HomeBusinessWhy companies need to understand arbitration agreements

Why companies need to understand arbitration agreements

BY JACOB MUTEVEDZI

Commercial arbitration is consensual in nature. This means that without the consent of the parties to refer a dispute to arbitration, no arbitration can take place. The source of the power of an arbitrator or an arbitral tribunal to determine a dispute is derived from an agreement of the parties to refer their dispute to arbitration. This is why lawyers often claim that the arbitration agreement is the cornerstone of arbitration.

Consent constitutes the foundation of arbitration because without it an arbitral tribunal has no legal basis to act. To submit to arbitration the parties must “consent” to do so. They consensually agree to remove their dispute from the jurisdiction of the formal courts and submit it to a private dispute resolution mechanism. It is this consent which confers “jurisdiction” on the arbitral tribunal while simultaneously ousting the jurisdiction of the courts. This jurisdiction deriving from consent is antecedent to any powers that can be exercised by an arbitral tribunal. This consent is normally expressed in an arbitration agreement.

Parties can give their consent to refer a dispute to arbitration in a variety of ways. For instance, parties can refer an existing dispute between themselves, to an arbitrator. This is achieved by entering into a written post-hoc arbitration agreement, after the dispute has arisen. This post-hoc arbitration agreement has been variously referred to as a submission agreement. The French expression of compromis is also frequently used in practice. Usually, parties will consent to take future disputes to arbitration as opposed to existing disputes. This is done by the inclusion of an arbitration clause in their contract. The arbitration clause is included in the contract during drafting when there is no existing dispute, and the parties will agree that any future dispute arising out of their agreement will be resolved by way of arbitration. Such a clause is called “an arbitration clause”.

Once entered into by the parties, arbitration clauses and submission agreements relating to future disputes are valid and binding. However, in the absence of the consent of the parties, either through a submission agreement or an arbitration clause, there can be no basis for arbitration. In the event that your company is dragged to arbitration, one of the initial exercises that your arbitration lawyers should occupy themselves with is to study the conditions for the validity of the relevant arbitration agreement. Counsel must interrogate the formal and substantive conditions for an arbitration agreement to be valid and to be binding.

For those companies that wish to have commercial disputes resolved by arbitration, it is important for corporate counsel to master the technique of how arbitration agreements need to be drafted for them to be effective, that is to say, for them to be able to carry out the effects which the parties intend them to carry. The ultimate effect of an arbitration agreement is to effectively force the parties to refer the dispute to arbitration.

Closely related to the enquiry of whether or not there exists a valid arbitration agreement are the two legal concepts relating to the arbitration agreement. The first one is the doctrine of “Separability” and the second one is the concept of “Kompetenz Kompetenz”.

Separability is a legal fiction in terms of which the arbitration clause contained in a contract is conceptually considered to be a separate contract from the main contract. In other words, the arbitration clause is a stand-alone and distinct agreement from the contract which contains the arbitration clause. The reason for this legal fiction of Separability is that, if an arbitral tribunal, at the end of an arbitral hearing, were to find that the contract between the parties is null and void, or has been terminated, or has no legal effect for whatever reason, without Separability, this would mean that the arbitration clause itself has no legal effect. This, in turn, would mean that the arbitrators themselves lack the power to make the finding in the first place that the contract has been terminated, is null and void or is otherwise not carrying any legal effect. Therefore, the arbitrators would basically be pulling the rug from underneath their own feet by making a finding that the contract is not valid. This is why the concept of Separability is indispensable.

The second concept is Kompetenz-Kompetenz. This is yet another legal fiction which states that if any party challenges the jurisdiction of the arbitration tribunal, the arbitral tribunal itself is empowered to determine that challenge. For instance, if a respondent in an arbitration claims that the tribunal does not have the power to hear the dispute because the arbitration agreement is not valid, this question of whether or not the tribunal has got the power to hear the dispute is a question which the arbitrators themselves need to resolve. It is by no means an issue that can be resolved in the first instance by the domestic courts of a particular country.

Conclusion

Without these legal contrivances of Separability and Kompetenz Kompetenz, arbitration as an institution would be doomed. Any discussion on Separability is incomplete without mentioning the doctrine of Kompetenz Kompetenz. These principles function hand in glove. In his article, “Separability and Competence-competence in International Arbitration: American Review of international Arbitration, (2002) R. H. Smit describes Separability and Kompetenz Kompetenz as the “conceptual cornerstones” of arbitration. Kompetenz Kompetenz and Separability are complementary doctrines because they both assist in answering the important question of who decides the jurisdiction of the arbitrator and seek to prevent premature judicial intervention in arbitral proceedings.

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