In recent years a trend toward expansion of arbitration has been noticed. Arbitration is considered to be an attractive alternative to traditional court proceedings due to its features such as privacy, cost-saving, party autonomy, choice of arbitrator, and avoidance of adversarial proceedings.
It is considered a general principle that arbitration may be used to resolve almost any type of claim or dispute concerning legal rights. This has been referred to as a ‘presumption’ of arbitrability.
So, what is arbitrability? Arbitrability refers to disputes that can be settled by arbitration.
However, it is precisely because arbitration is a private proceeding with public consequences that some types of disputes are reserved exclusively for national courts. These proceedings are commonly related to public policy concerns.
The rationale for this is that certain matters are considered to be so important to the operation of justice or the running of the business that they are reserved exclusively to the control of the courts.
If a dispute is not arbitrable, the arbitral tribunal is limited in its jurisdiction and the claim must instead be submitted to domestic courts.
When discussing arbitrability, the most common questions that arise are:
What exactly is arbitrable and non-arbitrable? Who decides on arbitrability? Must the party raise the question of arbitrability or will the arbitrator raise it himself?
These are some of the questions that this blog post will seek to answer. But before dwelling on these substantive questions, you may read more about arbitration in Alternative dispute resolution (ADR) and it’s advantages and disadvantages and What is Binding Arbitration? Is it better than Court?.
I. The concept of Arbitrability
The concept of arbitrability is recognized in the provisions of the New York Convention and the UNCITRAL Model Law. Even though these instruments do not define arbitrability in precise terms nor do they refer to the term as such, they mention disputes capable of settlement by arbitration, which has been interpreted as referring to arbitrability.
In the general sense, arbitrability involves the question of whether a specific category of disputes can be barred from arbitration or whether it belongs exclusively to the domain of state courts.
Arbitrability is related to the law governing the recognition and enforcement of the arbitration agreement.
II. Limits on Arbitrability
Possible restrictions may arise in two different ways: subjective and objective arbitrability restrictions.
(a) Subjective Arbitrability
Subjective arbitrability refers to the personal legal capacity of the parties to enter into arbitration proceedings, including the power to conclude an arbitration agreement.
Certain entities, such as States or State bodies, due to policy considerations involved, may not be allowed to enter into arbitration agreements or may require special authorization to do so.
In the absence of a contractual capacity to enter into an arbitration agreement or be part of arbitration proceedings, the arbitration agreement is invalid, which makes the dispute overall non-arbitrable.
The question of the state’s capacity to enter an arbitration agreement is a matter of public policy”. To put it in opposite terms, subjective non-arbitrability concerns deficiencies in the contractual capacity of a party and it affects the overall validity of the arbitration agreement.
(b) Objective Arbitrability
Objective arbitrability, on the other hand, is related to the subject matter of the dispute.
For an arbitration agreement to be enforceable, the subject matter has to be arbitrable, i.e. it has to be a subject that the state considers appropriate to be arbitrated.
Some states allow any matter to be arbitrated which the parties may freely dispose of.
This is the solution in Belgium, Italy, the Netherlands, and Sweden.
However, since arbitration is a private proceeding with public consequences, some countries impose limitations and restrictions regarding the type of disputes that are suitable for arbitration proceedings.
These disputes are, by reason of their very character, non-arbitrable.
For example, in the United States, the 2017 Arbitration Fairness Act invalidates any pre-dispute resolution clause in relation to employment, consumer, antitrust, or civil rights disputes on the grounds that the weaker parties have little or no meaningful choice as to whether to select arbitration.
In general, non-arbitrable disputes are related to the criminal legal system of a country, such disputes related to bribery, fraud or corruption, but also to paramount national interests, such as natural resources.
Additionally, there is a set of economic-related disputes that some national arbitration practices recognize as non-arbitrable disputes, as follows:
- Patents and trademarks
- Antitrust and competition laws
- Insolvency
- Corporate governance disputes
Each of these categories will be considered separately below:
(i) Patents and trademarks
Patents and trademarks are monopoly rights that only States can grant. For this reason, any dispute related to their grant or validity is outside the domain of arbitration.
However, the owner of a patent or trademark frequently issues licenses to one or more corporations or individuals in order to exploit the patent or trademark; these disputes between the licensor and the licensee may be referred to arbitration.
(ii) Antitrust and competition laws
In general, anti-trust and competition law-related issues are non-arbitrable when the arbitrator is asked to make a decision over which the public authorities have sole jurisdiction under applicable rules.
However, throughout time, the arbitral case law has consistently confirmed the arbitrability of disputes involving antitrust claims.7
(iii) Insolvency
Issues of arbitrability arise in respect of insolvency law as a result of the conflict between the private nature of arbitration and the public-policy-driven collective procedures provided for under insolvency laws.
In general, insolvency proceedings are usually in the exclusive jurisdiction of the national courts, and arbitration proceedings should be suspended once these proceedings are opened against one of the parties.
This is in line with the legislation of the European Union, but also with the national systems of English and Argentinian law.
In the U.S., national bankruptcy courts were traditionally reluctant to defer their jurisdiction to arbitrators.
However, this approach has changed over time and courts now look at the type of dispute before them and determine whether there are any core insolvency issues that may deprive an arbitral tribunal of jurisdiction.
(iv) Corporate Governance issues
In some jurisdictions, parties are free to submit corporate governance issues to arbitration.
But this is not the case everywhere. For example, Russian courts decide on the arbitrability of corporate disputes under Russian law.
III. The Law Governing the Issue of Arbitrability
The question of what law governs arbitrability is a complex one, and that the answer to it may depend upon the stage at which it is raised.
If the issue of arbitrability arises, it is necessary to have regard to the relevant laws of the different states that are, or maybe, concerned.
These are likely to include: the law governing the party involved, where the agreement is with a State or State entity; the law governing the arbitration agreement; the law of the seat of arbitration; and the law of the ultimate place of enforcement of the award.
Most commonly, the law of the seat of arbitration will be considered. That is because if the dispute is not arbitrable according to the law of the place of arbitration, the award will be open to setting aside procedures in that country and its enforcement may be excluded in another country.
However, there are exceptions. For example, under the 2017 Arbitration Fairness Act, the validity and enforceability of an agreement to arbitrate is determined by a court, under federal law, rather than an arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically, or in conjunction with other terms of the contract containing such agreement.
The question of arbitrability may be raised at two different stages of the dispute resolution process: the commencement of the proceedings and the recognition enforcement stage, including any proceedings to set aside the award.
Although in the majority of the disputes the arbitrability of the case is raised by one of the parties, the predominant view is that arbitrators have the duty to analyze the arbitrability of disputes and deny jurisdiction if the matter is not arbitrable.
(a) Commencement of the proceedings
The first stage is at the commencement of the process.
A national court may be asked to stay curial proceedings, instituted in apparent contravention of an arbitration agreement.
A stay may be refused on the ground that, according to the relevant national legal system, the dispute is not susceptible to determination by arbitration.
Alternatively, at that point, a national court may be asked to affirm, by some appropriate declaration, or order, the enforceability of an arbitration clause.
Alternatively, the question may be asked before an arbitral tribunal, which needs to determine, based on the principle of Kompetenz-Kompetenz, whether it has jurisdiction over the dispute.
According to the principle of Kompetenz-Kompetenz, an arbitral tribunal is vested with the authority to decide upon its jurisdiction with respect to any given dispute.
In making such a decision, it will inevitably include an assessment as to whether the dispute at hand is arbitrable should such a question arise. In general, when faced with a question of arbitrability, most Tribunals will apply the law of the seat of arbitration.
ln the case Company M v. M SA”, the tribunal considered that if the issue of arbitrability arises at the pre-award stage, the applicable law is that of that governing the arbitration agreement.
(b) Enforcement and Recognition stage
The other point where the question may arise is at the enforcement stage.
Then, the question may arise in one, or more, countries where the award may be sought to be enforced, whether recognition should be refused on the ground that the subject matter of the dispute was not capable of settlement by arbitration under the law of that country.
Article II and V of the New York Convention lay down a uniform rule addressing issues of arbitrability that may arise at the stage of recognition and enforcement of the award.
Under these provisions, issues of arbitrability must be dealt with under the lex loci.
In other words, the party resisting recognition and enforcement of the arbitral award must demonstrate that the subject matter of the dispute is not arbitrable in the place where recognition and enforcement are sought.
UNCITRAL Model Law, in Article 36, mirrors this approach and provides for issues of arbitrability to be determined by the laws of the state where recognition is sought.
In conclusion
Arbitrable disputes are those that can be settled by arbitration and will be ratified by courts if necessary. Non-arbitrable disputes can be only resolved by national courts due to law requirements, public order, and national interest.
Hint: Our worldwide map for arbitration costs can assist you in estimating your arbitration fees.