Text of a lecture by Geoffrey Beresford Hartwell first given to the Summer School at Keble College, Oxford for the Diploma in International Commercial Arbitration and revised for the Western Counties Branch of the Chartered Institute of Arbitrators - 23 January 1997
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In England, for the last year or so, the new legislation has been uppermost in our minds. I hope it will come as some relief to know that I am not about to embark upon an exegesis of the Arbitration Act 1996 this evening. This evening, I would like to introduce you to what may be an entirely different way of looking at our subject. To challenge existing conceptions.
I am going to concentrate on the distinction between Arbitration and processes at law, to set a foundation for a radical approach to procedural freedom. It is not that I wish to suggest that the English Act is not important; it most certainly is important, although perhaps not in the way which is often acclaimed in public. It is academically interesting in that, although it was hailed as a part of the Government's programme of de-regulation, it exercises an unprecedented degree of Court control, of state intervention in arbitration.
I should also say that it does rather little to enhance the powers of arbitrators to progress the reference, although it confers on them the responsibility for doing so. The only notable powers which could be said to be new are i) that of ordering security for costs, which is a power to stop the reference and, if one accepts the views of Viscount Reading in re Unione Stearinerie Lanza and Wiener, is plain bad law, and ii) the power to cap costs, which arguably was available before, albeit by agreement, and now may be excluded by agreement, so nothing new there. The remaining powers almost certainly existed before 1950 and were thought by many to have been codified at the time.
The Act, once you get past the declaration of purpose, is about nuts and bolts. That is not what I would like to discuss this evening. My topic this evening is not "how" but "why". I want to invite you to think about what Arbitration is and perhaps then about its implications. To do that, I shall be looking beyond the confines of England and Wales, because what I have to say seems to me to have a wider scope.
I hope to demonstrate that Arbitration is not, as is sometimes supposed, a part of the legal system. I believe it to have a more fundamental justification than that and I will take you through some arguments to support my view that in accepting an appointment as Arbitrator, you embark on a noble task.
Some of you may think that it is curious that what seems to be a particularly esoteric province of the law should be presented to you by someone who professes no law at all. Perhaps one of those whom Kipling had in mind when he spoke of "Lesser Breeds without the Law." I make no apology for that. Law must be accessible to, and open to analysis by all. If Law is a private mystery, then all pretence to Justice is lost.
I will begin by taking you back to basics, if such a hackneyed phrase may be permitted. I apologise if by doing so, I seem to ignore your knowledge and experience of law, but my premise has to begin with a foundation which is logically sound.
Most of us are used to the idea that the State should step in to deal with our private relationships. There is a body of law about contracts, relationships that come about by agreement; there is a body of law about other obligations which arise independently of agreements. To a greater or lesser degree, whatever our quarrel with our neighbour, the power of the State can be brought to bear on the rights and wrongs of it.
In history, that was not always so. In English Law, for example, quite complex legal fictions had to be developed to enable the Courts to deal with private relationships. Land always was a matter for the Crown, but before you could invoke the power of the king and his judges in any other context, you had to answer the first question: "Why should we intervene in your private affairs?" or, in modern words, which you may recognise, "What's in it for us?"
Broadly speaking, there were two ways to answer that question. If the matter were one within the scope of an ecclesiastical court, then it would suffice to allege that it was a matter of conscience, but your own conscience had to be quite clear before you could take that line with any safety.
Otherwise the ploy, if I may call it that, was to protest that, because of your neighbour's failure to comply with his bargain, you were unable, or less able, to pay your taxes. That idea would engage the King's attention. It was the origin of the writ of quominus and provided the essential link between your private contract and the more or less enlightened self interest of the Court.
I said there were two ways. In fact, there was another aspect of policy which could motivate the Court and the Crown to assist an allegedly injured party. It springs from the principle of the King's peace. If an injured party were to have no recourse available, then the only remaining choice would be self-help, retaliation, or seizure of the goods, or of money, by private force.
Clearly, as Society became more regulated, self-help became less acceptable, for obvious reasons, at least one of which has come down to us as a guiding principle in Rugby Football "Get your retaliation in first." The validity of this policy is illustrated rather well in those countries where gambling of one kind or another is permitted but where gambling debts cannot be enforced at Law. Two choices are open to the creditor. One is to "warn off" the offending debtor, which is a relatively civilised method used in horse racing. The other is recourse to violence which, since its purpose is to set an example to others, may be very unpleasant.
I have used English Law for the purposes of illustration. In other countries, the Roman tradition remained in place and the principles of the Law of Obligations developed along rather different lines, but essentially with the same consequences, at least in general terms.
I have looked at the basis for the Law's intervention in private affairs, albeit in a fairly superficial way, to demonstrate that it is by no means a natural phenomenon.
Moreover, there is an additional problem about the intervention of the Law which arises as soon as you start to consider commerce and private relationships across national boundaries. Recognition. The sad fact is that States do not, as a general rule, recognise and enforce the decisions of foreign Courts in private matters.
There are exceptions to that general rule. Some States have reciprocal treaties with others, there are some matters, usually rather restricted, with which Courts will deal in the context of the comity of Nations, and, increasingly, there are arrangements within free trade areas. Nevertheless, it may be said that States generally do not enforce foreign judgements in private law. Arguably, therefore, in private international commerce, there is no Law. Let me repeat that, because it is a surprising conclusion: In private international commerce, there is no Law.
When I first set out on this study, I aimed to produce a clean slate, a tabula rasa as we engineers call it, on which to develop my ideas. Well, you could hardly hope for a cleaner slate than that. No Law.
Fortunately, however, that is only half the picture. For the rest of the picture, I would ask you to think about the necessary fundamentals of human social behaviour, how they apply to commerce, and particularly how they apply to International Commerce. Then I will try to take you back to the firmer ground of Law.
Commerce is an aspect of social intercourse, a practical aspect of social intercourse which has real benefits for the individuals who trade with one another and generally for society as a whole. It is the way in which skills, abilities and goods become available for the common weal.
The prime means for social intercourse, facilitating commerce, is language. Language is essentially structured by definitions. At the fundamental level, those definitions are held in common by most, if not all peoples. I exclude, for this purpose, those imaginary islands, beloved of philosophers, where one tribe tells only the truth and the other tells only lies.
Truth or lie notwithstanding, I suggest to you that an exchange of words (or of signs or symbols or, for that matter, of actions) between persons engaging in commerce has the purpose of defining the commerce between them. If that purposive proposition is unattractive, then I suggest that, to make sense of their commerce, their exchange must be taken to have the effect of defining the commerce between them.
I have a peach, you have an apple. I give you my peach, you give me your apple. That is a commercial transaction, perhaps without words. You bite the peach and the transaction is no longer reversible.
Offer and acceptance in the raw, followed by conversion of the goods. The actions define the commerce. Of course commerce is more sophisticated than that. It exists at a higher level of abstraction, a level which depends upon the promise.
Now, the promise is at the root of commercial transactions of all kinds. It is also the basis of intervention at Law. Law enforces promises, but promises are not a creation of Law. The principle pacta sunt servanda is a definition, an identity, a simple truism if you like. Agreements are to be honoured. In mathematical terms pactum is identical with servandum; the two words are simply the same in every respect. (the logicians triple "equal" sign does not have a character symbol available in hypertext)
It is not Law that makes a pact into something to be performed. If it is not to be performed then, quite simply, it is not a pact. If it is a pact then it is to be performed. Now, of course, logical consequences flow and Law will follow those consequences and enforce them.
Nevertheless, Law is the creation of society, not society the creation of Law. Law is the servant of the people; the people are not servants of the Law. At least, if and insofar as the people may be servants of the Law, it is because they are servants one of another and of the State.
To return to the promise, you will see that it is fundamental to the whole conduct of Commerce.
A promise is a fact. Save only for such restriction of the right to make and enforce promises as may be accepted as a matter of common principle or may have become the subject of legislation or other legal sanction in individual jurisdictions, it is a commonplace that commercial promises are effective and will be enforced by systems of Law worldwide. As I have said, there is a practical difficulty in taking the decision of a State Court outside its own borders, but that is only a practical difficulty, not something that detracts from the universal nature of the promise.
I would like now to turn to one class of promise that is so universally recognised that it transcends, in effect, the limitations of national jurisdiction. It is at once an ethical promise which puts commerce on to a higher footing and a practical promise which makes possible free commerce between nations. A promise, moreover, which has created an entirely distinct and separate jurisprudence, or more correctly, perhaps meta-jurisprudence of its own, more complete and arguably more just, within the limited scope of its application, than any National Jurisprudence.
Let me go back to the fruit. I have a peach, I would like an apple. You have an apple and would like my peach. I promise to give you my peach, you promise to give me your apple, but only if the peach is ripe and not rotten. That may be in words, it may be a customary term in the exchange of fruit. We look at the peach and cannot agree. We decide to ask a friend about the peach and agree to do as he says.
That is another level of promise. We promise one another that we will comply with a friend's decision. In doing so, we each relinquish a measure of personal freedom. We do not elevate the friend beyond us. We do not cloak him in a gown, we do not put a cap or a wig upon his head, still less a crown. We merely say to each other that we will abide by what he says. Incidentally, if neither of us likes what he says, we can agree to ignore it. Save where the State or others have a direct interest in it, the parties to a promise may release each other by consent whenever they please. It is that promise that is the basis of private arbitration.
You will find that much debate about arbitration takes place in what appears to be a legal context. If my submission is correct, then arbitration does not have its basis in Law but in a more fundamental principle of human society.
Law has relevance, however, for a number of sound reasons: First, perhaps, is that, in a complex society, it may be assumed that commercial transactions take place in what may be called a climate of Law, so that common legal principles, at least, may be taken to have been in the contemplation of the parties to any promise and thus to form a part of the promise. Secondly, if the promise to abide by the outcome of an arbitral reference is not honoured, then a Court may be asked to enforce it; in those circumstances it would be surprising if the Court did not expect the decision it is asked to enforce to be one which it can countenance, even if it is not one the Court itself would have made. Thirdly, Law in general, and Commercial Law in particular, has developed largely to recognise bargains and reasonable expectations between parties, so that it is more than likely that the private decisions made by an arbitral tribunal will be at one with the decisions that an appropriate Court would have made.
One may summarise all that by saying that there is a presumption (which may be rebuttable by evidence, by the way) that a contract between parties is to be taken as according to the appropriate Law, so that an Arbitral Tribunal will be bound by that Law, even if its methods of proceeding are not the same as those of the Court.
Apart from procedure, the other principal differences between arbitration and the Court are first that, because the arbitral tribunal is private and created only for the purposes of the immediate reference, it does not make new Law, does not interpret law for the purposes of others and therefore has only the concerns of the disputing parties in its mind.
The second principal and often important difference is that the arbitral tribunal is not concerned with the interests of the State. If commercial arbitration is a private affair, and if the principles underlying it are philosophical, rather than legal principles, then how is it of practical value? You and I may ask for an honest man to decide between us, but what if one or the other reneges on the agreement? Honest men do not have armies.
Essentially, there are two methods of enforcement. One is purely commercial. In many trades, there are associations whose practice is to publish the names of those who fail to comply with the decision of an arbitral tribunal. That may put an end to the credit of the trader so identified. It may put an end to his ability to trade. It is a draconian sanction. Like many sanctions, to invoke it brings no satisfaction to the injured party, but it creates a powerful incentive for compliance.
The second method of enforcement is through the Courts. Almost every nation recognises the promise to arbitrate and, subject usually to various local conditions, will enforce the decision of an arbitral tribunal. It is when the Courts are asked to assist in an international matter, however, that the full rationale and advantage of arbitration can be seen. That is because there exists a mechanism whereby the decision of a foreign arbitral tribunal may be recognised and enforced almost anywhere in the world.
I ought to emphasis here that, unlike the judgement of a national Court, the award of an arbitral tribunal may be enforced almost anywhere in the world. The mechanism for recognition and enforcement of foreign awards is the The New York Convention of 1958 . Even England and Wales, possibly the most chauvinist of nations in the value set on their national Law, adopted the Convention (in 1975, which was swift by English standards). There is an article about the New York Convention on this website, but for now I ask you to view it as a Convention based upon the ethical principle of the promise, of pacta sunt servanda, rather than upon Law, which I say it transcends.
It is this almost universal international recognition, which is subject to a very limited control, combined with the moral and ethical principles that I have outlined, that has made International Commercial Arbitration, for most practical purposes, the inevitable method of choice for determining issues in International Commerce.
The secondary advantages, such as efficiency and confidentiality, are just that - secondary, as is the advantage of selecting a tribunal having familiarity with the issues or with the trade. The vital feature of International Commercial Arbitration is that it is recognised by the Law in almost every country, but free of the influence of any State. In its limited area, it brings us as close to the ideal of Justice as we are likely to get.
Whether I am right in my somewhat free-thinking concept of the arbitral process, which is essentially an expression of the so-called "promissory" or "radical" hypothesis of arbitration or whether my jurist friends are more correct in their presentation of arbitration as a kind of licensed extension of the Court into the private sector, the "jurisprudential" hypothesis, is now a debate of little other than academic interest. For all practical purposes, the New York Convention ties them firmly together, as do the various forms of legislation by which arbitration is linked to the legal systems of the nations.
In addition, whatever else may be said about it, the UNCITRAL Model Law provides a very fair and practical guide as to those aspects of laws applicable to arbitration which are commonly held. There is, therefore, a basis to our study which is practical and need not depend upon our philosophical approach (although there may be times when a return to first principles provides a new light upon an immediate problem).
My purpose is to set in motion some trains of thought which you may find interesting and supportive as my distinguished colleagues take you through the work of the days which follow. The first, then was the universal nature of the promise and the special importance of a promise to abide by the decision of a tribunal of your own making. Another is about the implications of arbitration as a practical choice.
Now, as this article originally was drafted for an Oxford Summer School, might be as good a time as any to remind you of the definition of arbitration in the Shorter Oxford English Dictionary:
Arbitration 1. Uncontrolled decision 1651. 2. The settlement of a matter at issue by one to whom the parties agree to refer their claims in order to obtain an equitable decision 1634.
Well, I know that there is at least one learned judge (now - 2012 - retired) here in England who would suggest that the first was a fairly good definition. With great respect (another well known saying among engineers) I do not agree with him and I want to concentrate on the second definition, the definition of Arbitration as we understand it.
The definition makes remarkably clear and efficient use of language. It is all there. The settlement of a matter at issue by one to whom the parties agree to refer their claims in order to obtain an equitable decision. No mention of the Court, no mention of the legal system, no mention of rebuttals, rejoinders, surrebuttals and surrejoinders, no mention of any White Book, Green Book, Code de Procedure Civile, rules or any of the paraphernalia which give us so much opportunity to waste time and employ ourselves at the expense of the hapless and often unwitting parties.
I go further, looking at the definition in the context of English Law: What of equity? Although the Judicature Acts of 1873 to 1875 sought to fuse only the administration of law and equity, they did more than that. Inexorably, the flexibility of equity was lost as more and more discretionary powers of the court came to be the subject of rules, interpreted in the more or less formulaic manner that has come to exemplify English Law in action. The present position is very largely one in which the flexible concept of equity could be said to have been subsumed into law and, indeed, tamed by the Court.
If I were to argue the extreme, I would say that there is no longer any independent concept and practice of equity within the English Legal System. Sir George Jessel, M.R., were he alive today could say again, as he said in the late nineteenth century, "This Court is not, as I have often said, a Court of Conscience, but a Court of Law." (Re National Funds Assurance Co. (1878), 10 Ch.D. 118, at p.128).Interestingly, and half way around the World, Oliver Wendell Holmes said much the same. Perhaps it may have been to silence a "bleeding heart" advocate, I do not know, but Holmes said "This is a Court of Law, young man, not a Court of Justice."
How sad that is. These were great men, but no equity means no justice. That is why people need something else. Law is no longer predictable, because law has to develop in the Courts. Decisions are capricious and the expense intolerable. There must be a way for parties in dispute to solve their differences themselves.
That is what Arbitration is. It is a means for parties to determine their differences themselves. They do that by agreeing to appoint someone of their choice to determine their differences on their behalf. The Arbitrator makes the decision they cannot make, but, and I repeat myself, he makes it on their behalf.
The judge has all the honour and panoply that go with his office. He or she is a high Officer of the State, worthy of every respect and entitled to every deference. That must be right. An arbitrator is just a worker, under a duty to do his best, but with no authority other than the will of the parties themselves.
Nevertheless, I suggest to you that there is no higher honour, in the field of international commerce, than that of being freely selected by professional colleagues or commercial parties to determine issues between them and to make the decisions they cannot make. No higher honour and no more fascinating area of study, whatever our profession.
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