, states having the close connection to arbitration, provide the legal framework and body for proper proceedings and have the exclusive authority of determining legality of the acts within the national borders. While parties may select a seat because their laws for arbitration are attractive, once it is chosen, the country’s lex arbitri must be obeyed fully.
The seat theory, revolving around localization has various benefits. It is arguably the most efficient and fair resolution of a dispute since the seat of the arbitration would allow for competent and effective jurisdiction. The law of the seat of arbitration would be the most connected with the arbitration process and would avoid delays if a foreign authority was unfamiliar with the applicable law. The seat theory also reduces risk of failure of arbitration and improves enforcement by essentially granting a nationality to it. Under the New York Convention, the recognition and enforcement of the awards are referred to the lex loci arbitri. This prevents issues where a foreign seat, that is a non-signatory of international conventions, from deeming the award not valid and blocking its enforcement as well as allowing to set aside the award before proceedings under the nationality of the award. Finally, the seat approach offers significant cost-saving measures as there are aspects to consider such as accommodations, logistics, and usage of facilities which is more consolidative and effective to hold locally rather than from foreign territory.
The seat theory also maintains certain disadvantages. The primary one is the firm attachment of the arbitration to the lex loci arbitri of the seat, giving virtually no ability to for parties to compromise on a neutral seat. It reduces party autonomy, an element which is critical to international arbitration, and the freedom of choice may be a deciding factor for some parties to opt for arbitration rather than litigation. Due to the strict seat approach, there is not only no possibility of selecting a neutral seat but leaves for no considerations of other aspects such as validity, enforcement, cost-efficiency, arbitrator eligibility, and others that parties may find important.
Delocalization Theory
The delocalization theory has emerged as a response to the complexity of global conditions and maturity of international law, forming a transnational legal order that does not rely on states for arbitration. Under the delocalization theory, involved parties have full autonomy to submit arbitration dispute international law without the lex loci arbitri influence of domestic law. This approach is based on delocalization, and under the premise that laws governing arbitration would be universal around the world known as Model Law, creating a level playing field. The arbitration tribunal would adhere to international laws without consideration of local provisions that govern arbitration under the seat theory.
Delocalization theory is based strongly in the principle of autonomy of the arbitration parties, specifically their agreement to arbitrate proceedings are based one two primary arguments. First, the assumption that international arbitration is guided by its own rules adopted by the parties or developed by arbitration tribunal. Oftentimes, international arbitration is already self-regulating, following procedures formulated as part of arbitral institution or created ad hoc, with the tribunal filling any gaps. Second, the assumption that control should stem from law of the location of the enforcement of the award. It would legally make the place of arbitration irrelevant, moving away from the connection between place of arbitration and law of the location as currently practiced.
Outside the level playing field argument and autonomy of parties, there are also other benefits to the delocalization theory. While the seat theory approach supposedly allows for parties to exercise conscious choice by selecting place of arbitration, the local law always has the risk of not being corresponding to expectations. Most lex loci arbitri are not structured to adhere to international commercial arbitration rules, so it creates additional efforts and inefficiency to adhere to local regulations as well. Furthermore, most arbitration agreements already have clauses which cover nullities in the process and force of law in regard to the order of the tribunal (such as freezing assets). Local courts are rarely involved, and even so, decisions or enforcement of award does not mean that a foreign court is entitled to enforce the award upheld by the arbitration location court. As a result, it speaks for the need of a universal arbitration law and process that is not reliant on national regulations or enforcement mechanisms.
There are, however, criticisms to the delocalization theory. It can be argued that some aspects of arbitration proceedings may require court intervention, such as appointment of arbitrators which are directly associated with recourse against an award. In such cases, when foreign law is selected, it will create contradictions and errors. Furthermore, there are practical necessities of using local law, despite its potential nuances. For example, elements of arbitration such as collection of evidence or enforcement of awards does require local court involvement. The belief that a universal or any foreign procedural law would be able to regulate every dispute is unrealistic.
Different Approaches Taken in Contract States
As stated earlier, according to international conventions and the reality of practice, the majority of international practice occurs using the seat theory approach where national law takes precedence in arbitration. The delocalization of arbitrations occurs rarely potentially in international organizations such as the ICSID that are governed by international law. The delocalization theory is only possible if the national law overseeing arbitrations, lex loci arbitri, allows for it and embraces international law. This highlights the different approaches that different signatory states to the New York Convention 1958 have taken to their lex arbitri. While the practical reality of the seat theory applies, states have different stances on the extent of localization of the lex arbitri. However, 157 countries have contracted in the NYC 1958, meaning that an arbitration award obtained in one country, would be capable of enforcement in the courts of all 156 other countries.
The clearest laws on arbitration which link the seat of arbitration to lex arbitri are England and Switzerland. The English Arbitration Act of 1966 suggests, “’the seat of the arbitration’ means the juridical seat of the arbitration designated,” with some provisions applying if the seat of the arbitration is geographically in the UK. Meanwhile, the Swiss law suggests that the arbitration of provisions apply if the seat of arbitration is in Switzerland and at least one of the parties is does not have residence in the country. However according to Swiss Federal Statute of Private International Law, Section. 178(2), the arbitration agreement must conform to Swiss law.
Other countries choose a more delocalized approach. In France, a landmark court case Gotaverken Arendal AB v Libyan General National Maritime Transport Co, found that “The place of the arbitral proceedings, chosen only in order to assure their neutrality, is not significant” and that the seat of arbitration chosen by the parties does indicate intent to subjugation under French law. Belgium similarly had a delocalized approach, where parties could not challenge arbitrary award in Belgian courts unless one of the parties resided in the country, but this led to a significant decrease in international arbitration locally until the law was changed.
In the United States, the Federal Arbitration Act governs international commercial arbitration, where the second chapter implements the NYC 1958. While the FAA governs the scope of arbitration agreements, it requires courts to enforce agreements based on their terms, and U.S. courts honor the parties’ contractual choice of law, regardless of if it is of the U.S. state or another country. While parties may seek injunction from local U.S. courts, if the arbitration is ongoing under the rules of an arbitration institution such as the ICDR, these must be consulted firsthand. Arbitration rewards are not limited, and challenges are rarely successful in the U.S. It can be argued that the U.S. has a hybrid system, utilizing elements from both seat and delocalization theory.
Consideration of Court Intervention of Supervision Before Enforcement
The current status quo for international commercial arbitration is that courts do not intervene in arbitration proceedings unless a supervision is necessary and there are extraordinary circumstances for it. According to the UNCITRAL Model Law, “In matters governed by this Law, no court shall intervene except where so provided by this Law.” Similarly, in the England Arbitration Act 1996, it is stated, “in matters governed by this Part the court should not intervene except as provided by this Part.” In both cases, court functions are similar in that it can be needed for appointing or removing arbitral tribunal and its members, interim remedies, securing attendance of reluctant witnesses, evidence collection, and others. In practice, supervisory courts are typically only involved in the final stage of arbitration, which is enforcement of the award. The involvement of state courts in the arbitration proceedings has always been seen as supportive rather than controlling.
Therefore, the use of local courts and practical realities support the seat theory over that of delocalization, with the fear that without the grounded national lex arbitri, in rare cases where court supervision is required, it would not be available. However, theorists of the delocalization approach argue that this is not the case. Parties choosing this type of arbitration incorporate into statues and contracts of the arbitration the relevant statutory provisions that the national law provides, only in the international context. As such, the court then has limited grounds to intervene in the resolution dispute, to the extent of only enforcing minimum standards of legal protection while respecting autonomy of both sides. Meanwhile, the most common provision of national arbitration regulations on the application of substantive law is rendering and enforcing of the reward decided by the arbitral tribunal. In the delocalized approach, the failure of the tribunal to render an award based on the delocalized law would be sanctioned as a significant irregularity.
Bibliography
Primary Sources
International Agreements
- Model Law on International Commercial Arbitration 1985 (United Nations Commission on International Trade Law [UNCITRAL]) UN Doc A/40/17, Annex I.
- New York Convention 1958, 330 UNTS 38; 21 UST 2517; 7 ILM 1046 (1968).
- National Legislation.
- England Arbitration Act 1996, c.23 s 101.
Secondary Sources
Books
Gary Born, International Commercial Arbitration (2nd Ed, Kluwer Law International 2014).
Nigel Blackaby and others, Law and Practice of International Commercial Arbitration (6th edn, Oxford University Press 2015).
Journal Articles
Alastair Henderson, ‘Lex Arbitri, Procedural Law And The Seat Of Arbitration : Unravelling The Laws Of The Arbitration Process.’ (2013) 26 Singapore Academy of Law Journal. Web.
Dejan Janićijević, ‘Delocalization In International Commercial Arbitration’ (2005) 3(1) Law and Politics. Web.
Gary Born, ‘The Principle of Judicial Non-Interference in International Arbitral Proceedings’ (2011) 30(4) University of Pennsylvania Journal of International Law. Web.
Roy Goode, ‘The Role of the Lex Loci Arbitri in International Commercial Arbitration’ (2001) 17(1) Arbitration International. Web.
Reports
Latham & Watkins, ‘Guide to International Arbitration’ (2017). Web.
Temitayo Bello, ‘Cacophony of Delocalization; Emerging Trend in the International Commercial Arbitration; (2019) Babcock University. Web.
Chen W-J, “Determining “Appropriate” Procedural Rules of International Commercial Arbitration and Its Relationship with the Law Governing Arbitral Procedure: In the Perspective of Enforcement Under The New York Convention” [2009] Contemp. Asia Arbitration.
Websites
Global Legal Insights, ‘International Arbitration USA’ (n.d.) Web.