A Brief History of Commercial Arbitration

EARLY HISTORY

Arbitration in its simplest sense is a process that can be used to resolve disputes between parties without going through a formal court system. The most common use of international arbitration today is the resolution of commercial disputes.

Some historians hold that arbitration was used as a means of resolving disputes before the appearance of the court system. These historians point to records of the ancient Egyptians, Greeks and Romans to support this claim. These records indicate that in ancient times, contrary to the practice of today,  the arbitrator was generally a person know and trusted by both parties – the better known the arbitrator the more confidence the parties would have in his or her judgement.

Philip of Macedon, father of Alexander the Great, is recorded to have used arbitration to settle territorial disputes arising from a peace treaty with some of the Greek states in 337 BC.[1]

Lord Mustill,  Lord Justice of Appeal,  commences his article ‘Arbitration – History and Background’  in the Journal of International Arbitration(1989),  “Commercial arbitration must have existed since the dawn of commerce. All trade potentially involves disputes, and successful trade must have a means of dispute resolution other than force.”

One can then say with some conviction that Arbitration in the arena of commercial transactions have ancient origins.

Lord Mustil  also stresses that of the two types of alternative dispute resolution, namely ad hoc and institutional arbitration, the latter is more fully documented. Some of forms of institutional arbitration found in the 1600s listed by Lord Mustil are;

1.   The Stannary Courts in Cornwall, England    –    a pseudo court that functioned in parallel to the state legal system with jurisdiction over matter arising from the extensive tin mining in the region.[2]

2.   Arbitral tribunals of Italy and France    –     These institutions dealt with trade disputes and had their roots in Italy where they were called the officium mercanziale.

 

While these institutions did not possess means of enforcing their decisions when compared with the formal legal systems in force at the time, compliance was achieved though isolating any individual who failed to adhere to an award in his / her trade. Lord Mustil says “A merchant who fell out with his guild was finished. In other contexts, failure to honour a decision could have grave social or business consequences

EVOLUTION OF ARBITRATION IN ENGLAND -1600 Onwards

In England, a country that was late in entering into the mercantile arena, had considerably less of these institutions and combined with difficulties encountered in taking commercial matters in all their complexity to formal courts, private arbitration began to flourish, and again in the words of Lord Mustil  “on a scale which may not have been equalled elsewhere”.

The fundamental weaknesses in private arbitration were;

1.   A the time (17th century) the agreement to arbitration was considered to be a revocable mandate. This allowed a party to frustrate any attempt to reach an agreement is he or she so wished.

2.   There was no system of keeping the parties in an arbitration. If one party decided to set aside arbitration and litigate in a formal court he or she was free to do so.

3.   There was no mechanism to enforce an award made through arbitration.

While institutionalized arbitration gained favour on the European continent[3] private or ad hoc arbitration dominated the resolution of commercial disputes in England especially after the enactment of the Common Law Procedure Act of 1854. Lord Mustil traces the origins of the Common Law Procedure Act to 1698 when the initial attempts were made to legislate towards ameliorating the above challenges.

The essence of the solution provided in the Act of 1854 was to bring in the concept of arbitration ‘pursuant to a rule of court’ where the court employed its judicial power to refer a complex matter to arbitration. This reference being an extension of the ruling of a formal court allowed the court to employ its penal powers to ensure compliance with an award made through arbitration. This new approach to commercial arbitration arrived at an opportune moment for English Commerce for it was in the 19th century that the English trading empire began to dominate much of the known world.

EVOLUTION OF ARBITRATION IN AMERICA

Before the arrival of Europeans on the American continent the Native American Indian tribes are believed to have used arbitral processes to settle disputes arising within tribes as well as those arising with other tribes.

Without doubt the concepts of arbitration from both the European Continent and latterly England (after extensive English colonial settlement the US courts inherited a good part of the English Common Law system)  would have been initially taken across by migrants to the New World after 1492. This would have included both institutionalized and private arbitration.

The first president of the USA, George Washington had included an arbitration clause in his will empowering a panel of three arbitrators to render a final and binding award to resolve any dispute that may arise over the interpretation of the wording.[4]

The onset of the industrial revolution in America naturally led to an upsurge of commercial transactions and with it disputes demanding resolution. As far back as 1829 the Journeymen Cabinet-Makers of Philadelphia had included an arbitration clause in their union constitution[5]. Similarly, a grievance arbitration clause was placed in the constitution of the United Mine Workers of America at its founding convention of 1890[6].

The mass  scale of industrialization and unionization in the USA during the 1930’s and the National Labour Relations Act of 1935 gave even greater impetus to the development of arbitration. Another key motivator towards the development of arbitration in the USA was the Second World War, where the ‘War Labour Board’ during the Roosevelt presidency insisted that both labour and management incorporate grievance-arbitration clauses in collective bargaining agreements as a final and binding step of grievance resolution in order that national military production needs were not hampered during the war years.

As an indication of the popular rooting of arbitrationin the USA, the American Arbitration Association (AAA) has now become one of the largest and popular arbitration organizations in the world representing over 8,000 arbitrators and mediators across the world.

GLOBALIZATION OF COMMERCIAL ARBITRATION 

The International Chamber of Commerce (ICC) was established in 1919 and became the voice of the international business community. The ICC has also been a strong supporter of arbitration as a means of resolving international commercial disputes.

Globalization of international arbitration can be traced to the Geneva Protocol of 1923 and the Geneva Convention on the Execution of Foreign Arbitral Awards of 1927. In the words of Fali S Nariman, a distinguished constitutional jurist and one time Additional Solicitor General of India “These international instruments were, however, largely ineffective.” and “so they went the way of the League of Nations, which had sponsored them[7].

The failure of the 1927 Geneva Convention to enforce foreign arbitration awards added impetus to create a more effective mechanism.

The main developments that fuelled the process were the New York Convention of 1958, the UNCITRAL Arbitration Rules of 1976 and the UNCITRAL Model law of 1985.

The New York Convention

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards provides for international recognition and enforcement of arbitration agreements and awards. The convention in addition to making arbitral awards enforceable also require courts of contracting states to stay, upon request, any action in a national court, that has been brought in contravention of a valid arbitration agreement. Lord Mustill says of the 1958 convention “This Convention has been the most successful international instrument in the field of arbitration, and perhaps could lay claim to be the most effective instance of international legislation in the entire history of commercial law”.

As at December 2012 there are 148 signatories to the convention and a substantial body of international case law has developed in the process of its application. Sri Lanka became a signatory to the convention on 9 April 1962 without reservation. With the growing success of international commercial arbitration a number of dedicated institutions have come in to being across the globe. Some of these are;

  1. The London Court of International Arbitration (established 1892)
  2. The Stockholm Chamber of Commerce (established 1917)
  3. International Chamber of Commerce (established 1919)
  4. American Arbitration Association (established 1926)
  5. China International Economic and trade Arbitration Commission (1956)
  6. Hong Kong International Arbitration Centre (established in 1985)
  7. Singapore International Arbitration Centre (established 1991)

The UNCITRAL Rules

By the 1970’s a demand was felt for a set of defined, neutral arbitration rules suitable for use in ad hoc arbitration. This was done by the United Nations Commission on International Trade Law (UNCITRAL) and came in to operation in 1976. These rules aim to address the different areas of the arbitration process and include procedural rules and a model arbitration clause. These rules were thought out to be deemed acceptable in different economic systems as well as to countries in different stages of development and operating under either common or civil law systems. The UNCITRAL working group II began work on a revision of the initial rules in 2006 and proposed revisions were completed by 2010. The 2010 revision was adopted by the UNCITRAL at its 43rd session and recommended for use by  General Assembly resolution 65/22 (57th plenary meeting, 6 Dec 2010).

The UNCITRAL Model Law

The Model Law on arbitration from UNCITRAL was another significant milestone that emerged in 1985. Redfern and Hunter state “If the New York Convention propelled international arbitration onto the world stage, the Model law made it a star, with appearances in states across the world.”[8]

A number of countries have adopted the model law outright, while many other countries have based their arbitration laws on it. Shortfalls in the original law led to a revision which was adopted as the Revised Model Law by the UN in Dec 2006 – the key changes in the revision include an allowance for the requirement of an arbitration agreement to be in writing to be defined in very broad terms.

In Sri Lanka a new Arbitration Act (No 11 of 1995) was enacted to remodel national arbitration legislation on the UNCITRAL model. While the Act largely follows the Model Law there are departures from it nevertheless.


[1] Bales, Richard C “Compulsory Arbitration : The Grand Experiment in Employment”

[2] A ‘Stannary’ was a tin mine

[3] In the Constitution of 1791, the French revolutionaries proclaimed the constitutional right for citizens to resort to arbitration. The code of civil procedure of 1806 also enshrined the concept of arbitration.

[4] Op Cit  Bales, Richard C

[5] Nellse, The First American Labor Case. 41 Yale L.J 165. 1931 quoted by Robert V. Massey, Jr in his article ‘ History of Arbitration and Grievance Arbitration in the United States)

[6] Russel Bonasso, ‘Fire in the Hole’ 2003

[7] Fali S Nariman, ‘International Arbitration in the Twenty-First Century : Concepts, Instruments and Techniques’

[8] Redfern and Hunter on International Arbitration, 5th Edition, Oxford University Press, 2009

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