Limitations of Party Autonomy in International Regime of Arbitration By Asst. Prof. Pallavi Bajpai

Abstract: Parties to International trade prefer International Commercial Arbitration as a desired alternative to National Courts. One of the reasons for such preference is the “pro-arbitration” belief which means that the parties are granted autonomy to control their own dispute resolution mechanism. This article focuses on how the autonomy is unbridled. The applicable law, public policy, rules of arbitral institutions, intervention of courts in cases of bias of arbitrators, misconduct of proceedings, Arbitrability etc. which curtails the autonomy of parties.

These limitations formulate the basic contours of International Commercial Arbitration and if violated, it would render the arbitral award unenforceable. This research paper highlights the stages and degree of party control over them, starting from where parties negotiate, agree upon an agreement and issue requests for arbitration till the appointment of  arbitrators then to the  period between the signature of the terms of reference and lastly where the award is to be  rendered.

This paper also advances the legal framework under various statutory provisions upholding the autonomy of the parties under New York Convention and UNICITRAL Model Law.

The purpose of this paper is to critically analyze the concept of party autonomy, its purpose, and impact on International Commercial Arbitration. As well as analyzing the limitations upon it. The conclusion reached is that though party autonomy if one of the pillars upon which the International Commercial Arbitration stands, it is not absolute and these limitations do not fetter the freedom of parties’ infact it prevents the institute of International Arbitration being abused. These limitations infact have been developed so as to protect the freedom that parties exercise. Limitations are the knot that binds the uniformity in International commercial arbitration and thus keeps the institute of International commercial arbitration ignited.

Introduction:In the International riyam if the parties wish to seek a binding method of resolving dispute through third party they do not have much choice, as there are no International public courts to resolve International commercial disputes. The only recourse available is either to head towards National courts (i.e. litigation) or for private international dispute resolution mechanism. For participants in International trade, the most efficient shelter to resolve their dispute has proved to be through International commercial arbitration (ICA).

One of the prominent Indian writer has expressed[1], “When the International Chamber of Commerce at Paris started offering the services of its Court of Arbitration, businessmen in different countries found it convenient to avail themselves of that facility. In course of time that ‘convenience’ became a ‘preference’ and the preference has now ripened into a necessity.”

International commercial arbitration has proved to be one of the most efficient and successful mechanism to resolve disputes for participants in international trade. One of the reasons for its fame is the flexible approach towards its procedure. The idea which brings in this flexibility is “party autonomy”.

Party autonomy is the heart and soul of International commercial arbitration. This principle dates back its origin to the 19th century[2]. In ICA parties to arbitration begin from exercising this autonomy at the first step itself which is choosing this forum over litigation, then parties determine what will be the applicable law, rules ,they appoint arbitrators, participate in selection of chairman if any. The strongest evidence of party autonomy is the arbitration agreement itself.

Party autonomy will firstly depend on the choice as to which arbitration rules should they choose and secondly by keeping vigilance during the different stages of arbitral proceedings. As a right or freedom without any restrictions is impossible to imagine, there are certain limitations on this autonomy of the parties too. In order to maintain basic tenents of International arbitration these limitations are must.

In this research paper, Firstly, party autonomy will be explained in the context of International Commercial Arbitration. Following that will be stages and degree of control by parties in International Arbitration. Then analyses of the statutory implications of party autonomy, judicial interpretation on the issue, and limitations on party autonomy and whether these limitations curb the freedom of the parties or it is mandate to maintain the standard of of International Arbitration? This paper aims to answer the above question by understanding the legal framework that governs party autonomy and its limitations.

The flexibility of International Commercial Arbitration allows the parties to formulate proceeding according to their wishes. This institute is also a faster, cheaper and less complex method of dispute resolution. But the degree of these benefits would accrue based upon the length, costs and complexity of their issue. For arbitration, there has to be an agreement between the Parties that they would solve disputes through arbitration and it is usually in a form of an arbitration clause inserted into the business contract or it can also be through a submission clause. Considering the fact that parties have a say in articulation of the procedure of International commercial arbitration the written rules gives party a leeway. These rights are granted only for the procedure and they cannot infringe on other areas of contract or other ways of solving disputes. There are some tenents which must be upheld over and above this party autonomy principle example the principle of neutrality of procedure, the principle of good faith, the odd number of arbitrators. This brings us to illustrate what exactly is party autonomy.

PARTY AUTONOMY

Meaning: Autonomy could be said to exist ‘when an individual has the capacity to make a choice among real alternatives and can make the choice for reasons with which he or she is comfortable.’[3]It would mean that parties have freedom to frame their contractual relationship in a way they find feasible. Party autonomy is the self-arrangement of legal relations by individuals according to their respective will. Autonomy means “total independence”. Here party autonomy would mean control of the parties over the proceedings. It would mean that parties have a substantial control over organising the arbitration but it would not mean conducting it, which in fact is the task of the arbitrators. This control depends on the choice of the parties whether they wish to proceed with Institutional arbitration or ad-hoc arbitration. In Institutional arbitration the procedural framework are already tailored by the institution itself, the only thing parties do, is to state their will in the arbitration or submission agreement. Whereas in Ad hoc arbitration, the procedural framework made by the parties governs the arbitration. The evidence of this is the “arbitration or submission agreement”, which is the path in determining the procedure to be followed in an International arbitration.

There are certain traits of this principle, these are as follows:

  • It is a pillar on which arbitration stands.
  • It is based on the law of contract.
  • It is a ground for the removal of arbitrators.
  • It is a ground for annulment of the award.
  • It acts as an estoppel to the parties.
  • It enjoys national as well as international recognition.

Purpose of ‘Party Autonomy’

  • It preserves the rights of the parties as to what should be the powers of tribunal in relations to the award of interest.
  • It confers the freedom to enter into contractual relationship between parties and between parties and the arbitrator.
  • It boosts confidence in the parties.
  • It maintains predictability as parties can interpret that everything will flow according to the arbitration agreement.

Because of this freedom the parties decide upon applicable laws to arbitration and substance, they decide as to who should be appointed as an arbitrator, the timetable, place, language etc.

STAGES AND DEGREE OF CONTROL  BY PARTIES

1st Stage: Negotiation of arbitration clause

Parties who are negotiating a contract choose a dispute resolution mechanism which is arbitration by signing a transaction. In this stage it is easy for the parties to decide and agree upon various elements regarding the governing of arbitration as the conflict has not yet arisen.

At this stage parties dominate the autonomy over the procedure. The most crucial question at this stage is what will be the rules of arbitration. This choice has its implications on the degree of control by parties. They have to either opt for institutional arbitration or ad-hoc arbitration.

The next choice to be made is what will be the place of arbitration; this choice has to be made very carefully because firstly the legal structure of the place of arbitration sets the minimum procedural perquisites and secondly the national courts acquires jurisdiction to settle procedural defects such as annulment of award ,challenges to arbitration.

2nd Stage: Arising of the dispute, selecting arbitrators

The first choice to be made at this stage would be appointing a lawyer to advice, this choice makes feasible not only to retrospect the issues of procedure, but estimating the liability and even choice as to implicit arbitrator.

The lawyers bring in chances of procedural compromises, which at times are very lucrative.  For example cost can be brought down by agreeing on a sole arbitrator, at the same time even by deciding the deadlines to reach a decision cuts expenses.

These facts contribute towards greater party autonomy. Taking about the last unilateral act of the parties which would be the choice of co-arbitrator.

If the party chooses an arbitrator who is experienced and well versed in the procedural rules to be applied in the arbitration proceedings, parties tend to have greater autonomy in relation to it.

The procedural issues like choosing the chairman, time for preparation, raising of new issues, factual testimony, legal arguments, post –hearing beliefs and time for an award are important aspect of party control which is exercised at this level, by selecting the right choice of arbitrator.

3rd Stage: The Hearings

This stage caps the duration between the signature of terms of reference and the date on which the award will be rendered, at this stage party loses its autonomy and the tribunal acquires paramount autonomy.

4th Stage: Enforcement, Annulment and Settlement

After the tribunal delivers the award, it ceases to have any legal control, except for minor rectifications. It is now for the parties to take up the autonomy from here, and they have to either opt to comply with the award or resist enforcement by seeking to annul it.

However the national courts usually are in this obedient habit of respecting and upholding the arbitral award, annulling it is very limited, it can only be done where arguments are raised as to procedure, public policy or jurisdiction etc.

Statutory Analysis of Party Autonomy

Party autonomy has been recognised and even incorporated in various National laws as well as International treaties and rules on arbitrations. This principle has been confirmed by the International Law Institute Resolution dealing with International arbitration concerning state parties[4], where it was stated;“The parties have full autonomy to determine the procedure and substantive rules and principles that are to apply in the arbitration. In particular, 1) a different source may be chosen for the rules and principles applicable to each issue that arises and 2) these rules and principles maybe derived from different national legal systems as well as from non-national sources, such as principles of International law, general principles of law and the usages of international commerce.”[5]

This principle is acknowledged as a right itself because of its universal recognition. In countries like Germany it is a right which is constitutionally guaranteed, while in European Union, it is a part of general principles.[6]

Party autonomy under New York convention

This treaty basically deals with the enforcement of foreign arbitral award. It acknowledges principle of party autonomy and recognises it in the written agreement made by the parties where they wish to submit to arbitration all or any of their differences[7]. For example it denies the enforcement of an award if the composition of tribunal is not according to the agreement of the parties.

The agreement is essential for recognition and enforcement of award, when the party applies for recognition and enforcement it is mandatory that the original agreement or a duly certified copy must be supplied to the court[8]. (As referred to in article II)

There are certain grounds for non-recognition and no enforcement of award under New York convention one of them is a limitation to the principle of party autonomy which is public policy[9].

Party autonomy under UNCITRAL Model Law

UNCITRAL Model law was formulated to bring reforms in the New York convention. Initially it adopted the party autonomy principle without any opposition[10].It has been stated that “Subject to the provisions of this law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings[11] and that “in matters   Governed by this law, no court shall intervene except where so provided in this law,”[12] confirming the principle of party autonomy.

UNCITRAL Model law also states that the tribunal shall deliver and decide the dispute in accordance to the law chosen by the parties.

UNCITRAL from its inception has worked in a direction which leads towards improving the enforceability of arbitral awards and removes hindrances in the path towards recognition. It has set of rules which serve as a guide for the parties to be in streamline with the arbitration process. In other words model law is a comprehensive document which governs the arbitration agreement, its composition, jurisdiction, conduct of the proceedings etc.

The Model law does not intend to grant unfettered autonomy to the parties in relation to the conduct of arbitration. It wanted to give an autonomy which could be balanced with the safeguards, which is in the form of mandatory provisions that could not be derogated, as they are considered essential tenents of this regime. However there is no such strict delineation between the mandatory norms and non-mandatory, but there are a couple of them which have proved to be mandatory over the period of time.

Provisions which seem to be mandatory somewhere caste a limitation upon the party autonomy, some of the provisions are:

  • That the arbitration agreement must be in writing[13].
  • That the parties should be treated with equality and each party should be given full opportunity for presenting his case[14].
  • That party must be given notice regarding every hearing and requisite material must be supplied to the tribunal by the other party[15].
  • That award shall be in writing which should specify the date and place. It should also be delivered to the parties[16].

The model Law includes many articles having phrases like “unless otherwise agreed by the parties”. These phrases display the non-mandatory attribute of these articles.

Article 19 provides for the determination of rules of procedure which is as follows:

“(1) Subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.

(2) Failing such agreement, the arbitral tribunal may, subject to the provisions of this Law, conduct the arbitration in such manner as it considers appropriate. The power conferred upon the arbitral tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence.”

Parties can conclude their agreement as per their choice but the only limitation here would be that the agreement must not be in conflict with any mandatory provisions. So it is a need of an hour that there should be clarity as to mandatory provisions which are non- derogable.

Article 34 (2) of the Model Law reads:

“An arbitral award may be set aside by the court specified in article 6 only if: (a) The party making the application furnishes proof that: (iv) The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law.”

There is no  certainty as to issues which are mandatory and if there is uncertainty regarding future of the procedure to be followed in arbitration, as to whether it would be hit by a mandatory provision or not  it would definitely lead to curtailment of party autonomy.

LIMITATIONS ON PARTY AUTONOMY

As stated earlier also that autonomy of party is not unfettered, there are certain restrictions cast upon them. They are as follows:

  • EQUALITY TREATMENT
  • THIRD PARTY
  • ARBITRATION AGREEMENT
  • ARBITRABILITY
  • INSTITUTIONAL ARBITRATION
  • PULIC POLICY

Equality Principle:

The parties are autonomous enough to agree upon their own conduct of arbitration, but it cannot be done by infringing the provisions relating to equal treatment of parties. While pen downing the arbitration agreement either party can abuse its choice by imposing unfair procedural terms and conditions. At  times the rules chosen by the parties can be interpreted in such a way that it leads to unfair treatment, so here it becomes the duty of arbitrators and even National courts to maintain the basic attributes of the Institution of arbitration and restrict party autonomy .If the technical rules which relates to equality of parties such as presenting the case, notice of hearings, cross –examination, information regarding the material being presented are not followed or are restricted by the party agreement ,such agreements are void and have no validity.[17] This restriction is widely accepted. The New York Convention[18] and UNICITRAL [19]also recognise it as a mandatory provision which should not be derogated.

Third Party:

The arbitration agreement can only be enforced against the parties constituting it i.e. parties cannot agree on anything which has implications on third parties [20].Even the tribunal has got no rights to call upon third parties either to act as witnesses, or for production of documents or to pay a sum etc.; although there is an exception to this restriction for the tribunal. The tribunal can acquire such a right after the approval and assistance of national courts.

Arbitration Agreement:

The agreement which gives autonomy to the parties acts also like a restriction. Whatever agreed upon in the agreements binds them and later they cannot deviate from it.

Arbitrability:

Arbitrability means whether an issue is appropriate for subjecting it to be resolved by arbitration or whether it is capable to be resolved by arbitration. However this is purely a concern for a legal domain, therefore it is definitely a limitation on autonomy of the parties.  Suppose there is an issue which is non-arbitrable then the arbitration agreement will lose its validity and will be void. Certain issues like family and criminal law are subject to national courts and so can’t be subject matter of arbitration even if parties wish to.  Therefore the tribunal will have no jurisdiction over it. Non- Arbitrability can be one of the reasons under the lex-arbitri for setting aside the award.

In HDFC Bank case[21], the High Court of Delhi gave noteworthy guiding principle as to what is arbitrable and what not under an arbitration agreement. It laid down that disputes concerning to ‘rights in personam’ are arbitrable and parties have autonomy to go for arbitration as an alternative, on the other hand disputes concerning to ‘rights in rem’ which have public interest are not subject to arbitration and are not arbitrable.

Institutional Arbitration:

This is another limitation on party autonomy. If the parties chooses institutional arbitration over ad-hoc arbitration , the freedom to frame procedural rules gets subjected to the pre-designed norms of the Institution being chosen, it would be difficult rather impossible for an institution to agree for rules of some other institution.

Public Policy:

The last but not the least is the most encountered restriction which is public policy. This restriction owes its existence to the concept of state sovereignty, thus every state can demarcate the boundaries within which arbitration can take place.

Public policy is subject to no precise definition .But it can be said that it refers to the minimum rules to which parties have to adhere. This concept depends on the cultural, social and economic tradition of each country.

Usually, the arbitral tribunal when refers to public policy, it is morals, equity laws of the country, where the award is likely to be enforced.[22]But such an attitude is not encouraged [23] as implications of international arbitration are much more than that of domestic arbitration, infact public policy of all nations should be respected and kept in mind.[24]

It is basically a protective measure for the society at large that they should not violate some fundamental principles which come under the framework of public policy, infact it is an attempt to stop parties from drawing contracts which are illegal.

Public policy enables a judge to deny enforcement and recognition of award  if he thinks that it contradicts with the fundamental tenents of the legal system where the award has to be enforced.

In Mastrobuonu v Shearson Lehman Hutton Inc.[25], the U.S Supreme Court held “parties are generally free to structure their arbitration agreement as they see fit…but albeit with certain limitation.”

 In Peh Teck Quee v Bayerische Landesbank Girozentrale[26] , the court of appeal of Singapore held “that parties can use their autonomy to draft an agreement but where the enforcement of such agreement is contrary to public policy, it will be declared void at that point”.

As we know nothing in this world is for free, if the parties wish to perform their autonomy in relation to the arbitration agreement there are certain limitations which they are required to strictly adhere to.

JUDICIAL INTERPRETATION

Party autonomy was not whole heartedly accepted by the courts earlier as they considered it as a menace to their jurisdiction. They were afraid that such a principle would restrict the jurisdiction of judges. Although Judges in England had a positive attitude towards this principle but judges in other states like Switzerland curtailed the autonomy of the parties to an extent.[27]

Courts in India always wanted to have a hold over the national parties heading for arbitration be it in India or even outside, This attitude however was in conflict with the party autonomy principle, but a recent BALCO judgement shows a changed promising and open minded attitude of Indian judiciary . Though have shown respect towards the arbitration agreement; they do not allow parties to take refuge in litigation once they make their choice to head with arbitration. Court has always born this attitude that except in certain circumstances, it will not interfere in the arbitral proceedings. Some of the Indian cases supporting the party autonomy principle are enumerated below.

In Rodemadan case[28] the Supreme Court honoured the arbitration agreement made by the parties and even preceded to appoint the presiding arbitrator by upholding the validity of the arbitration agreement.

Similarly, in Sedco Forex case[29] the Supreme Court upheld the petition regarding the arbitration clause and appointed the arbitrators.

In Kamdhenu Cooperative case[30], the Delhi High Court observed that: “It is not a case where the respondent was not aware of the Arbitration proceedings but for the reasons best known to the respondent, respondent chose not to contest the matter…In my considered view the respondent deliberately took an uncooperative stand in deciding to stay away from the Arbitration proceedings and must bear the consequence thereof”.

The Delhi High Court in A – One Alums case[31] took a strong stand for party autonomy and held: “This court cannot re- appreciate evidence as it is not an appellate authority. It is not the function of this court to differ with the award even if this court was to come to a different conclusion on the same set of facts. The parties have chosen the forum of arbitration and the arbitrator is the designated person to decide the disputes”.

Thereby the court made it very clear that parties which pursue arbitration as a dispute resolution mechanism should get their issue resolved by that arbitration only.

A controversial judgement of Supreme Court[32] which had put fetters on the autonomy of the parties participating in arbitration has been recently turned down.

In Bhatia case, the Supreme Court ruled that part I of the Indian Arbitration Act was applicable to all kinds of arbitration whether domestic or national, unless parties exclude it by an agreement. This judgement meant that the Indian court could have jurisdiction for granting interim relief under section 9 and even to set aside the award under section 34 of the act. Thus giving extensive leeway on substantive issues even when seat of arbitration was not in India.

The resent decision of supreme court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Service, Inc.[33]has limited the participation of Indian courts in International arbitration, where seat of arbitration is outside India this judgement reflects a brighter attitude towards party autonomy principle as the judgement upholds autonomy of parties and territoriality as under UNICITRAL Model Law. This judgement comes close in vicinity with the International counterparts. This BALCO decision is likely to go down in the archives of arbitration reports as the watershed judgement which heralded a new era for Indian arbitration.

CONCLUSION

If we fancy international commercial arbitration as a movie, then the principle of party autonomy would be the director of this movie, because it the director who selects the cast, the situation and other details regarding the movie. In the same way, here referring to party autonomy, it is the parties who choose the laws which shall be applicable, who shall be the arbitrators, the language of the proceedings, the place of arbitration etc.

In other words it can be said that by virtue of this principle the parties get this freedom to regulate the essential attributes of an arbitration proceedings. Today it would not be wrong to assert that party autonomy is a sine qua non for International commercial arbitration.

The principle of party autonomy is based on the freedom to contract. The extent this freedom depends upon the stage in which they are, staring from negotiating the agreement till the passing of the award.

However this freedom is not absolute, it has certain limitations attached to it, which in turn maintains the uniformity and standard of the institution of arbitration. These restrictions are equal treatment towards parties, restriction as to third party, the arbitration agreement; the Arbitrability of the issue, institutional rules and the most important is public policy.

As arbitration is a private settlement of dispute, parties can exercise their autonomy subject to these restrictions.  These limitations do not abuse the freedom of the parties but Infact it is the knot that keeps the arbitration intact. If unlimited autonomy would have been granted then it would lead towards total chaos and the shadow of justice which follows arbitration would be lost somewhere. Unlimited freedom is a myth because it is improbable for the parties to have similar negotiating power or be equal economically or logically, which is the reason why there are limitations to this freedom.

By:- Asst. Prof. Pallavi Bajpai,(UGC- Net, LL.M Nalsar University of Law) Assistant Professor, School Of Law , ITMU, Gurgaon)

[1] Palkhivala in his book “We, The Nation: The Lost Decades”

[2] Dicey, Morris and Collins, The Conflict of Laws, vol 2 (14th edn, Sweet&Maxwell 2010)

para 32-004.

[3] Matz, D. E., Mediator Pressure and Party Autonomy: Are they Consistent with Each other? Negotiation

Journal 10, 4 October 1994, Pg 339-365, Summary by Tanya Glaser.

[4] On September 13, 1989 (XVI YBCA 236 (1991) 238.)

[5] Ibid, Art.6.

[6] Dagmar, Coester-Waltjen., supra note 8.

[7] New York Convention, Art.II.1.

[8] Ibid, Art.IV (1) (b).

[9] Ibid, Art (2) (b).

[10] See UN Doc. A/CN.9/207, Para. 17:”… probably the most important principle on which the model law should be based is the freedom of the parties in order to facilitate the proper functioning of international commercial arbitrations according to their expectation.”

[11] UNCITRAL Model Law, Art.19 (1).

[12] Ibid, Art.5.

[13] Art. 7 (2) of UNCITRAL Model Law

[14] Art. 18 of UNICITRAL Model Law

[15] Art. 24 (2), (3) UNITRAL Model Law

[16] Art. 31 (1),(3), (4) UNITRAL Model Law

[17] Redfern and Hunter, para 6.11.

[18] New York Convention, Art V (1) b

[19] Model Law, Art 18.

[20] Redfern and Hunter, para 6.19

[21] HDFC Bank v. Satpal Singh Bakshi, 2012

[22] Model Law, Art 36 (1) (b) (ii); New York Convention, Art V (2) (b); English Arbitration Act, s 103 (3).

[23] Fouchard, Gaillard and Goldman, International Commercial Arbitration (Kluwer Law  International, 1999)

[24] Engle, 342.

[25] 514 US 52, 55 (1995).

[26] [2000] ISLR 148 (CA).

[27] Ruhl, G., Party Autonomy in the Private International Law of Contracts: Transatlantic Convergence and

Economic Efficiency (CLPE Research Paper, Law Research Institute Research Paper Series,Vol.03 No.01,April 2007)

[28] Rodemadan India Limited v. International Trade Expo Centre Limited, Supreme Court of India, Arbitration Petition 25 of 2005, decided on April 17, 2006

[29] Sedco Forex International Drilling Inc. v. Oil and Natural Gas Corporation Limited, Supreme Court of India, Arbitration Petition 1 of 2006, decided on April 20, 2006

[30] Kamdhenu Cooperative Group Housing Society Limited v.Messrs Vardhman Contractors and Builders Private Limited and Another, Delhi High Court, Cs (Os) No.2458A of 1996, decided on February 16, 2006

[31] Messrs A-One Alums Private Limited v. Messrs Chemcon Fabricators (Delhi) Private Limited, Delhi High Court, Cs (Os) No.930A of 1997, decided on February 16, 2006

[32] Bhatia International v. Bulk Trading S.A. & Anr, (2002) 4 SCC 105

[33] Bharat Aluminium Co. v. Kaiser Aluminium Technical Service, Inc.,2012

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