ARBITRATION – WHY HAS IT NOT WORKED? A COMMENT ON THE OPERATION OF THE ARBITRATION ACT

I must say straight away that the subject was chosen for me. It presumes that arbitration has not worked. I will presently examine it.

Many people think that arbitration law is simple to understand and simple to apply, given a modicum of common sense, Ideally, this would be so, but it is not. It combines strength with flexibility. That is the great advantage of arbitration. Strength, because it yields enforceable decisions, backed by the coercive powers of the State. Flexible because it allows the contestants to choose their own judges having regard to the nature of the dispute and choose procedures, which ideally should also fit the nature of the dispute and the business context in which it occurs.

Sri Lanka has a rich tradition of dispute resolution going back to two thousand five hundred years. The village councils were then the forum for settlement of disputes. In India it was the panchayat. The society at that time was highly influenced by religion and administration of justice was directed towards the amicable settlement of disputes.

Since 1505 Sri Lanka has been under western governance and subjected to several different legal traditions. Portugese rule (1505-165) did not bring with it any notable legal reform. The Dutch rule (1656-1796) that followed brought with it the Roman Dutch Law which still remains the common law of the land. The British followed the Dutch in 1796. With the introduction of the English Law to commercial dispute resolution, the basic concept of modern arbitration was introduced.

Prior to the introduction of the Arbitration Act No. 11 of 1995, arbitration law was based primarily on three statutes. Namely, the Arbitration Ordinance No. 15 of 1866, the Civil Procedure Code of 1889 and the Reciprocal Enforcement of Foreign Judgments Ordinance of 1921 which also provided for the enforcement of foreign arbitral awards.

Developments in trade, commerce and investments in the private sector after 1978 led to the increasing realisation that a speedier, cost effective and a well integrated alternate dispute resolution mechanism for commercial disputes should be in place.

Introducing the Arbitration Bill in Parliament at its second reading, in May 1995, the then Minister of Justice had this to say,-

“One of the endeavours of this Government has been to accelerate the economic development of our country…. ……………one of the constraints with regard to foreign

investment…….is the cumbersome procedure relating to the resolution of commercial disputes……………… Potential investors are greatly concerned about delays. ……..One of the salient features of our judicial system is the influence of the adversarial system……inherited from the British system of jurisprudence…….We think the adversarial system is not appropriate or adequate and we have to focus upon alternative methods for the resolution of these disputes. ..We are convinced ….that there has to be a far greater role for arbitration in respect of commercial matters. Dispute resolution will then become quicker, less expensive and less technical.”

This was to be achieved by formulating a comprehensive regime pertaining to arbitration. The Arbitration Act No. 11 of 1995 was that.

In drafting the new Arbitration Act the draftsmen were guided by the overall objective of making comprehensive legal provisions for the conduct of arbitration proceedings and the enforcement of awards made there under and to make legal provisions to give effect to the principles of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958.

The Act was intended to bring about a fundamental change for the better. I believe that this Act provides the most exciting of challenges to arbitrators and those practicing around them. It was intended to establish arbitration as the alternative form of dispute resolution indeed, as the preferred mode of dispute resolution. It was hoped that arbitrators and the parties or their representatives will spurn the old ways that mimicked the Civil Procedure Code syndrome and opt for the new regime for a flexible, speedy and cost effective resolution of their disputes.

In order to achieve this fundamental change the new law incorporated the following basic elements.

A valid arbitration agreement is a bar to court proceedings.

Once arbitration had commenced, court intervention is minimised and controlled. It plays only a supportive role.

Party autonomy.

Arbitrators follow the rules agreed upon by the parties.

Full play given to the principle of audiatur et altera pars, with provision that a party who does not avail himself of this opportunity cannot prevent the proceedings going forward.

No review of an award on the merits.

Finality of the award is enhanced.

An award may be set-aside only on narrowly defined grounds.

Clear, unambiguous and efficient enforcement procedure for domestic awards.

Clear, unambiguous and efficient procedure for the recognition and enforcement of foreign arbitral awards as provided for by the New York Convention of 1958.

The intent to give party autonomy permeates the entire Act. Parties are free to determine the number of arbitrators – section 6. Parties are free to agree on a procedure for appointing the arbitrators – section 7. Parties are free to agree on the place of arbitration – section 16. Parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings – section 17 (subject to the provisions of the Act). Parties are free to agree on the manner of evidence to be led before the arbitrator. Most importantly by section 24 the parties are free to agree as to such rules of law applicable to the substance of the dispute and an arbitral tribunal shall decide the dispute in accordance with such rules of law. However, the arbitral tribunal is permitted to decide disputes according to considerations of general justice and fairness or trade usages if the parties have expressly authorised it to do so. To accentuate the finality of such consensual awards, right of appeal was limited to narrowly defined grounds and parties were permitted to even waive rights of appeal to the Supreme Court by what are called ‘exclusion agreements’. This is sanctioned by section 38 of the Act.

Another feature introduced by the Act was to promote the Courts to play a supportive, as opposed to an interventionist role in arbitrations. Towards this end the legislature has severely curtailed the power and jurisdiction of courts to adjudicate upon matters agreed to be submitted for arbitration. This was because of the criticism that the old regime permitted innumerable challenges in courts at various stages of the arbitration, which tended to stultify and render nugatory the dispute resolution process in commercial matters and because of the perceived lack of familiarity with the realities of the commercial world by the judiciary. This was compounded by the fact that there were remissions of awards by courts for re-consideration by the arbitral tribunal and the endless cycle of visits and re-visits to courts. Arbitration became a litigator’s paradise. There was no finality.

This problem was principally addressed in the Act by section 5 thereof, which was important and novel. Section 5 of the Act decreed that where a party to an arbitration agreement institutes legal proceedings in a court against another party to such agreement in respect of a matter agreed to be submitted for arbitration under such agreement, the court is devoid of jurisdiction to hear and determine such matter if the other party objects to the court exercising jurisdiction in respect of such matter. However, the court is not denied jurisdiction to hear and determine any other matter or dispute so far as that matter or dispute does not fall within the ambit of the matter agreed between the parties to be submitted to arbitration.

The supportive role of the court is also to be seen in its power to grant injunctions or interim measures of protection to protect or secure the claim which forms the subject matter of dispute during the interregnum between the giving of the notice of arbitration and the constitution of the arbitral tribunal. Upon the constitution of the arbitral tribunal it is independently empowered under section 13 of the Act to order interim measures of protection.

Considering the fact that the new Act was a paradigm shift from the then existing culture various awareness raising programmes, seminars on commercial arbitration and training courses for arbitrators and lawyers with the participation of members of the judiciary were also conducted by the Institute for the Development of Commercial Law and Practice (ICLP) to make the commercial community and other stake holders aware of the new Act and the advantages of arbitration proceedings under the new regime over traditional litigation.

The Act has now been worked for nearly eight years. Several commercial arbitrations, domestic and international have taken place under the new regime. The question is now asked – has it worked? Or has it failed?

The answer is Yes and No.

No independent study has as yet been undertaken on the subject, as far as I am aware. Therefore in attempting to comment upon the operation of the Arbitration Act I am compelled to draw from my own experience and exposure to the conduct of arbitration in Sri Lanka and its journey through the judicial process in seeking to have awards enforced and set aside and appeals from decisions of the High Court on this to the Supreme Court.

The success or failure of any human endeavour is determined by several factors. On the one hand we have the hope, the aspiration and the vision of those who wish to achieve a particular purpose. On the other we have those for whose benefit the purpose is conceived of and addressed. Then there is the third group, which becomes necessarily involved in the implementation of the purpose because of its expertise and experience. I believe the interplay of these three forces determine the success or failure of the endeavour.

Arbitration is no exception. The Arbitration Act was enacted with a vision and purpose in mind. It was addressing the needs of the commercial community and the country’s economic regeneration by making dispute resolution quicker, less expensive and less
technical. The ‘players’ who were to realise this vision and purpose are firstly, the arbitrators, secondly, those who represent the disputants in the arbitration proceedings and thirdly, the judicial system.

In evaluating the success or failure of arbitration, the enquiry should necessarily be directed towards ascertaining how the ‘players’ have responded to the challenges posed by the new regime and whether they have honoured the purpose and intent behind the provisions of the new Act and the guidelines set out to ensure the integrity and honesty of the system.

Such will include due diligence in the prosecution of the claim; obligation to eschew technicalities, indeed rules of evidence are to be excluded; acceptance of party autonomy to the largest possible extent in the conduct of the proceedings, i.e. arbitrators must follow the rules agreed to by the parties and be bound by it; they should not over-reach their mandate; and the paramount duty of arbitrators to be independent and impartial and their obligation to make known to the parties any circumstances which are likely to give rise to justifiable doubts as to his impartiality or independence, and the obligation of Courts to be supportive and not interventionist.

I believe not too well at all, as there is widespread disillusionment with the way in which arbitration is being conducted.

The main criticism is that arbitration has become too similar to court procedures – the very evil that was sought to be overcome by the new Act! Proceedings are often delayed and take much longer than what the parties had hoped when they incorporated arbitration agreements in their contracts. I personally know of a proceeding where a single witness was cross-examined for three years, against protests, before a single arbitrator.

Most arbitrators are retired judges – mostly of the Supreme Court. Old habits die hard. They are quite content to let arbitration to be conducted in the same way as court proceedings.

Another aspect is the confrontational character of the proceedings, with more emphasis on legal and procedural technicalities, totally ignoring the philosophy underlying the Act.

Sittings are often of short duration, because counsel appearing are busy practitioners and would like to adjourn early to get ready for next day’s court work! Most arbitrations start around 4.30pm or 5pm and go on for 2 to 3 hours only. Postponements are readily granted, necessitating a greater number of sittings. Parties suffer if they have to pay per sitting both the arbitrator and party’s representatives. A full day sitting on consecutive days is virtually unknown, except in domestically held international arbitration.

Another very disturbing feature which is fast emerging and also evidenced by challenges to awards, mostly of three panel arbitrators, are complaints about some arbitrators that they often exceed their mandate and or are impartial/biased – calling into question their independence and impartiality. This is further compounded by the fact that the awards are final and binding on the parties and is subject only to limited grounds of challenge based on the New York convention. The frustration is enormous.

Though in the nature of things this trend is not easy of proof, the perceptions on the subject are so strong that many parties say that they would prefer to litigate in court rather than arbitrate -especially in the Commercial High Court -because of the transparency of judicial proceedings and currently, the speed with which cases are disposed of.

Can we say because of this unfortunate aberration brought about by two of the ‘players’ I had referred to earlier – arbitrators/counsel – that arbitration has not worked? I submit not.

The vision and philosophy behind the new Act remains relevant and the provisions of the Act can still be worked for the benefit of all concerned if measures are taken timorously to correct the aberration.

The correction, to use a cliche, is not to throw out the baby with the bathwater. One cannot discard the good with the bad. As with weeds the roots must be tackled if the weeds are to disappear. We must read the problem bottom up. Start with the malfunctioning players.

In the short term, this has to be achieved by the parties to the dispute requiring those who represent them to conduct the arbitration in a speedy manner on a full day basis. For this purpose the end users of arbitration should be made aware that this is their right and that they are entitled to demand it of their representatives and through them of the arbitrators.

Very often I have heard complaints by clients in this regard, but very few would seem to insist on this at the outset, conditioned perhaps by their experience in court litigation over which they have no control and the mystique of the black-coated fraternity.

The adoption of recognised Rules of arbitration (i.e. institutionalised arbitration) in the matter of procedure will go a long way towards resolving this problem, as most of the arbitrations are conducted in an ad hoc basis with no direction, so that a weak tribunal is unable to control the proceedings and a compliant tribunal is willing to go along with it, and the arbitration takes place at a pace set by Counsel on both sides in a convenient 2-3 hour evening sitting ambling along, sometimes over years.

Can we blame the new Act for this? I submit not.

What then is the solution? The solution to the problem, in the long term, I believe is to invest in the younger generation of lawyers and judges to bring about attitudinal changes, to inculcate an arbitration culture and wean them away from traditional court practices.

This involves teaching and training in arbitration law at the Judges Institute, the Law College and at the Universities. Arbitration should be made a compulsory subject at Law College, for after all it also deals with dispute resolution. Diploma courses on the subject may be considered for those who are already in practice or are holding judicial office.

My experience as a Visiting Lecturer in like courses at the Law College on Intellectual Property and much earlier at the Law Faculty on International Trade Law and Insurance compels me to believe that such training and exposure to arbitration is vital to impress upon them the merits of modern commercial arbitration practice and the importance of improving the effectiveness of proceedings if the advantages of arbitration are to be properly realised.

All is therefore not lost. I will therefore say, that the new Arbitration Act has not failed. It has worked quite well, given the constraints to which it has been subjected to and the environment into which it was born. It will no doubt grow and blossom in the ripeness of time if we can truly appreciate its usefulness and honour its intent, philosophy and purpose.

It is therefore in our hands to see to its fruition. It is in our hands to kill the weeds and fertilise the soil to see it grow.

That’s the challenge we face.

May arbitration flourish.