Arbitration and the Sovereign Power

Reproduced with permission from The Journal of International Arbitration, Vol. 17 No. 2, April 2000, published by Kluwer Law International.

Derogation: 1. The partial abrogation or repeal of a law, etc. 1548. 2. Impairment of the power or authority of; detraction from 1450. 3. Lowering in value or estimation; disparagement, depreciation 1520. 4. Falling-off in character or excellence; loss of rank 1898 - The Shorter Oxford English Dictionary 1972.

The learned and distinguished authority on Arbitration Law, Arthur Marriott QC, has said, in an address to the ICC Institute of Business Law and Practice, given on the celebration day for Michel Gaudet in 1998, and published in "Improving International Arbitration" (Benjamin G. Davies ed., ICC Publishing S.A., Paris, 1998) and more recently in the millennium edition of Arbitration, the journal of the London-based Chartered Institute of Arbitrators, that arbitration is a derogation of the Sovereign Power. It is an echo of the principle "Lex facit Arbitrum", propounded by Professor Mann many years ago, and superficially attractive, but it will not do.

It is an understandable view, characteristic of lawyers whose background and thinking is defined within a national legal system. The concept of rights generally being in derogation of the Sovereign Power comes about because, in much legal thinking, personal rights are not the inalienable property of mankind, but only awarded by state systems of law. One could paraphrase the general view as being that the people exist for the law, rather than the law for the people. Our rights, our physical liberty and our very lives are held on sufferance. Indeed there have been, and still are, states where that is practically and very tragically true, but there is no moral principle, no principle of Natural Law, to justify the conduct of such states and the International Community does right to disapprove of them.

Of course, if that view of human rights were correct, then all human endeavour could be described as a derogation, to some degree or another, of the Sovereign Power. It is my argument, however, that such an approach is anathema to the thinking of free peoples.

I ought perhaps develop that argument. For a basis of the thinking of free peoples, I can do little better than to extract a part of the preamble to The Unanimous Declaration of the Thirteen United States of America, adopted in Congress on 4 July 1776, a date which I believe still to be celebrated in that country.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed.

That was not, I suggest, a finding, a development of principle from a basic belief. The use of the word "hold" demonstrates that it was itself, to those who drafted the Declaration, a statement of basic belief, an essential tenet, axiomatic for what followed. It was in direct contrast to the assumptions of Sovereign Power current at the time, themselves arguably modified from the idea of the divine right of kings, rooted in the concept that a state has some justification of its own, independent of and superior to the rights of the governed. The source, indeed, of such rights as the governed may have.

What the American Founding Fathers believed was that the state's power, far from existing in its own right, was itself a derogation of the rights of the individual. The wording of the second statement of the Preamble supports that view. The just powers of a government, and no others, are derived from the consent of the governed. Semble, it has to be accepted that a government may arrogate to itself other powers, without the consent of the governed, but the preamble does not assert their legitimacy and does not assign to them the qualifier "just".

Among the freedoms which arguably are implicit in the general structure of the preamble are freedom to communicate and, in doing so, to make promises. Systems of law, in general, recognise those freedoms and go further. Where promises involve commitments, or obligations, to another party, systems of law generally will recognise those commitments and, to protect the peace, will stand in where necessary, to enforce the rights and obligations made.

I say that systems of law generally will recognise those obligations because the recognition is not unrestricted. Certain classes of obligation, such as some of those which may arise within family arrangements, are so personal as to make it inappropriate for outsiders to enforce them; certain classes of obligation are so intangible or so trivial that the intervention of the legal system is absurd (de minimis non curat lex); certain classes of obligation are offensive to the state itself, so that they are either made illegal or merely ignored so that the state will not lend itself to their enforcement. The latter classes of obligation form a group, the group of illegal contracts, whose treatment is complex and where rules of law may vary, sometimes widely, between state jurisdictions. The whole matter of illegal contracts is one which makes for difficulties in the context of arbitration, and that is one reason why any question as to the nature of arbitration is not merely one of intellectual theorising but one of real practical importance.

Now, the essence of what I have written so far, from the Declaration of Independence to the above paragraph on the exceptions to the general principles of the freedom of contract, is that, far from being a derogation of the Sovereign Power, freedom of contract is a natural component of the general freedom of the individual. Insofar as it may be limited by the state, that is only because the state has extended its power to encompass specific aspects of contract, not that contract is itself a derogation from some wide and all-embracing power.

There is a note of caution to be introduced here. Much modern trading is conducted by entities whose existence is a product of law, a legal fiction if you will. There is a sense in which a corporation may be regarded as a legal person. The term is often used. Then it may be said that the legal person is given, by law, a restricted set of the rights attributable to natural persons and may be subject, again by law, to additional duties. That may open other questions, but I do not think that it need detract from my general argument about the nature of arbitration.

My thesis, and it is not new, is that arbitration is the product of an agreement between parties. That agreement is no derogation from the Sovereign Power, because it is an agreement which individuals have the freedom to make. Arbitration legislation does not confer the right to make such agreements or the duty to abide by them, nor does it confer on the person chosen the right to act as the parties to the agreement intend. That right is a right of the parties themselves, conferred voluntarily upon a person of their choice. Legislation does not create the arbitral process, but it may regulate it within the appropriate jurisdiction.

There is a corollary to this argument, and it has some practical implications. If the arbitral process is not a surrogate for the state, then it follows that arbitration, whether at the national or the international level, cannot resolve every issue, particularly where there is an element of public interest. It is of the nature of arbitration that the tribunal is created, directly or indirectly, by the choice of the parties. That means that an arbitrator well may be a jurist from a jurisdiction other than the seat of the arbitration and, indeed, may not be a jurist at all. There is a long tradition of arbitration, mercantile arbitration, in which the role of the arbitrator is given to an expert or to an experienced colleague of the disputants.

In an international arbitration, it is also likely that several systems of law will have links with the process. The proper law of the dispute itself, of the contract perhaps, may well differ from the law of the seat of arbitration, which differs from the law at the place where exequatur may be sought for any award and in turn differs from the law of the domicile of the two parties. (Domicile may have a relevance to a party's legal capacity.) All that is well known, of course. The point here, however, is that, if arbitration is not a process of the state, then it cannot be taken for granted that the tribunal, however learned, will have detailed knowledge of the national laws that may relate to the arbitration.

That is why, for example, the procedural rules of state courts(1) do not apply to arbitral proceedings. Only mandatory rules of law, and those common rules which are necessarily implicit in the agreement to arbitrate, such as the requirement of fairness and Natural Justice, will govern the proceedings. Of course it is open to a state to create mandatory rules of law for arbitration within the jurisdiction of that state. Arbitral practitioners know of these, generally speaking, because they are embodied in specific codes or in legislation.

It is also why care needs to be taken with matters of so-called public policy. A state court may be deemed to know what is the public policy of the state of which it is a part. That is a part of judicial knowledge. Such judicial knowledge cannot be attributed to an arbitral tribunal, for the reasons I have suggested. It may not be composed of jurists and, even if it is so composed, they may not be of the appropriate national background. Nevertheless, public policy may be significant, and there has grown a distinction between the public policy of individual states and a more general idea of international public policy, a kind of common sense and commonly accepted view of what is right. Now is not the time to discuss that distinction, but I suggest that, if my premiss is correct, an arbitral tribunal reasonably could be expected to have a view about the latter, more general, set of principles, but not about the more detailed policy of a specific nation.

Three examples might be given. One is the question which arises where the parties have not canvassed, before the tribunal, a point of competition law(2). The competition law may be effective in the domicile of one party and not the other; it may be effective as part of the proper law of the contract; it may not. For the reasons I have suggested, the tribunal may or may not be aware of the point; they cannot be assumed to be so. What is to be done if the parties' neglect of the point was inadvertent? What if it was intentional? Should the tribunal investigate and invite the parties to comment upon their findings?

A second interesting example is found in those notorious cases where the Award of a tribunal has been set aside in the place where it is made, but nevertheless enforced in another jurisdiction(3). The New York Convention of 1958 recognised the possibility of such a development(4). If the process were in fact a derogation from the Sovereign Power, then setting aside or nullity, from a state court of competent jurisdiction, would have the effect that the Award simply would cease to exist, so that there would be nothing for the foreign court to consider. The structure of the Convention, in my submission, is powerful evidence that the arbitral process must be something else, something sui generis, and not a derogation of the Sovereign Power.

The third example concerns the practice of arbitration itself, and perhaps other areas of Independent or Alternative Dispute Resolution. There has been a move in recent years to control dispute resolution by asserting that the conduct of proceedings and the representation of disputing parties in ADR is the practice of law, to be regulated by the Bar in some jurisdictions and directly by the court in some others. That seems to be based on the principle that such activities are in some way extensions of the legal system. It is one reason, perhaps, for making the assertion that ADR involves a derogation of the Sovereign Power and is derived from the state. Sometimes described as "protecting the lawyer's turf", it is arguably more akin to the seizure of territory belonging properly to others.

There is no doubt that the analytical, investigative and presentational skills of the experienced lawyer are invaluable in arbitration as elsewhere, but the drive to exclusivity may lead to mistrust and, if my thesis is right, then there is no theoretical or philosophical basis for it. Commercial ADR is a field upon which lawyer, business man and scientist meet on equal terms, to the benefit of all. I argue that there are sound reasons for that, and that it should remain so(5).

There are other practical implications to be developed, but the prime purpose of this paper is to set out the argument for the uniqueness of the arbitral process as something to be distinguished from the processes of state systems of law.

Of course, there is a derogation of the power of the state in certain respects. Voluntarily to accept the principle that a court should stay an action where an arbitration agreement has been made is an acceptance, by the state, of a limitation of its jurisdiction. It is required of signatories to the New York Convention of 1958. Voluntarily to accept that an arbitral Award may be made effective through the state's own mechanisms, as if it were a judgement, is clearly a concession by the state, perhaps in recognition of the paramountcy of the agreement, perhaps as a matter of judicial efficiency. The practical assistance of the court is partially a recognition of the contractual nature of the process and partly an additional support of what is thought to be a laudable enterprise, but it is here that the distinction, between the twin concepts of arbitration as a creature of freedom of contract and arbitration as an extension of the legal system, starts to blur. To the lawyer, all decision making is the prerogative of the court, so another decision maker must be some kind of subordinate tribunal and its very existence a derogation of the Sovereign Power. That, I suggest, is a basis for misapprehension.

Ironically, it is in enlightened states, with modern statutes, giving a high degree of recognition and cooperation, that the distinction between arbitration tribunal and court becomes most obscured. To put the whole scene in perspective, it is instructive to contemplate a notional state in which there is no arbitration statute, but respect for the ordinary common law (or, in deference to my friends and colleagues in civil law jurisdictions, basic constitutional principles and commercial practice).

In such a state, the parties would be free to arbitrate, because that is a matter of contract. The arbitrator would be free to act, because there would be no reason to prevent it. Arguably, witnesses could not be examined on oath; that is a specific power, given in England and Wales for example, by successive arbitration statutes, but prohibited generally by other legislation (the Oaths Act). (In some other jurisdictions, witnesses are not examined on oath at all.) The Award would be made, the parties would have agreed to abide by it, so it would be enforceable as a product of their contract, if properly evidenced, subject to the arbitration having been what they reasonably could have contemplated in their agreement. A perfectly simple arbitration regime, broadly satisfactory, albeit without the valuable trimmings which legislation has provided. Moreover, if the state had adopted the New York Convention, the recognition would have been available for foreign awards and the court would not have been able to proceed with an action in the face of an arbitration agreement.

I venture to suggest that, in the absence of legislation, arbitration would have developed in a very different way, both internationally and nationally, and we would not be faced, as we now are, with the criticism that arbitration is not conducted in the way commercial men are entitled to expect. It is tempting to think that, without the detailed legislation of modern times, arbitration generally would have become a more efficient and simple process for commercial decision making, but that can only be conjecture.

Very interesting in this regard is the historical situation in Italy, where it has been recognised for years that arbitration may have two purposes, one seen in Arbitrio Rituale, a form of litigation in the private sector, a private variant of the court, more or less directly enforceable, subject to the registration of the Award, and the other in Arbitrio Irrituale, a form of commercial arbitration, which may go so far as rectifying contracts to take account of changed circumstances or to correct lacunae, whose Award, if not observed, has to be enforced as a matter of contract like any other, in the court(6). What the supporters of the derogation theory risk, I suggest, is that all arbitration may be seen as Rituale, a likelihood that already may seem all too familiar to many practitioners.

There is another way of looking at the same point. The courts of a state are not seized of a private question until the parties bring it before them. I distinguish and set on one side two matters, one the interest of the state in transactions that may attract taxation, the other transactions that may be illegal in themselves. Those are special cases. I wish to discuss, more generally, questions which may give rise to issues justiciable inter-partes.

If the private question is not in difference between the parties, there is no issue and thus nothing for the courts to consider. The Sovereign Power has no role. An "issue" necessarily is something that "issues" or "comes out". How may it have come about that the question is not in difference between the parties? There are several possible answers to that, but three choices seem fairly evident at first sight: first that the question never became in difference, secondly that there was a difference but the parties resolved it by themselves, thirdly that there was a difference, but the parties resolved it privately with the assistance of a third party. I suggest that, however it came about, there is no issue, no justiciable issue, from any of those sets of circumstances. What might have been a justiciable issue is not, and the Sovereign Power is not invoked. Unless one argues that the right to discuss and agree a point is itself a derogation of the Sovereign Power, there has been no need for derogation.

For completeness, I say again that, when the parties have agreed something and one or the other does not honour his agreement, whether it be an oral agreement, a written agreement following a negotiation, or an arbitral award created by a third party pursuant to a private arrangement, the aggrieved party may well turn to the state for support. Then the state is free to say whether or not it will enforce the results of the agreement and, of course, it may do so on its own terms.

The state has perfect freedom to do as it pleases. The court may accept to become seized of the matter; it may not. The court may act justly; it may not. It will, however, act legally, because that is necessarily what a court does, but acting legally means only acting on its own terms(7). The court may enforce the agreement or it may make conditions for doing so; that is the effect of legislation and other sources of law. The well-known requirements for the conduct of arbitration, for example, are conditions of the kind. If they are not met, the result may not be enforced. The point is that, in general the court functions as an arm of the state. Indeed, the court personifies the Sovereign Power and necessarily it acts in accordance with political expediency, albeit often at one remove.

That is why I argue that the Sovereign Power is invoked only when a question becomes a justiciable issue. In private arbitration, an otherwise justiciable issue may be resolved between the parties by the aid or intervention of a third party, before it comes outside their relationship to become publicly justiciable. That issue falls into the realm of the court if, and only if, first, the parties do not comply with their bargain and, secondly, one elects or both elect to bring it to the court.

Nothing in what I have said seeks to suggest any limit to the authority of a court to control an arbitral process within its jurisdiction and where the appropriate Law specifically so provides. Nor does the principle I have set out seek to restrict in any way the authority of a court to recognise or not to recognise an arbitral award, or to provide or not to provide assistance to arbitration if it pleases. What I do argue, however, is that the powers of the court are a construct of positive law and not inherent in the arbitral process itself.

I hope I have established, at least in outline, why I feel, with the very greatest respect, that distinguished and erudite though the proponents of the derogation theory of arbitration may be, their theory is outmoded and a threat to the understanding and development of the arbitral process, particularly in the international field. The totalitarian concept of the Sovereign Power and of human endeavour as in derogation of that power is one shared by the extremes of the political spectrum; it may be tempting to those who seek certainty in life, but it is dangerous and, I suggest, inimical to the arbitral goal of justice.

That publication by the ICC, "Improving International Arbitration", was subtitled the need for speed and trust. For much of the world, the state is associated with uncertainty, political influence and fear. If there is to be a system of justice in the commercial world, it must not be a derogation of any Sovereign Power, it must have its own claim to independence and the justice that follows.

Notes:

1. In this article, the word "court" is used exclusively, to mean courts which derive their authority from a state or states, either directly or indirectly as a consequence of treaties and the like. I do not include bodies such as the Arbitration Court of the ICC or the LCIA, whose use of the word is somewhat misleading.

   

2. As, for example in Eco Swiss China Time Ltd. v. Benetton International NV, (1999) European Court of Justice No. C-126/97.

   

3. Such as Société Hilmarton v. Société OTV, 1994 Rev. de l'Arbitrage 327 (Cour de Cassation 1994) or Chromalloy - In the Matter of the Arbitration of Certain Controversies between Chromalloy AeroServices and The Arab Republic of Egypt (1996) Civ. No. 94-2339 , U.S. District Court for the District of Columbia, 11 Int'l Arb. Rep. C-54 (August 1996).
   
   The matter of Hilmarton is remarkable, both for the different outcome in France and in England and for the comparison between the English case and  Soleimany -v- Soleimany, also an English case.
   
   The circumstances in the two matters had an essential similarity: in each there was a contract which involved illegality in the place at which the contract was to be carried out. Put very simply, in Hilmarton, the Algerian Law forbade payment of certain classes of commission; in Soleimany the Iranian Law forbade the export of carpets without licence.
   
   In Hilmarton, there were two consecutive arbitrations in Switzerland. In the first, the arbitral tribunal refused to award an amount in respect of commission, basing its decision on the law of Algeria, the place of performance. That decision, the first decision, was vacated by the Court in Switzerland, but recognised in France. A second Swiss tribunal, however, decided against the Algerian law and awarded a sum which was later recognised by the Court in England. Thus the English Court decided against allowing the law in the place of performance to determine.
   
   In Soleimany, there was one arbitration, under Jewish Law (by agreement), before a tribunal of the Beth Din in London. The Dayan (arbitrator) decided that the Iranian Law did not determine the matter and awarded a sum (a share of the profits of sale of the carpets). In that case, however, the Court refused to recognise the award and vacated it, effectively on the basis that it contravened the law of Iran. Thus, in that case, the English Court decided in favour of allowing the law in the place of performance to determine.

   

4. Article V (1): Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that: . . . . (e) The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made. Note that this is a discretionary power - . . . may be refused.

   

5. The English legislature appears to have moved to counter this trend by statute. The Arbitration Act 1996 provides (S.36) that unless otherwise agreed by the parties, a party to arbitral proceedings may be represented in the proceedings by a lawyer or other person chosen by him.

   

6. Some commentators argue that the distinction here described may become progressively less significant in the climate following the introduction of Law #25 of 5 January 1994, a law which modifies aspects of the code of civil procedure and has added an entire new chapter relating to international arbitration (articles 832-838).

   

7. Cf. Oliver Wendell Holmes Jnr: The prophecies of what the courts will do in practice, and nothing more pretentious, are what I mean by the Law. and, of course: This is a Court of Law, young man, not a Court of Justice, a distinction never to be forgottten by those who seek the latter.