HomeOpinion & AnalysisArbitration insights: Theories of international commercial arbitration

Arbitration insights: Theories of international commercial arbitration

BY JACOB MUTEVEDZI

Numerous theories are invariably proposed to explain the juridical nature of arbitration. All these theories are underpinned by the interplay between private control and state regulation of arbitration.

Proponents of the jurisdictional or territorial theory place paramount importance on the role of national law, particularly, that of the seat of the arbitration. Notwithstanding the autonomy of the parties to choose arbitration over court litigation and nominate their preferred arbitrators, it is the state which allows them to do so and consequently, arbitrators as discharging a public function.

Further, arbitrators are seen as possessing a quasi-judicial status which entitles them to the immunity enjoyed by court judges. This theory, despite holding sway for decades, is now considered antiquated and has since lost ground to modern theories in favour of “delocalization”.

Mono-Localisation Theory

According to Gaillard (2009) this theory basically equates an arbitrator to a judge whose only source of power is the legal order of the seat. Jan Paulsson (2011) terms it the “Territorial Thesis”. In terms of this theory, the only source of the arbitrator’s power is the legal order of the seat of the arbitration. It is for this reason that it is referred to as “the Mono-Localisation Theory”

No other scholar appears to endorse this particular philosophy more than F.A Mann (1986) when he observed that the law applicable to the arbitration is exclusively that of the seat because nothing done by the parties can have any legal effect without the sanction of a legal system. Mann asserts that: “The Lex loci arbitri cannot be the law of any country other than that of the arbitration tribunal’s seat. No act of the parties can have any legal effect except as the result of the sanction given to it by a legal system.”

Mono-localists believe that the lexi loci arbitri enjoys a monopoly over the regulation of arbitration occurring within its jurisdiction. This theory is archaic and in these modern times some arbitrators may not adhere to it as seen in cases like Salini Construttori v The Federal Republic of Ethiopia and Saipem v. Petrobangla.

Westphalian Theory

Purveyors of this theory do not place much importance on the seat of arbitration; rather they focus their attention on the culmination of the process. More particularly, the fact that the award will be recognised in several countries if it conforms to the prescribed criteria of recognition and that the only legitimacy which matters is that conferred ex post facto at the place of enforcement.

Gaillard dubs this theory “Westphalian” by analogy to the 1648 Peace of Westphalia that established a system of political order based on co-existence between sovereign States. According to Gaillard, under this vision, individual countries decide for themselves whether or not an award is worthy of recognition. The views of the courts of the seat are not that important. Unlike the territorialist philosophy, the Westphalian theory considers that international arbitration can derive its legitimacy from a multiplicity of legal systems, namely various States of enforcement.

As a result, Westphalians will not slavishly adhere to the dictates of the laws and the orders of the courts of the seat. In the Salini case referred to above the arbitral tribunal seemed to embrace the Westphalian view after facing undue harassment from the Ethiopian courts.

Trans-nationalist Theory

This theory recognises the arbitrators’ latitude to apply transnational procedural rules, transnational choice of law rules and even transnational substantive rules. Proponents of this theory will ignore rules which are inconsistent with transnational public policy notwithstanding that such rules have been chosen by the parties or constitute part of the lex loci arbitri. Trans-nationalists will recognise an award that has been set aside at the seat of the arbitration for “idiosyncratic reasons”.

Its existence does not emanate from the laws of any State, but from a transnational legal order. It recognises jurisdictional and contractual elements in the arbitration regime, but significantly downplays the control that the law of the seat of arbitration may exercise.

The wide acceptance and recognition of arbitration across the globe as a dispute resolution mechanism of choice in commerce, has conferred on arbitration an autonomous status which transcends any national legal order. The theory is well embraced in France and that is the current position of the French courts. In Putrabali v Rena, the French Cour de Cassation held that: “an international arbitral award, which does not belong to any state legal system, is an international decision of justice and its validity must be examined according to the applicable rules of the country where its recognition and enforcement are sought.”

The courts of the USA have, to some extent, accepted the theory, but their stance is less consistent on account of the federal structure of the courts. The American case of Chromalloy Aeroservices v Arab Republic of Egypt provides a good example. The court set out the grounds for enforcing an arbitral award annulled at the seat. The award had been set aside in Egypt following a detailed substantive judicial review, in circumstances where the parties had waived any such review. The US court held that the US public policy in favour of final and binding arbitration of commercial disputes bound it to enforce the award despite its annulment at the seat.

In Yukos Capital SARL v OJSC Rosneft Oil Company the English courts recognized and enforced number of arbitral awards notwithstanding the fact that they had been annulled in Russia, the place of arbitration. The court rejected an argument that the awards no longer existed legally because they had been annulled. The court held that the annulment was a result of a “partial and dependent judicial system” and should therefore be disregarded in the enforcement proceedings.

In practice, it is difficult to envisage how this theory works considering that an award rendered in complete disregard of the laws of the seat may prove unenforceable in terms of the New York Convention 1958, in particular Article V(1)(a) and (e) and Article V (1) (d).

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