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International arbitral jurisdiction Zhang, Yulin 1994

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INTERNATIONAL ARBITRAL JURISDICTIONbyYULIN ZHANGB.A., LL.B., 1987, Graduate Diploma, 1989Beijing University, P.R., ChinaA THESIS SUBMITTED IN PARTIAL FULFILLMENT OFTHE REQUIREMENTS FOR THE DEGREE OFMASTER OF LAWSinTHE FACULTY OF GRADUATE STUDIES(Faculty ofLaw)We accept this thesis as conformingto the required standard.THE UNIVERSITY OF BRITISH COLUMBIASeptember 1994© Yulin Zhang, 1994In presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.(Signature)Department of___________________The University of British ColumbiaVancouver, CanadaDate / 2h7 (L.DE-6 (2/88)11ABSTRACTAmong the several reasons that contribute to the success of international commercialarbitration is the maximization of party autonomy and the minimization of court interventions inarbitration. This paper considers international arbitral jurisdiction in view of party autonomy andcourt interventions.The nature of international commercial arbitration involves both private consensus and publicrecognition. Private consensus lies in the agreement of the parties. Problems which arise from theagreement and concern arbitral jurisdiction are where arbitral jurisdiction comes from, whetherinternational arbitrators have the power to decide their own jurisdiction, to what extent internationalarbitrators can assume jurisdiction and to what extent a national court should review the decisionsof the arbitrators.The analysis is primarily based on international arbitration rules, published arbitral awards,arbitration legislations and court decisions of countries which have a fairly developed system ofinternational arbitration. The paper concludes that international arbitrators are empowered to dealwith their own jurisdiction and their decision is subject only to attack at a national court.International arbitrators and national courts should cooperate to facilitate a speedy resolution ofdisputes. National laws should play the role of filling in the gaps of international arbitral jurisdiction.Parties should frame their agreement in a way to avoid ftiture uncertainties.111TABLE OF CONTENTSABSTRACT.iiTABLE OF CONTENTS iiiLIST OF TABLES viiLIST OF ABBREVIATIONS viiiACKNOWLEDGEMENTS xINTRODUCTION 1CUAPTER 1: PRELIMINARY ISSUES 51.1. Definition 51.2. The Purpose of Choosing Arbitration 81.2.1. Scarcity in Dispute Resolution 81.2.2. The Opportunity Cost 121.2.3. Efficiency in Arbitration 131.3. Nature of International Commercial Arbitration 17iv1.3.1. Freedom ofContract.171.3.2. Relationship between Arbitrators and Parties 191.3.3. Public Interest 24CHAPTER 2: SOURCE OF ARBITRAL JURISDICTION 282.1. Form ofArbitration Agreement 282.1.1. Agreement in Writing 292.1.2. Arbitration Clause v. Submission Agreement 312.2. Contents of Arbitration Agreement 332.2.1. Intention to Arbitrate 342.2.2. Scope ofDisputes 372.2.3. Appointment of Arbitrators 412.2.4. Rules ofProcedure 422.2.5.Applicablelaw 432.3. Enforceability of Arbitration Agreement 452.3.1. Law Applicable to Arbitration Agreement 462.3.2. Effect of Arbitration Agreement 50CHAPTER 3: JURISDICTION AS TO JURISDICTION 553.1. Who Is to Determine the Competence of the Arbitrators? 553.2. Competence of Competence 613.2.1. As an International Legal Principle 62V3.2.2. As an Inherent Jurisdiction.643.2.3. In Relation to the Doctrine of Separability 673.2.4. In Relation to the Arbitrators’ Impartiality 723.3. The Nature of the Decision on Arbitral Jurisdiction 75CHAPTER 4: SCOPE OF ARBITRATION JURISDICTION 824.1. Considerations about the Disputants 824.1.1. Parties to the Arbitration Agreement 824.1.2. Capacity and Nationality 844.1.3. Group ofCompanies 884.1.4. Multi-Respondents 934.1.5.JoinderofParties 964.1.6. Consolidation ofArbitrations 994.2. Considerations about the Claims 1034.2.1. Preliminary Institutional Examinations 1034.2.2. Terms ofReference 1054.2.3. Extent of Claims 1074.2.4. New and Counter Claims 1094.2.5. Withdrawal of Claims 111CHAPTERS: JUDICIAL REVIEW OF AREITRAL JURISDICTION 1145.1. Judicial Review In General 114vi5.1.1. Dual System of Judicial Review 1145.1.2. Judicial Review on the Merits Excluded 1205.1.3. Judicial Review on Procedure 1225.1.4. No Judicial Review 1255.2. Review ofArbitral Jurisdiction 1295.2.1. Validity of Arbitral Jurisdiction . . 1295.2.2. Excess of Arbitral Jurisdiction 1315.2.3. Public Policy in Relation to Arbitral Jurisdiction 136CONCLUSION 142BIBLIOGRAPHY 144viiLIST OF TABLESTable 1: Comparison ofDispute Resolution Mechanisms.11viiiLIST OF ABBREVIATIONSAAA American Arbitration Association.BCICAC British Columbia International Commercial Arbitration Centre.CIETAC China International Economic and Trade Arbitration Commission.ICC International Chamber ofCommerce.ICSID International Centre for Settlement of Investment Disputes.LCIA London Court of International Arbitration.SCC Stockholm Chamber ofCommerce.UNCITRAL United Nations Commission on International Trade Law.Geneva Protocol Protocol on Arbitration Clauses, done at Geneva on 24 September1923.ixGeneva Convention Convention on the Executionof Foreign Arbitral Awards, done atGeneva on 26 September 1927.European Convention European Convention on International Commercial Arbitration, doneat Geneva on 21 April 1961.ICSID Convention Convention on the Settlement of Investment Disputes Between Statesand Nationals of Other States, done at Washington on 18 March1965.New York Convention Convention on the Recognition and Enforcement of Foreign ArbitralAwards, done at New York on 10 June 1958.xACKNOWLEDGEMENTSI wish to express appreciation to my supervisor, Professor Pitman B. Potter, who has, overthe past two years, done the most to encourage and support me in doing the necessary research forthis work and made many helpffil comments on the manuscript, and Mr. Edward C. Chiasson whoread every word of the manuscript and offered acute observations and valuable suggestions. Theirinsights enriched my writing immeasurably and helped to shape my thinking about the current law andpractice of international arbitration. I should say that any mistakes in the writing are my soleresponsibility.Special thanks and gratitude must go to my wife, Hong Yu, who has consistently andunreservedly supported my work and taken good care of our first baby boy, Richard M. Zhang, bornduring the time ofmy study, so as to allow time for me to focus on my work.Finally I owe an immense debt of gratitude to the Faculty of Law for offering me theoppoitunityto do the study, the Faculty of Graduate Studies for giving me the University GraduateFellowship, and St. John University Alumni for their St. John Scholarship to enable me to completethe study. Without their financial support, it would be impossible for me to do the study.1INTRODUCTIONInternational commercial arbitration undoubtedly experienced a full-scale development duringthe last few decades. Today business people commonly use arbitration clauses in internationalcontracts for the sale ofgoods, the transfer oftechnology, franchise and foreign investment. Arbitralinstitutions are administering a significant number of arbitrations every year.1 International lawyerssignificantly are involved in drafting arbitration agreements, presenting arbitration cases and seekingenforcement of arbitral awards. Arbitrators and legal experts not only provide part-time or full timein arbitration cases, but also hold regular communal meetings to exchange experiences andresearch on arbitration.3 Published arbitral awards are taken frequently as precedents in thesubsequent arbitrations.41 In the International Chamber ofCommerce (“ICC”) arbitration, e.g., in 1993, the InternationalCourt of Arbitration received 352 new requests for arbitration involving 900 parties from a recordof 94 different countries: The ICC International Court of Arbitration Bulletin, Vol. 5, No. 1, May1994, p. 20.2 In China International Economic and Trade Arbitration Commission (hereinafter “CIETAC’),for example, some senior arbitrators work lull time and permanently for CIETAC on arbitration cases.They are either appointed by the parties or frequently appointed as presiding arbitrators by thechairman of CIETAC.For example, International Council for Commercial Arbitration (“ICCA”) holds a congressevery four years and an interim meeting every two years exchanging views on various problems ininternational commercial arbitration.See generally, Klaus Peter Berger, “The International Arbitrators’ Application of Precedents”,Journal of International Arbitration, Vol. 4, No. 5, September 1992, pp. 5-22.2As far as the legal framework is concerned, national arbitration laws have been amended toaccommodate the needs of international dispute resolution;5 new laws are expected to be enacted incountries having a less developed arbitral system.6 Bilateral agreements on trade relations providelegal protection for arbitration,7and multilateral conventions have been worked out to facilitate andsafeguard the recognition and enforcement of arbitral awards, for instance, the United NationsConvention of 1958 on Recognition and Enforcement of Foreign Arbitral Awards (the “New YorkConvention”).8Further, the United Nations Commission of International Trade Law (“Uncitral”) hasprovided the nations with a Model Law on International Commercial Arbitration for adoption by thestates and a set of Arbitration Rules for optional use by private parties.Among the several reasons that contribute to the success of international commercialarbitration is the maximization of party autonomy and the minimization of court intervention inarbitration. These are two sides of one coin, which concern the relationship between internationalFor example, in England, the Arbitration Act of 1950 was amended in 1975 and furtherupdated in 1979. In Canada, the old arbitration law based on the English Act of 1889 was replacedby the Uncitral Model Law in 1986 at both the federal and the provincial levels: see generally, RobertK. Paterson, “International Commercial Arbitration Act: An Overview” in Robert K. Paterson andBonita J. Thompson, Q.C., eds., UNCITRAL Arbitration Model in Canada (Toronto, Calgary,Vancouver: Carswell, 1987), p. 113.6 For example, in China an arbitration law is much demanded and a debate is going on as towhether to cover both domestic and international arbitration by one legislation.‘ For example, the “Protocol on the General Conditions for the Delivery of Goods between theForeign Trade Organizations of the People’s Republic ofChina and the People’s Republic ofRomaniaof 1961” provides an arbitration scheme for dispute resolution between the foreign tradeorganizations ofthe two countries: see Gene T. Hsiao, The Foreign Trade of China: Policy. Law andPractice (University of California Press, 1977), p. 195.8 According to information provided by the United Nations Treaty Section, there have been 117signatories to the 1958 New York Convention as of 16 March 1993: see Yearbook Comm. Arb.XVIII (1993), p. 325.3arbitrators and national courts. This relationship has been seen as complementary or rival. The courtprovides a complementary role when exercising its coercive power to uphold arbitration and advancethe arbitral proceedings,9but the court acts as a rival when exercising its judicial power to control thearbitral process and prevent an award from being enforced in its State.’°In this paper, we will consider international arbitral jurisdiction in view of the party autonomyand court interventions, and examine whether international arbitral jurisdiction has developed into asystem ofjurisdiction free of court control. Problems that centre on international arbitral jurisdictioninclude whether private parties are entitled to a private procedure for dispute resolution, whereinternational arbitral jurisdiction comes from, whether international arbitrators have the power to dealwith their own jurisdiction, to what extent arbitrators can assume jurisdiction and to what extentnational courts should review the decisions of international arbitrators. We will examine theseproblems by looking into the theories and practices of arbitration. In the analysis, we primarily relyon international arbitration rules and conventions, published arbitral awards, national legislations andcourt decisions of countries which have developed a fairly sophisticated system of internationalcommercial arbitration. We will reveal that international arbitral jurisdiction is to a great extentindependent of the national courts and operates under its own principles. We will also note that tosome extent international arbitral jurisdiction needs support of national courts.Chapter One discusses some preliminary issues, including the character of arbitral jurisdictionand the purpose and nature of international commercial arbitration. Chapter Two and Three analyzeSee generally Goldman, “The Complementary Role ofJudges and Arbitrators in Ensuring thatInternational Commercial Arbitration is Effective” in 60 Years of ICC Arbitration 257 (1984).10 See W. L. Craig, “Uses and Abuses of Appeal from Awards”, Arbitration International, Vol.4, No. 3, p. 182 (1988).4the source of arbitral jurisdiction and the arbitrator& power to rule on their own jurisdiction. ChapterFour explores the scope of arbitral jurisdiction from published arbitral awards. Chapter Five dealswith the pros and cons ofjudicial review of arbitral jurisdiction.The paper will conclude with an assessment of the autonomy of international arbitraljurisdiction. We will point out the need for a cooperative relationship of the arbitrators and thecourts, and advocate the role ofnational laws in filling in the gaps of international arbitral jurisdictionand the role of private parties in preventing jurisdictional problems of arbitration cases.5CHAPTER 1: PRELIMINARY ISSUESWe will start with a definitional question: what is international arbitral jurisdiction. We willalso analyze the purpose of choosing international commercial arbitration and the nature of sucharbitration.1.1. DefinitionArbitration is a quasi-judicial procedure whereby the arbitrator appointed by the parties makesa binding decision.1’ Since there involves a binding decision, questions arise as to what matters ofthe decision are binding and who is to be bound. These are jurisdictional problems which need propersolutions before a decision on the merits can be taken.The term “jurisdiction” has several different meanings. It can mean, for example, theadministration ofjustice or the extent of legal authority; it can also mean a geographical area withpolitically defined borders.’2 In the field of court proceedings, it means the power of the court todecide a matter in controversy and presupposes the existence of a duly constituted court with control“Arbitration is a device whereby the settlement of a question, which is of interest for two ormore persons, is entrusted to one or more other persons - the arbitrator or arbitrators - who derivetheir powers from a private agreement, not from the authorities of a state, and who are to proceedand decide the case on the basis of such an agreement”, Rene David, Arbitration in InternationalTrade (Deventer: Kluwer Law and Taxation Publishers, 1985), p. 5; “An arbitration is the submissionofa dispute between two parties for decision to a third party of their own choice”, John Parris, Ihlaw and Practice of Arbitration (London: George Goodwin Limited, 1974), p. 1.12 Blacks’ Law Dictionary, 6th ed., p. 853.6over the subject matter and the parties.’3 By analogy, arbitral jurisdiction means the power of anarbitrator to render a binding decision on the merits of an international commercial dispute.The ability of international arbitrators to deal with business disputes is generally undisputed.International arbitrators function as justice carriers in the international business community. Theyhave jurisdiction over both the disputing parties and the subject matter referred. For the purpose ofsubsequent analysis, it is useful to spell out the basic features of arbitral jurisdiction, particularly thoseof international commercial arbitration.First of all, in order for the jurisdiction to be exercised, there must exist legal disputes, ordisputes arising from a legal relationship between the parties.’4 This proposition does not imply thatthe parties may not formulate a reference of future disputes. The parties may arrange arbitration forfuture disputes at the time ofconcluding their contract. The existence of legal disputes requires that,at the time of submitting to the arbitrators’ jurisdiction, there must be real disputes capable of beingdescribed or located before the actual submission of the disputes could be dealt with.’5Second, there must be a basis for submission to arbitral jurisdiction. For different types ofarbitration, there are different bases to rely upon.’6 In consensual arbitration, the basis is the written13 Pinnerv. Pinner, 33 N.C.App. 204, 234 S.E.2d. 633.14 Such a legal relationship may be contractual or not contractual: see Art.II (1), United NationsConvention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 10 June1958 (hereinafter “New York Convention”); Art. 7 (1), UNCITRAL Model Law on InternationalCommercial Arbitration (hereinafter “Uncitral Model Law”).For a case when a “dispute” exists, see: Tradax International S.A. v. Cerrahogullari T.A.S.,The M Eregli, [19811 3 All E.R. 344 (Q.B.).16 For types of arbitration, see general discussion by McLaren and Palmer, The Law and Practiceof Commercial Arbitration (Toronto: The Carswell Company Ltd., 1982), p. 9; also see QuintetteCoal Ltd. v. Nippon Steel Corp. 29 B.C.L.R. (2d) 233 (B.C.Supreme Court), where the court states:7arbitration agreement conferring the jurisdiction over the dispute on the arbitrators, while in statutoryarbitration, the basis would be those specific legislations providing arbitration procedures for certaintypes ofdisputes.17 International commercial arbitration is based on the agreement to arbitrate, whichrenders the procedure consensual.Third, in exercising arbitral jurisdiction, the arbitrators must remain impartial and treat theparties with equality. This is particularly true in the context of international commercial arbitrationwhere one ofthe purposes of reference to arbitration is to avoid the likely prejudices emerging in theproceedings of a national court. Both arbitration laws and procedural rules require an arbitral tribunalto be impartial and neutral.’8 In case that the parties are not treated equally, the immediate remedyavailable to the parties is to seek a challenge or replacement of the arbitrator(s) who are to beresponsible for such treatment, and the ultimate remedy is to seek setting aside or non-enforcementof the award made by the said arbitrator(s). 19Fourth, arbitral jurisdiction exists until a final and binding award is rendered. By formulatingan agreement to arbitrate, the parties give the arbitrators a mandate to make a final and bindingdecision with respect to their rights and obligations. Whether a final arbitral award is rendered or not“Broadly speaking, there are two kinds of arbitral tribunals. One is statutory to which and itsjurisdiction by statute parties must resort. The other is private” (p. 247).17 For example, disputes relating to expropriation of property for government purposes arestatutorily arbitrated; see McLaren & Palmer, op. cit., p. 12.18 See infra Sect. 3.2.4. Most national laws impliedly provide the requirement of impartiality inthe provisions on enforcement, i.e., if there is partiality or misconduct on the part of the arbitrators,the award shall be set aside. The Model Law, however, sets out this principle in express terms: seeArt. 18, UNCITRAL Model Law.‘ For setting aside of awards, see infra Sect. 5.1.8is determinative ofthe question whether arbitral jurisdiction still effectively exists. An interlocutorydecision does not terminate the arbitral jurisdiction unless the decision itself concludes otherwise.Conferred upon the arbitrators by the private parties, arbitral jurisdiction is limited to thearbitration agreement and retains an h character.2° The coverage of arbitral jurisdiction mayvary from case to case. When an award is rendered, arbitral jurisdiction terminates for the particularcase and the arbitrators also terminate their office as arbitrators. They may be enlisted in a list ofarbitrators,21but they are dormant and cannot exercise arbitral jurisdiction unless freshly appointed.1.2. The Purpose of Choosing ArbitrationSince arbitration is conducted by an ad hoc tribunal which might cause divergence in arbitraldecisions, why do business people choose arbitration in the first place? What is the purpose ofchoosing arbitration? Is their choice motivated by economic considerations? Is the arbitral processitselfan efficient private adjudicative procedure? We will use an economic analysis to approach thesequestions and to find the purpose of choosing international commercial arbitration.1.2.1. Scarcity in Dispute Resolution20 The term “h” is not being used in the context of institutional and hQ arbitration inthe classical sense. The hQ character of arbitral jurisdiction applies to both institutional andh arbitrations. For the distinctions between these two types of arbitration, see infra Section 2.1.21 For example, China International Economic and Trade Arbitration Commission (CIETAC)maintains a List of Arbitrators for the purpose of appointment; arbitrators must be appointed fromthat List: see Art. 10, CIETAC Arbitration Rules (adopted at the Third Session of the First Congressof the China Council for the Promotion of International Trade (China Chamber of InternationalCommerce) and effective as of 1 January 1989 (hereinafter “CIETAC Rules”).9A basic principle in economics is that there is scarcity in human resources. The existence ofscarcity suggests that choices must be made by human beings within the confines of their resources.22A resource, in the economic context, is in essence “any good or service that is potentially of valuein some way”. Given this definition of resource, it can be immediately discerned that all proceduresdesigned for the purpose ofdispute resolution involve a considerable amount of economic resources.It is argued that the volume of resources used by different sorts of procedure will influence the choiceof procedure.24The spectrum of dispute resolution at the international level generally includes negotiation,mediation (or “conciliation”), arbitration and litigation. Faced with a limited choice ofmethods fordispute resolution, economically the parties have to consider which type of dispute resolution is moreefficient and effective. They know by definition that negotiation is directly conducted betweenthemselves and their business partners for the purpose of a direct settlement or an agreement on howto settle their disputes. They may also be aware that conciliation involves a third party: theconciliator, who is to assist the parties in reaching a settlement25,but not to make a binding decision.They may ftirther consult their legal counsel as to the legal ramifications of arbitration and litigation.Transnational litigation with respect to commercial disputes takes place at a national courtof a particular state. There is no other hierarchy as a supra-national commercial court whose22 Robin Paul Malloy, Law and Economics: A Comparative Approach to Theory and Practice(St.Paul: Minn. West Publishing Co., 1990), p. 15.Roger A. Bowles, “Economic Aspects of Legal Procedure” in Paul Burrows & Cento G.Veljanovski eds., Economic Approach to Law (London: Butterworths, 1981), p. 192.24 Id.25 Art. 7 (1) Uncitral Conciliation Rules of 1980.10jurisdiction may extend by international legislation to transnational parties. Thus considerations aboutwhether to arbitrate or litigate in the international context are actually made against an unbalancedscale, as Redfern and Hunter observed:‘In a domestic context, parties who are looking for a binding decision on a disputewill usually have a choice between a national court and national arbitration. In aninternational context there is no such choice. There is no international court to dealwith international commercial disputes. In effect, the choice is between recourse toa national court and recourse to international arbitration” (emphasis original).26In evaluating the different processes of dispute resolution, it can be asserted without doubtthat the parties to a dispute wish to have the annoying dispute settled at the least expenses and withinas short a period of time as possible. The parties will ask which process is the most efficient andwhich saves time and money.In view of other factors that are of parallel importance to the choice-making process, it isusefhl to generalize the fUndamental factors which determine the advantages and disadvantages ofdifferent mechanisms. The following table is prepared for a rough comparison.26 Redfern and Hunter, Law and Practice of International Commercial Arbitration (London:Sweet & Maxwell, 1986), p. 19.11Table 1: Comparison ofDispute Resolution MechanismsFeature Third Ap- Cost Flexi- Result Mutual\ party peal bility RelaType tionNegoti- n/a n/a Least Much Settlement Maination (N) or to A/L tamedMedi- Medi- n/a > N Much Same as N Maination (M) ator tamedArbitra- Arbi- No > M < M Award enfor- Easytion (A) trator < L ceable sub- toject to con- mainditions tamLitiga- Judge Yes Most Least Judgment Brokention (L) enforceableNote the cost column of the four mechanisms. The cost of arbitration is more than eithernegotiation or mediation but less than litigation. In some cases of significance, internationalcommercial arbitration is not cheap because the parties have to pay the fees of the arbitrators as wellas the administrative fees and expenses ofan arbitration institution (if the parties resort to institutionalarbitration) and the fees for international travel services,27 but international business and internationallitigation is not inexpensive.Be that as it may, business people still tend to favour arbitration at the international level.What is the motive ofthe parties favouring the choice ofarbitration? The answer may be sought fromthe economic concept of opportunity cost.27 Id., p. 18.121.2.2. The Opportunity CostThe concept of opportunity cost means, by choosing a specific resource, one has foregonethe value that the chosen resource would have “if it were freed from its current use and applied to themost valuable competing alternative use”. In other words, opportunity cost asks people to considertheir next best option when making choices.With this notion in mind, business people would ask what is the next best option in makinga choice ofdispute resolution methods. In considering litigation at a national court of a neutral thirdcountry, both parties will ask the same question. The unfamiliar language, culture and the legalsystem in the third country demand the parties to use interpreters and hire local lawyers, which willinevitably incur additional expenses. Although interpretation and local legal counsel also may be usedin international arbitration and incur similar expenses, these expenses are balanced against such benefitfrom non-economic factors as familiarity with the chosen procedure, the flexibility of andconfidentiality ofthe process, and a non-appealable arbitral award. In third country litigations, thesebenefits are lacking.The opportunity cost of litigating either in the defendant’s home country or the plaintiffscountry is unbalanced for the two parties. In the first case, the plaintiff would have a higheropportunity cost than the defendant because it has to pursue the proceedings in the defendant’s homecountry; in the latter case, the result is vice versa. When viewed with this analysis, the prospect ofchoosing litigation for claims arising out of an international business transaction is unattractive.Negotiation and mediation definitely save the parties time and cost if (and only if) a settlementis reached and performed to the satisfaction of both parties. When these processes fail, things may28 See Bowles, op. cit., p. 192.13get worse and other more formal proceedings may have to be resorted to. In the internationalcontext, business people invariably think of negotiation in the first place, trying first on their own toget the matter amicably settled, or seeking a way of proper settlement. Many arbitration agreementsare the result of such negotiations. It is the same with mediation. If substantial agreement is out ofthe question, businessmen would seek an agreement on procedure. Though generally these twomechanisms save time, they can be very time-consuming and uncertain. Patience has to be paid tothese mechanisms until a stop is called.1.2.3. Efficiency in Arbitration‘Because arbitration is a voluntary service provided in a competitive market, it may appearthat any procedures widely used in arbitration must be efficient procedures for deciding the type ofdispute in question”? When turning to arbitration, the parties will naturally ask whether the arbitralprocedure is efficient and operates with a minimum of expense, effort and waste.First of all, is there any mechanism available to compel submission to the private adjudicationof the arbitrators in case where one party dishonours his promise to arbitrate and refuses to submitto the arbitral jurisdiction? The answer can be found in the laws and rules of arbitration.3°The basic29 William M. Landes & Richard A. Posner, “Adjudication as a Private Good”, 8 J. Leg. Stud.(1979), p. 249.30 See, e.g., Art. 25 (2) (3), International Commercial Arbitration Act, S.B.C. 1986, c. 14; Art.15 (2), ICC Rules ofConciliation and Arbitration (in force as from January 1, 1988. ICC PublicationNo. 447) (hereinafter “ICC Rules”); Art. 23, Rules of the Arbitration Institute of the StockholmChamber of Commerce (adopted by the Chamber and in force from 1 January 1988) (hereinafter“SCC Rules”); Art. 30, Commercial Arbitration Rules of the American Arbitration Association asamended and in effect April 1, 1985 (hereinafter “AAA Commercial Rules”); and Art. 29, CIETACRules.14principle is that when one party, though duly summoned, fails to appear, the arbitral tribunal, whensatisfied that the party’s absence is without valid excuse, shall have power to proceed with thearbitration and make the award on the evidence before it. The party’s waiver of right to appear willnot disrupt the procedure; on the contrary, it will deny itself the opportunities for the properpresentation of its case.If a recalcitrant party deliberately challenges the jurisdiction of the arbitral tribunal, the latterhas the power, subject to the relevant laws, to determine its own jurisdiction based on the agreementto arbitrate.3’Though the challenging party may have recourse to the court for a judicial decision asto the arbitrator’s jurisdiction, this power to determine its own jurisdiction ensures that the arbitraltribunal proceeds with the process even if its jurisdictional issue is still pending before the court.32Second, selection of arbitrators is the area where questions arise as to whether the proceduresavailable for the appointment of the private judge are efficient. This is a weak area in keepingefficiency because the party who envisages an unfavourable award from the arbitrator has an incentiveto drag its feet in agreeing to the appointment of an arbitrator.The rules vary as to the methods of appointment. The ICC practice is that the Court ofArbitration will appoint the arbitrator(s), unless otherwise agreed upon by the parties.33 The Chinesepractice is that the third arbitrator who will serve as the presiding arbitrator is invariably appointed31 See infra Chapter 3.32 See Art. 21(4), Arbitration Rules of the United Nations Commission on International TradeLaw (hereinafter “Uncitral Arbitration Rules”).Art. 2 (2) (3) (4), ICC Rules.15by the chairman of the commission.34 The AAA practice in the international field allows parties “tomutually agree upon any procedure for appointing arbitrators”.35Different as the method of appointment may be, the rules do provide a time limit forconstitution of the arbitral tribunal. Under the Uncitral Arbitration Rules, the tribunal should beconstituted within no more than ninety days in the case of a sole arbitrator, and one hundred andtwenty days in the case ofthree &bitrators. The experience of the ICC Court of Arbitration is that,“barring exceptional circumstances, a tribunal is usually constituted within three months”Third, the award rendered by the private judge is of a final and binding nature, which avoidsany appeal on the substance of the case after the closure of the arbitral proceedings. The finality ofthe award renders the arbitral process advantageous to the court proceedings whereby judgments aresubject to appeals. It is obvious that the more time a procedure consumes, the greater the expenseswill be, let alone the uncertainties connected with the various procedures.The binding nature ofthe award also makes arbitration more attractive than either negotiationor mediation, since these two methods result in no decisions directly enforceable before a competentauthority, except, ofcourse, a settlement agreement capable of being enforced on a contractual basis.Art. 14, CIETAC Rules; cf, in Stockholm Chamber ofCommerce arbitration, the ArbitrationInstitute retains the power to appoint the sole arbitrator or the chairman of the arbitral tribunal: seeArt. 5, SCC Rules.Art. 6 (1), International Arbitration Rules of the American Arbitration Association, asamended and in force on or after 1 May 1992 (hereinafter “AAA International Rules”).36 Arts. 6 (2), 7 (2), Uncitral Arbitration Rules.David J. Branson & W. Michael Tupman, “Select an Arbitral Forum: A Guide to CostEffective International Arbitration”, 24 V.J.I.L. 1984, p. 925.16Finally, in the international field, enforcement of arbitral awards is expected to take less timeand effort than enforcement ofa foreignjudgement. This is because, first, the parties are more likelyto honour the award as they have voluntarily chosen to accept the arbitrators’ decision; second, evenif the losing party chooses to dishonour the award, the winning party is entitled to seek enforcementofthe award on the strength ofthe New York Convention, as long as enforcement takes place in theContracting States ofthe Conventjon.38 Because the Contracting States are obliged to recognize andenforce foreign arbitral awards subject to certain conditions, this procedure seems more simple thanthe procedure of judgement enforcement in a foreign state, where bilateral agreement and theprinciple of reciprocal treatment should be presupposed.It should be noted with emphasis that the purpose of choosing a procedure is to search fora final settlement of the existing disputes in the shortest possible time and with the least possibleexpense. For this purpose, the parties in international business transactions tend to seek astreamlined, efficient and inexpensive way of dispute resolution. Clearly arbitration is something thatthe parties are seeking.Some countries do not make the reciprocal reservation under the New York Convention, e.g.,Canada. In this case, an award may be enforced regardless of the nationality of the arbitral awards.171.3. Nature of International Commercial ArbitrationAs a matter of choice, there must be consensus between the parties as to whether to choosearbitration or any other form of alternative dispute resolution, and if chosen, when, where and howto have arbitration take place. The parties’ consensus on what to arbitrate, what law to be applied,what rules to follow and how to constitute the arbitral tribunal forms a framework within which thetribunal could come into being and conduct the process. Further, the agreement of the parties willcontinue to play its role once arbitration is in process.Ifwe ask why private parties can arrange an arbitral procedure by agreement, we will face theparties’ contract right.1.3.1. Freedom of ContractThe question is whether individuals are entitled to choose, by contract, a third party other thanthe court established by the state to decide the dispute that exists between them, or whether theindividuals have an innate right to choose their own private judges to administer justice. There havebeen two conflicting schools ofthought on this matter.39 One is in favour of the individuals’ freedomof contract. “The possibility of selecting one’s judge was regarded as a birthright (droit natural) ofman, as it was considered that such a right had to be protected against any encroachment by thelegislator”.4°The other school is against the principle of freedom of contract, the contention ofwhichis that the state court has the inherent right to handle disputes of a legal nature and is the sole organSee Rene David, Arbitration in International Trade, op. cit., pp. 55-56.° Id., p. 55.18having jurisdiction over dispute resolution. Their judicial power can not in any way be deprived ofby private agreement. Where this school prevailed, there might be no arbitration practice as in 1798France where a measure of prohibition was contemplated as a reaction against the earlier excessivefavour with arbitration.41The first school of thought which favours the individuals’ natural right to arbitration prevailsultimately due to the worldwide recognition of freedom of contract. “The Constitutions of a numberof Swiss cantons, currently, incorporate the same principle; the Constitutions of El Salvador (art.174) and ofVenezuela (art. 190) likewise proclaim the right of parties to resort to arbitration, -- andthe same right is regarded, in a number of other countries, as being implicitly guaranteed byprovisions of more general purport, which in the Constitution affirm the principle of freedom ofcontract” 42Based on the freedom of contract, private parties are free to select their own private judgeto resolve their disputes and confer upon him the decision-making power of a judge. This freedomof contract is recognized subject to mandatory regulations of arbitration.43The creation of a private forum is analogous to that of the court system of the state. In thewords ofProfessor Kitagawa:“The arbitration tribunal is an autonomous tribunal based on the agreement of bothparties, standing on an equal footing with the state tribunal, the theoretical source ofthe state is the ‘social contract’ of its members (staatsvertrag), whereby they tacitly41 Id., p. 56.42 Id.See Ouintette Coal Ltd. v. Nippon Steel Corp. 29 B.C.L.R. (2d) 233 (B.C.S.C., 1988).19agree in advance that all disputes between them should be referred to the state court,while both parties explicitly conclude an arbitration agreement either with respect tothe existing dispute (submission) or to future disputes (clause compromissoire). Iharbitration tribunal and state court are equally open to the choice of thedisputants” .(emphasis added)Transnational parties may choose not to resort to arbitration in the first place. But if theychoose to use arbitration instead of litigation to settle their disputes, they will be bound by their ownchoice. The arbitration agreement is the parties’ contract which holds them to their choice. Theimpact ofthe agreement to arbitrate is not limited to the parties, but extends to the arbitrators as well.Once an arbitrator accepts an appointment, he is not only bound by his promise to conductarbitration, but also bound by the arbitration agreement. This brings us to the relationship betweenthe arbitrators and the parties.1.3.2. Relationship between Arbitrators and PartiesThe relationship between the arbitrators and the parties seems to be an unsettled area of law.In common law jurisdictions, there is no given answer. In British Columbia, for example,neither the International Commercial Arbitration Act nor the Commercial Arbitration Act whichgoverns domestic arbitration defines the relationship between the arbitrator and the parties. InEngland, the same is true, but the matter has been examined in a pragmatic way by Mustill andTokusuke Kitagawa, “Contractual Autonomy in International Commercial ArbitrationIncluding a Japanese Perspective”, in Pieter Sanders ed., International Arbitration Liber Amicorumfor Martin Domke (Martinus Nijhoff/ The Hague, 1967), p. 138.20Boyd.45 They suggest three ways to look at the issue: as a quasi-contractual relationship, as a matterof status or as a matter of contract. They seem to favour the status approach. The office ofarbitrator involves “some degree of permanent status”, and thus status alone “is all that is needed byway of theoretical underpinning for the mutual rights of the arbitrator and the parties”.46 As to thecontractual suggestion, they hold:“[T]his would be a mistake. To proceed by finding a contract and then applying toit the ordinary principle of the law of contract will not produce a reliable answerunless a contract really exists to be found. Even in the extreme case of a massivereference, employing a professional arbitrator for a substantial remuneration, wedoubt whether a businessman would, if he stopped to think, conceive that he wasmaking a contract when appointing the arbitrator. Such an appointment is not likeappointing an accountant, architect or lawyer, Indeed it is not like anything else atall.”47The English courts seem to favour the theory of contract. In Cie Europeene v. Tradax,48when determining whether the plaintiffwas entitled to an injunction restraining the defendant fromproceeding with arbitration of claims which were time barred by statute, the court held:M.J. Mustill and S.C. Boyd, Law and Practice of Commercial Arbitration (London:Butterworths, 1982), p. 185.Id.Id., p. 189.48 Compagnie Europeene de Cereals S.A. v. Tradax Export S.A., [1986] 2 Lloyd’s Rep. 301(Q.B. (Corn. Ct.)).21“(S)ince the decision of Heyman v. Darwins Ltd., (1942) 72 Ll.L.Rep. 65; [1942]A.C. 356, it has been recognized that the arbitration clause is a self-contained contractcollateral or ancillary to the commercial contract of which it forms part (see LordDiplock [1981] 1 Lloyd’s Rep. 253; [1981] A.C. 909 at pp. 259 and 980). It is thearbitration contract that the arbitrators become parties to by accepting appointmentsunder it. All parties to the arbitration are as a matter of contract (subject always tothe various statutory provisions) bound by the terms of the arbitrationcontract.“49(emphasis added)The contractual approach is particularly appropriate to analyze the arbitrators’ agreement withthe parties as to their remuneration fees. °In civil law jurisdictions, it is generally accepted that there is a contractual relationshipbetween the parties and the arbitrators. Under the German and Italian law, there exists such acontractual relationship, which is established when the acceptance of the arbitrator is notified to theparties.51 In Swiss law, the arbitrator is seen as the joint agent of the parties (“mandataire”).52 InArgentina, the National Code ofCivil and Commercial Procedure expressly provides:Id., p. 306.° K/S Norjarl A/S v. Hyundai Heavy Industries Co. Ltd., [1991] 1 Lloyd’s Rep. 261 (Q.B.(Com.Ct.)).51 M. Rubino-Sammartano, International Arbitration Law (Deventer: Kluwer, 1990), p. 190.52 Jean-Flavien Lalive, “Immunity ofArbitrators under Swiss Law”, in Julian D.M. Lew ed., IhImmunity ofArbitrators (London: Lloyd’s ofLondon Press Ltd., 1990), p. 122.22“Acceptance by arbitrators of their appointment as such shall entitle the parties tocompel them to carry out their fhnctions and to hold them liable for costs anddamages derived from the non-performance of arbitral functions.”53Such a contract obviously cannot be taken as an ordinary contract for a joint venture or theundertaking of a project. Nevertheless, opinions differ as to the nature of such contractualrelationships. Some treat it as a mandate,54 some others see it as a contract for services, particularlyfor intellectual services.55It is submitted that the relationship between the arbitrators and the parties should be examinedin view of the role of arbitrators in international commercial arbitration. The role of internationalarbitrators should not be reduced to that of international lawyers who provide professional services.56The arbitrators’ role is not limited to a contractual framework. They not only use their knowledgeand expertise to decide the disputes at issue, but also use their commercial integrity and impartialityto conduct a procedure on a progressive basis.Though different from judges in a court of law who apply and interpret the law as they seefit and perform a rule-making function on behalf of the state, international arbitrators present somegood resemblance to national judges. Being decision-makers in a private procedure, internationalArt. 745, “National Code of Civil and Commercial Procedure” (Law 17. 454 of September19, 1967 as reformed by Law 22.434 ofMarch 16, 1981) in P. Sanders ed. Intl. Handbook on Comm.(Deventer: Kluwer), Suppl. 3, Argentina: Annex I-i.See M. Rubin-Sammartano, International Arbitration Law, op. cit., p. 190.See David, op. cit., p. 275.56 See Tang, “International Commercial Arbitration in the Far East - the PRC Example” in ICCACongress Series No,4, Arbitration in the Settlement of International Commercial Disputes Involvingthe Far East and Arbitration in Combined Transportation (Deventer: Kiuwer, 1988), p. 49.23arbitrators do not represent the will of any state57 or the will of any of the parties, but they must betested under the same criterion of impartiality as national judges,58 and, in most countries, enjoy thesame immunity as judges in their performance of the arbitral function.59An arbitrator’s position involves ajudicial function which is an indication differing arbitrationfrom appraisal or valuation. The arbitrator resolves the dispute through performing a judicialfünction.6°Therefore, the status ofthe arbitrator is unique and differs from that ofboth parties. Thearbitrators’ relationship with the parties can hardly be determined merely from a contractual point ofview.The theory of contract is limited in its application because of the public interest involved inthe arbitral process. For example, the arbitrators’ duty to conduct a fair procedure is not derived fromtheir “contract” with the parties and is not aimed at the parties personally, but it is “what the interestsof the state require”.61 The state on the one hand recognizes a legally binding agreement to arbitrateand encourages the use of such agreement, on the other hand it regulates the conduct of arbitration‘ “As arbitrator I am no representative or organ of any State”: see ICC Case No. 2321(1974)in S. Jarvin & Y. Derains, Collection of ICC Arbitral Awards (Deventer: Kluwer, 1990), p. 10.See Blanchette v. C.I.S.Ltd. [1973] 36 D.L.R. (3rd) 561 (S.C.C.), where the Supreme Courtof Canada held: “The principle to be applied is the same for Judges as for arbitrators”.See generally Lew, The Immunity ofArbitrators, op. cit. For English cases, see Sutcliffe v.Thackrah and Others (1971) 1 All E.R. 589; Arensonv. Casson Beckman Ruth’ & Co. (1975) 3 AllE.R. 901.60 See Concord Pacific Developments Ltd. v. British Colubmia Pavilion Corp. 60 B.C.L.R. (2d)121 (B.C. Court ofAppeal, 1991); also see Sport Maska Inc. v. Zittrer [1988] 1 S.C.R. 564 (S.C.C.).61 See Mustill & Boyd, op. cit., p. 188.24through its judicial as well as legislative organs and fills in the gaps of the law of contract by meansof the law of arbitration.1.3.3. Public InterestRenzhe Jian Ren, Zhizhe Jian Zhi.62 Different people have different views. If one looksat the public interest involved in international commercial arbitration from post-award stage, one mayconclude that international commercial arbitration, private in nature, is supported by the nationalcourt system that represent the will of the state, as Redfern and Hunter observed:“International commercial arbitration is a hybrid. It begins at a private arrangementbetween the parties. It continues by way of private proceedings, in which the wishesof the parties are of great importance. Yet it ends with an award which has bindinglegal force and effect and which, on appropriate conditions being met, the courts ofmost countries of the world will be prepared to recognize and enforce. The privateprocess has a public effect, implemented by the support of the public authorities ofeach state expressed through its national law.”63If one looks at international commercial arbitration from the view point of a national statewhere arbitration takes place, one may come to an extreme conclusion:62 A Chinese adage which literally means “the benevolent see benevolence and the wise seewisdom”.63 Redfern & Hunter, op. cit., p. 7.25“In the legal sense no international commercial arbitration exists. Just as,notwithstanding its notoriously misleading name, every system of private internationallaw is a system of national law, every arbitration is a national arbitration.”64It is submitted that international commercial arbitration as a system of dispute resolution doesexist in the international business community, but not in a legal vacuum. In the first place, arbitrationtakes place within the territory of a certain state and involves a certain extent of interest of that state.When arbitration takes place in one state or the other, it is presupposed that the law of that statepermits such arbitration to proceed. The state is concerned that such arbitration does not violate itsown law. The court of that state will ensure that the arbitration is progressing within the boundaryofthe national law. Where one party moves the court to invalidate the arbitration on grounds, e.g.,that non-arbitrable matters are being arbitrated, the court’s judicial function is brought into play todouble check the validity of such arbitration.If arbitration takes place in a third country, where no national ofthe parties’s home jurisdictionis involved, or even where its law is opted out by the parties, the state may still be concerned withthe fundamental justice of the case and the fairness of the procedure. For example, in France, theCode of Civil Procedure permits parties to choose “a given procedure law” 65 As a result, aninternational arbitration may be governed by a procedural law other than that of France. But if, e.g.,64 F. A. Mann, Lex Facit Arbitrum in P. Sanders ed. International Arbitration Liber Amicorumfor Martin Domke op. cit., p. 159.65 Art. 1494, French Code of Civil Procedure, Decree No. 81.500, 12 May 1981 (hereinafter“French Code of Civil Procedure”).26“due process” is not respected in the arbitration subject to the foreign procedural law, an action seemsto be possible to set aside the arbitral award on the basis of a territorial criterion.66The state not only ensures that the arbitration is fairly conducted, but also sees that the arbitralprocedure begins on a valid agreement in the first place. In English arbitral practice before theArbitration Act of 1975, the court had a considerable degree of discretion whether to grant a stay ofproceedings where the same subject matter was being arbitrated. Upon request for a stay ofproceedings, the court “may” make an order staying the proceedings, “if satisfied that there is nosufficient reason why the matter should not be referred in accordance with the agreement, and thatthe applicant was, at the time when the proceedings were commenced, and still remains, ready andwilling to do all things necessary to the proper conduct of the arbitration”67The Arbitration Act of 1975 restricted this discretion ofthe judge and adopted a less stringentapproach: the court, when seized with an application for a stay of proceedings, “shall” order a stay“unless satisfied that the arbitration agreement is null and void, inoperative or incapable of beingperformed or that there is not in fact any dispute between the parties with regard to the matter agreedto be referred”.68 Apparently, a stay of court proceedings is mandatory unless the prescribedconditions are met.69 The court retains the power to decide the validity and existence of the66 Id., Arts. 1502 and 1504. Art. 1502 deals with the grounds for an appeal against a decisiongranting recognition or enforcement; the first paragraph of Art. 1504 reads: “An arbitral awardrendered in France in international arbitral proceedings is subject to an action to set aside on thegrounds set forth in Article 1502” (emphasis added).67 Sect. 4 (1), Arbitration Act 1950.68 Sect. 1 (1), Arbitration Act 1975.69 See Kammgarn Spinnerei GmbH v. Nova (Jersey) Knit Ltd. [1976] 2 Lloyd’s Rep. 155-164,Yearbook Comm. Arb. ifi (1978), p. 284; Koch Shipping Inc. v. Associated Bulk Carriers Ltd.27arbitration agreement. If it were proved that there had been no arbitration agreement, or thearbitrator named in the arbitration agreement had already died, rendering the agreement “inoperative”,the court would not be bound to send the parties to arbitration.The nature of international commercial arbitration involves both private consensus and publicrecognition. Private consensus is the basis of the arbitration. The consensus aims at seeking a speedyand economical settlement of the dispute, which is ftindamental to the operation of internationalarbitral jurisdiction. Public recognition represents the concern of the state and ensures that the privateprocedure follows the rule ofnatural justice. Without state recognition the arbitral procedure wouldhave no footing in the world, and there would be nothing for the parties to choose.[1978] 1 Lloyd’s Rep. 24, Yearbook Comm. Arb., VI (1979), p. 316.28CHAPTER 2: SOURCE OF ARBITRAL JURISDICTIONInternational commercial arbitration is the business of arbitrators in terms of administeringjustice. It is the business ofprivate parties in terms of formulating the process. The parties make thearrangement by way of an arbitration agreement. This chapter considers the private agreement toarbitrate as the source of the international arbitral jurisdiction. We will discuss the various aspectsofthe arbitration agreement which have a bearing on the proper assumption of arbitral jurisdiction,including the form, contents and enforceability of the arbitration agreement.2.1. Form ofArbitration AgreementArbitration generally may be divided into two types: institutional and ad hoc. Institutionalarbitration refers to arbitrations organized by an established institution, although the arbitrationprocess is not conducted by the institution itself. For example, in ICC arbitration, it is the arbitratorswho decide the cases. The Court of Arbitration serves only as an administrative organ to facilitatethe progression of the arbitration process.7° This is also true in arbitrations before the BritishColumbia International Commercial Arbitration Centre (“BCICAC”).71By contrast, ad hoc arbitration refers to arbitrations conducted without administrativeassistance of a permanent arbitral institution. The parties formulate all the necessary procedures for° “The Court of Arbitration does not itself settle disputes”: see Art. 2 (1), ICC Rules.71 See generally Guidelines for the Arbitration of Commercial Disputes (Vancouver Centre forCommercial Disputes and British Columbia International Commercial Arbitration Centre, 1992).29the arbitrators to follow,72 or, failing the parties’ consensus, the arbitrator chosen by the partiesdecides the procedure subject to the mandatory rules of the law applicable to the arbitration.No matter what types of arbitration the parties use, there must be an arbitration agreementto give effect to the arbitrators’ jurisdiction.2.1.1. Agreement in WritingAn arbitration agreement is subject to some formal conditions in order to be enforced by law.In some jurisdictions, it can be valid on an oral basis. For example, in Germany an oral arbitrationagreement is valid between two merchants.73 The oral form might create serious problems of proofif one party decided to ignore the arbitration agreement.In order to prevent such difficulties of proof, modern national laws impose a written formrequirement on the arbitration agreement. In France, an oral arbitration agreement was perfectly validunder the French case law, nevertheless, the 1981 Code ofCivil Procedure innovated the requirementby providing that the arbitral clause must be in writing.74 In Canada, the Federal Commercial72 The European Convention on International Commercial Arbitration (the “EuropeanConvention”) provides that in case of ad hoc arbitration, the parties are free inter alia:“a) to appoint arbitrators or to establish means for their appointment inthe event of an actual dispute;b) to determine the place of arbitration; andc) to lay down the procedure to be followed by the arbitrators.”See Art. IV (1) European Convention on International Commercial Arbitration, done atGeneva on 21 April 1961 (hereinafter “European Convention”).Art. 1027, German Code of Civil Procedure, Zivilprozessordnung ZPO 30, 1, 1877, version12, 9, 1950 (BGB1 533).See Art. 1443, French Code of Civil Procedure and Intl Handbook on Comm. Arb. op. cit.,France -4.30Arbitration Code which implements the Uncitral Model law and governs both domestic andinternational arbitration at the federal level, requires a written form of the arbitration agreement.75In British Columbia, an arbitration agreement may be in an oral form in domestic commercialarbitration,76but must be in writing in international arbitration.77International instruments also require the arbitration agreement to be made in writing.Though the 1923 Geneva Protocol on Arbitration Clauses and the 1927 Geneva Convention on theExecution ofForeign Arbitral Awards provide no formal requirement for the arbitration agreement,78the 1958 New York Convention requires the arbitration agreement to be in writing in order to obtainenforcement under the Convention.79 The New York Convention further provides that an agreementin writing may include a clause in a contract or an agreement “signed by the parties or contained inan exchange of letters or telegrams”.8° Consequently the New York Convention recognizes theevidential value of the” exchange” of communications. If no exchange were effected, it would bedifficult to find an agreement.81Intl Handbook on Comm. Arb. op. cit., (Suppl. 10), Canada - 9.76 Sect. 2 (1) (c), Commercial Arbitration Act S.B.C. 1986 c. 3.‘ “An arbitration agreement shall be in writing”: Art. 7 (3), International CommercialArbitration Act S.B.C. 1986 c. 14.78 See Art. 1, Protocol on Arbitration Clauses, done at Geneva on 24 September 1923(hereinafter “Geneva Protocol”); Art. 1, Convention on the Execution ofForeign Arbitral Awards,done at Geneva on 26 September 1927 (hereinafter “Geneva Convention”).Art. II, New York Convention.° Id., Art. II, 3.Xl For example, in a case where one party forwards to the other a printed contract form with anarbitration clause, the German court seized of an application for enforcement of the award held thatthe forwarding ofthe contract does not constitute a written arbitration agreement within the meaning312.1.2. Arbitration Clause v. Submission AgreementAs an instrument in writing, the arbitration agreement may take the form of an arbitrationclause contained in a contract and a submission agreement independent from a contract. The formercontemplates reference of fliture disputes to arbitration and the latter makes a reference to theexisting disputes.The difference between an arbitration clause in the contract and a submission agreement notonly lies in the timing ofthe disputes, but also in the treatment of the scope of disputes. With respectto future disputes, the parties do not know at the time of conclusion of the arbitral clause the natureand extent of the disputes. They have to resort to a “broad form” clause,82 which says that anydispute arising in the future shall be the subject matter of arbitration. For example, the ICCrecommends the following broad form arbitration clause for insertion into a contract:“All disputes arising in connection with the present contract shall be finally settledunder the Rules of Conciliation and Arbitration of the International Chamber ofCommerce by one or more arbitrators appointed in accordance with the said Rules”.83The “broad form” clause usually covers “all” or “any” dispute relating to the various aspectsof the contract, ranging from the formation of the contract to the interpretation of the terms of thecontract, the validity of the contract, the performance of the contract or the breach by one or moreparties of the contract. Usually a “broad form” clause resorts to such terms as “arising out of’, “inofthe New York Convention and refused enforcement of the arbitral award: see F.R. Germany No.2, Landgericht Bremen, 16 December 1965, Yearbook Comm. Arb., II, (1977), p. 233.82 J Stewart McClendon & R.E. Everard Goodman, International Commercial Arbitration inNew York (New York: The World Arbitration Institute, 1986), p. 31.83 See “Standard ICC Arbitration Clause”, ICC Rules.32relation to” or “in connection with” to define the scope of the possible disputes. These terms may beused together to ensure a broader interpretation of the scope of disputes. In ODC Exhibit SystemsLtd. v. Lee et al.,84 the British Columbia Supreme Court held that “any dispute arising out of thisagreement” relates to “such matters as interpretation of the agreement when disputes arise out of thecarrying out of its terms”.85 The Court refused to send the parties to arbitration primarily on groundsthat the dispute about whether there was conspiracy, deceit and fraud in making the agreement didnot arise out of the agreement. The soundness of the reasoning might be defeated if the terms “inrelation to” or “in connection with” were used in the ODC case. The court might have to be morelenient in interpreting the arbitration agreement. 86As opposed to the “broad form” clause, a “narrow form” clause anticipates a certain scopeof disputes arising out of the contract, e.g., disputes as to the quality of the goods in an internationalsales contract or disputes as to the distribution of profit in international investment projects. The“narrow form” clause limits the reference to the contemplated disputes. If the reference is limited todisputes about the quality of the delivery in a sales transaction, arbitral jurisdiction may not extend84 ODC Exhibit Systems Ltd. v. Lee et al. 41 B.L.R. 287 (B.C.S.C., 1988).85 Id., p. 293.86 Cf. Boart Sweden AB et a!. v. NYA Stromnes AB Ct a!., 41 B.L.R. 295 (Ontario SupremeCourt (High Court of Justice), 1988), where the claims also include those of conspiracy, the Ontariocourt held that “(t)he matters in dispute in the Ontario action are inextricably bound up with thematters which the parties agreed to arbitrate. It would be mischievous to continue to litigate, pendingarbitration, matters which depend so much on the facts which form the basis of the arbitration” (p.305). The court stayed the proceedings pending arbitration. Also see, Roy v. Boyce, 57 B.C.L.R.(2d) 187 (B.C. Supreme Court, 1991), where the court held that whether the contract in issue wasterminated is a matter of evidence and is a dispute “arising out of or in relation to” the contract.33to disputes of quantity unless otherwise agreed to by the parties. Ultra vires exercise ofjurisdictionis not recognizable according to national laws and international conventions.87The “narrow form” arbitration agreement usually fits in the case of existing disputes. Theparties are clear about what they are disputing about. They may itemize or list all the disputing issuesin the agreement. A submission agreement tends to take a “narrow form”.An arbitration clause and a submission agreement may also have different consequences onthe effect of the agreement to arbitrate when the arbitral award is set aside. In the event that anaward is set aside, the whole arbitral procedure is set aside and the parties return to the point at whichthe dispute arose.88 If it is an arbitration clause, then the agreement subsists after an award is setaside and the parties may start arbitration afresh; if it is a submission agreement specific to a disputealready in existence, then the submission agreement may not survive the setting aside of the award.89The parties may have to reach a new agreement in order to start a new arbitration. A generalarbitration clause commits the parties to the arbitral procedure until a valid award is effectively made.2.2. Contents of Arbitration AgreementFor the consequences of ultra vires assumption of arbitral jurisdiction, see infra Sect. 5.2.2.88 Ian MacDonald Library Services Ltd. v. P.Z. Resort Systems Inc., [1987] 5 W.W.R. 427(B.C. Court of Appeal).89 Id.34The consensus of the parties to arbitrate lies in the arbitration agreement. The agreement maybe lengthy, covering some very specific procedural issues, but it may also be as simple as “Arbitrationto be settled in London”.9°In any event, the parties’ intention to arbitrate must be present.2.2.1. Intention to ArbitrateThe intention of the parties to refer to arbitration is virtually a condition precedent to thecommencement of the arbitral procedure. The intention determines the definitiveness of the parties’choice of arbitration. If the intention is absent, arbitration simply cannot take effect.Difficulties often arise in the borderline cases where the intention to arbitrate itself is indispute. In these cases, one has to examine the circumstances of each case.9’ For example, in a caseinvolving a clause which reads “general average and arbitration to be settled in New York”,92 theplaintiff obtained an arbitral award in its favour and a judgment based on it in New York. It thenbrought an action to enforce the judgment in New Brunswick. The defendant had consistently takenthe position that there was no jurisdiction under the charter parties to hold the arbitration in NewYork. The precise issue before the court was whether or not the clause submited all disputes arisingout ofthe charter parties to arbitration in New York or only those disputes which arose out of generalaverage differences. The court read the parties’ intention from the circumstances of the case and held:° See Tritonia Shipping Inc. v. South Nelson Forest Products Corporation, [1966] 1 Lloyd’sRep. 114, where the English Court ofAppeal held that such a clause must be given effect.91 Sport Maska Inc. v. Zittrer, [1988] 1 S.C.R. 564 (S.C.C.).92 Offen v. McCain Produce Co. Limited, 46 N.B.R. (2d) 108 (New Brunswick Court ofQueen’s Bench, Trial Division, 1983).35“In this particular case the charter parties were printed and made in New York.Payment was to be made in New York. General Average was to be settled in NewYork. I can see no reason why the parties would not also have intended thatarbitration on all other matters to carried out in New York as well.”93To ensure a smooth and effective arbitral procedure, it is advised that the arbitrationagreement clearly indicate the parties’ intention to arbitrate. For that reason, the intention to arbitrateshould not be stated in equivocal terms or contradicted with other terms of the contract. Otherwise,it is likely to render the arbitration agreement “incapable of being performed”.94It also should be noted that international commercial arbitration is a binding procedure whichresults in a final award subject only to a few grounds for setting aside. Parties’ arrangement of“arbitration first, litigation second” may not work in the international context. In a German case,95a German manufacturer of rugs and a Dutch firm concluded an exclusive distributorship agreement,which contained the following arbitration clause:“All disputes arising out of this contract will, if no friendly settlement can be reachedbetween [the parties], be submitted in first instance to an arbitral tribunal of theId.,p. 114.Art. 11(3), New York Convention. “The words ‘incapable of being performed’ would seemto apply to those cases where the arbitration cannot be effectively set into motion. This may happenwhere the arbitral clause is too vaguely worded, or other terms of the contract contradict the parties’intention to arbitrate”: see A.J. van den Berg, The New York Arbitration Convention of 1958(Deventer: Kiuwer, 1981), p. 159.Yearbook Comm. Arb., II, (1977), p. 239.36German-Dutch Chamber of Commerce. If the decision is not acceptable to eitherparty, an ordinary court of law, to be designated by the claimant, will be competent. u96Here arbitration is agreed as a step preceding litigation. When a dispute arose, the Germanparty started Court proceedings before the Court of first instance (Landgericht). The Court gave adecision against the Dutch party, who then took recourse to the same Court claiming that the disputeshould first be settled by arbitration.The Court held that the validity of the arbitration clause should be judged under both Germanand Dutch legal systems. Both German and Dutch laws provide that an arbitration agreement is validonly if the agreement specifically selects arbitration, which means that if the parties have agreed toarbitration, the Court cannot function as a second instance. The Court concluded that the arbitrationclause was not valid and the agreement was merely an attempt for conciliation preceding a courtaction. The parties’ intention to arbitrate is defeated by their intention to litigate since the parties didnot intend to accept a binding arbitral award.For institutional arbitration, it should be noted that the selection of the arbitration institutionper se must also be made clear in the arbitration agreement. An ambiguous indication of thearbitration institution will not effectively authorize the institution to take the arbitration case even ona prima facie basis.97 The arbitration institution may have to obtain the consent of the defendantbefore it could assume jurisdiction.96 Id.E.g., in ICC arbitration, “(w)here there is no prima facie agreement between the parties toarbitrate or where there is an agreement but it does not specify the International Chamber ofCommerce, and if the Defendant does not file an Answer within the period of 30 days provided byparagraph 1 of Article 4 or refuses arbitration by the International Chamber of Commerce, theClaimant shall be informed that the arbitration cannot proceed” (emphasis added): Art.7, ICC Rules.372.2.2. Scope of DisputesThe scope of disputes depends on the form of the agreement to arbitrate, i.e., a broad or anarrow form. In either form, it concerns (1) the availability of arbitration services98 and (2) therequirements of national laws on arbitrability.For the first issue, most of the established arbitration institutions deal with disputes ofcommercial nature, not, for example, disputes about family relationships or personal matters. TheICC Court of Arbitration handles business disputes of an international character.99 The BCICACdeals with commercial disputes arising from a contract or a defined legal relationship as itsrecommended clause reads:“All disputes arising out of or in connection with this contract, or in respect of anydefined legal relationship associated therewith or derived therefrom, shall be referredto and finally resolved by arbitration under the rules of the British ColumbiaInternational Commercial Arbitration Centre.”°°Matters of a non-commercial nature may not fall within the jurisdiction of an institution. Suchmatters may never reach the hands of international arbitrators because the institution would haverejected them in the first place.98 5 Jarvin, “The Sources and Limits of the Arbitrator’s Powers” (hereafter “The Arbitrator’sPowers”) in Julian DM Lew ed. Contemporary Problems in International Arbitration (Centre forCommercial Law Studies, Queen Mary College, University of London, 1986), p. 54.Art. 1 (1), ICC Rules.100 See Guidelines for the Arbitration of Commercial Disputes (British Columbia InternationalCommercial Arbitration Centre, 1992).38As for the second issue, under national laws arbitrability is a prerequisite for arbitration. Ifthe dispute were statutorily non-arbitrable, for example, “issues dealing with the legal capacity andstatus of individuals or issues involving moral sentiments and acceptable standards”,101 arbitraljurisdiction could not found. A private procedure cannot derogate from the mandatory rules of thestate. Otherwise, a state would have no control of the subject matter jurisdiction of arbitration.Many national laws prescribe arbitrable matters in positive terms. Under English law, e.g.,matters which affect the civil interests of parties are arbitrable.102 French’°3 and German104 lawsprovide that differences on which it is possible to reach a compromise may be arbitrated.The new Swiss law on international arbitration provides that “any dispute involving propertymay be the subject matter of an arbitration”.’°5 The term “property” is said to cover “all kinds offinancial or monetary interests connected to contractual, quasi-contractual, commercial, civil,administrative and public law matters, whether arising under domestic, foreign or international101 Art. 1913, Peru Civil Code (enacted 24 July 1984), Intl. Handbook on Comm. Arb. Suppl.7, Peru: Annex 1-2.102 Intl Handbook on Comm. Arb. (Suppl. 9), England - 13.103 Intl Handbook on Comm. Arb., France - 7.104 Id., Suppl. 7, Fed. Rep. of Germany - 6.2.105 Art. 177 (1), Swiss Federal Private International Law Act relating to International Arbitration(adopted on 18 December 1987 and in force as of 1 January 1989): see The New Swiss Law onInternational Arbitration (Swiss Arbitration Association, 1990).106 Id., p. 26.39The new Swiss law does not limit arbitrability to commercial matters. Any dispute which canbe valued in monetary terms can be settled through arbitration.Some nations list items that are non-arbitrable. For example, “under the existing Chinese law,disputes relating to infringement upon the rights of trademarks and patents cannot be arbitrated”.’°7Some others develop principles on arbitrabiity through case law. For example, in the UnitedStates, there has been a favourable judicial view of arbitrability with respect to internationalarbitration. In Mitsubishi v. Soler Chrysler-Plymouth,108Soler claimed that the dispute were of anantitrust nature and were not arbitrable. The key issue was whether in a international businesstransaction involving the application of U.S. antitrust law the parties’ choice of arbitration is stilleffective. The U.S. Supreme Court held in favour of arbitration1°9and found that “having permittedthe arbitration to go forward, the national courts ofthe United States will have the opportunity at theaward-enforcement stage to ensure that the legitimate interest in the enforcement of antitrust lawshas been addressed”.”°107 Tang, Houzhi, “International Commercial Arbitration in the Far East -- the PRC Example”(hereafter “the PRC Example”) in P. Sanders ed. Arbitration in Settlement of InternationalCommercial Disputes Involving the Far East (1988), op. cit., p. 49.108 Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth. Inc U.S. Supreme Court (1985) 473U.S. 614 87 L.Ed.2d 444., 53 U.S.L.W. 5069.‘° As to the scope of arbitration clause, the US Court of Appeals, First Circuit, stated at theoutset that: “Our analysis of the arbitration clause is guided by two basic principle. First, the scopeof the clause as it appears on the face of the contract is a question of law for our independentdetermination and not, as Mitsubishi argues, one of fact reversible only for clear error. Second, alldoubts are resolved in favour of arbitration”: see Soler Chrysler-Plymouth Inc. (U.S.) v. MitsubishiMotors Corporation (Japan) (723 Federal Reporter, 2nd Series, p. 155, 1983), Yearbook Comm.Ath..., X, (1985), p. 520.110 Id.40With regard to arbitrability, a question arises as to what system of law applies. The NewYork Convention resolves the question only in enforcement proceedings, where the law of the forumstate applies.11’ In arbitral proceedings, will an international arbitrator apply the law of the countrywhere arbitration is being conducted or the law of the home country of either of the parties? Thelaws of these countries may all have an impact on the issue of arbitrability.Arbitrability is first and foremost governed by the law of the seat of arbitration. If that lawprohibits certain matters to be referred to arbitration, they are not arbitrable within the territory ofthat state. Where the law of the home county of either of the parties imposes certain limitations onarbitrability, then matters beyond the limited scope may render the arbitration agreement invalid. InICC Case No. 4 132,112 the South Korean defendant contended that the contract and the arbitrationclause were unenforceable on the basis ofKorean public law (antitrust law, price law and fair tradelaw). The tribunal distinguished between the private law governing the contract and other rules ofpublic law that may be applicable to the contract. The tribunal felt empowered to apply nationalpublic law insofar as the enforceability of the contract is concerned. It was not satisfied with thedefendant’s proof about the extent of application of Korean public law to the case and held thatKorean private law governed the contract and that the disputes in question were arbitrable.National rules on arbitrability are mandatory and must be observed in formulating the scopeof disputes and conducting an arbitration. Inarbitrability of certain disputes under either the law of1 Art. V (2) (a), New York Convention.112 Preliminary Award of September 22, 1983, Case No. 4132, Jarvin & Derains Collection ofICC Arbitral Awards 1974-1985 (Kluwer, 1990), op. cit., p. 164.41the place of arbitration or the law of the home country of either of the parties may render thearbitration wholly or partly invalid.2.2.3. Appointment of ArbitratorsThe parties should agree on the way the arbitral tribunal is to be organized. If the arbitrationagreement refers to a set of procedural rules, the arbitral tribunal will be constituted in accordancewith the applicable procedural rules, which always have provisions regarding the appointment ofarbitrators. In ICC arbitrations, unless the parties have agreed or special circumstances requireotherwise, the Court ofArbitration shall appoint a sole arbitrator from a country other than those ofwhich the parties are nationals.”3 Under the Uncitral Arbitration Rules, in the absence of anagreement to the contrary, three arbitrators are to be appointed: one by each party and the thirdappointed by the two party-appointed arbitrators. If the two arbitrators cannot agree on a thirdarbitrator, the latter may be appointed by the appointing authority agreed upon by the parties or, inthe absence of agreement ofthe parties on the appointing authority, the same may be appointed, uponrequest, by the Secretary-General of the Permanent court of Arbitration at the Hague.”4Parties may avail themselves of the right to the appointment of arbitrators in their arbitrationagreement. They may decide on the number, the procedure of appointment and the qualifications ofarbitrators. The important thing is to prevent any impasse in the appointment process. For example,if the parties have named an arbitrator in the agreement, they must make sure that the so namedarbitrator will accept the appointment. Otherwise, problems will arise when the named arbitrator“ Art. 2 (5) (6), ICC Rules.“ Arts. 5, 6, 7, 8, Uncitral Arbitration Rules.42refuses to accept the appointment or unable to perform because of illness or death. They may agreeon an appointing authority to appoint arbitrators on their behalf in case their agreed procedure doesnot work. In this case they should also be certain that the appointing authority will be willing toperform the appointment.1152.2.4. Rules of ProcedureArbitral procedure rules are designed to provide the arbitrators with a code of rules governingthe procedure of arbitration. Arbitration rules generally provide an initial stage, an appointmentstage, a hearing stage and a decision-making stage. At the initial state, documents such as applicationfor arbitration, statement of claims and defence are produced and exchanged. At the appointmentstage, parties appoint arbitrators to constitute the arbitral tribunal. At the hearing stage, the arbitraltribunal hears the evidences and presentations of the parties for their cases. The final decision-makingstage provides the issuance of an arbitral award by the arbitral tribunal.The parties may take advantage of a set of rules in their arbitration agreement. These ruleswill afford them a great degree of predictability and certainty as to the various steps in an arbitralprocedure. The parties may also stipulate their own rules of procedure to supplement the proceduralrules they have chosen. In ICC practice, the ICC Rules of Arbitration itself permit parties or the“ In National Enterprises Ltd. v. Racal Communications Ltd., (1974) 2 W.L.R. 733, the namedappointing authority declined to appoint arbitrators simply because they did not consider it theirfunction to appoint arbitrators: see C.M. Schmitthoff, “Defective Arbitration Clauses”, Journal ofBusiness Law, 1975, p. 9; also see “Preliminary Award Made in Case No. 2321 in 1974”, S. Jarvinand Y. Derains, Collection of ICC Arbitral Awards 1974-1985, Kluwer, 1990, p. 8, where the namedappointing authority other than the ICC Court ofArbitration refused to appoint an arbitration “sayingthat he considered that the Court should appoint the arbitrator”, id., p. 9.43arbitrators to settle on any rules to fill any gaps of the Rules.116 Under the Uncitral Arbitration Rules,the parties may modifij the rules to tailor their own needs.’17Some arbitration agreements may neglect the selection of any procedural rules, for example,“arbitration in the city ofLondon”.’18 In such a case, the place of arbitration is selected and the lawof that place governs the procedure and fills in the gap of the arbitration agreement.2.2.5. Applicable lawParties should always be cautious about the issue of applicable law, since the validity of thearbitration and even the speed of the process may turn on which law applies to the arbitration. Firstand foremost, we should distinguish between the law applicable to the substance of the case and thelaw governing the procedure of the arbitration.’9 The former is the law that the arbitrators rely onin determining the substantive rights and obligations between the disputing parties; the latter involvesthe maimer in which the arbitral proceedings develop and the roles of the forum country’s court in thearbitral process.116 Art. 11, ICC Rules.“Where the parties to a contract have agreed in writing that disputes in relation to thatcontract shall be referred to arbitration under the Uncitral Arbitration Rules, then such disputes shallbe settled in accordance with these Rules subject to such modification as the parties may agree inwriting”(emphasis added): Art. 1 (1), Uncitral Arbitration Rules.Tzortzis and Sykias v. Monark Line A/B (1968) 1 Lloyd’s Rep. 337, cited by Schmitthoff,“Defective Arbitration Clauses”, op. cit.119 There is also a law applicable to the arbitration agreement, which may be different from eitherthe substantive law or the procedural law: see infra Sect. 2.3.1.44Second, parties are entitled to agree on the applicable law of their contract,’2°and they shouldconsider the choice of applicable law in their contract. Where they have chosen alaw applicableto the merits, the arbitrators must respect and apply the law so chosen; where the parties fail tochoose such a law, the arbitrators will decide the applicable law according to the conflict of laws ruleswhich they consider applicable.’2’ In all cases, they shall take account of the terms of the contractand usages of the trade.’22 Some arbitrators even go fhrther by applying lex mercatoria, or the lawof the merchant.’23As to the law applicable to the arbitral procedure, similarly, if the parties have made anexpress choice in their contract, the arbitrators shall follow the procedural law so chosen. But they120 Whitworth Street Estates (Manchester) Ltd. v. James Miller and Partners Ltd. [1970] A.C.583, 603 per Lord Reid.121 See, e.g., Art. 28 (1) (2), Uncitral Model Law; Art. VII (1), European Convention; Art. 13(3), ICC Rules; Art. 33 (1), Uncitral Arbitration Rules; Art. 42 (1), Convention on the Settlement ofInvestment Disputes between States and Nationals of other States, done at Washington, 18 March1965 (hereinafter “ICSID Convention”), United Nations, Treaty Series, Vol. 575, p. 160, No. 8359(1966).122 Art. 28 (4), Uncitral Model Law; Art. VII (1), European Convention; Art. 13 (5), ICC Rules;Art. 33 (3), Uncitral Arbitration Rules.123 In ICC Award NO. 3131 concerning a dispute between a Turkish company and a Frenchcompany, the arbitrators concluded:“Faced with the difficulty of choosing a national law the application of which issufficiently compelling, the Tribunal considered that it was appropriate, given theinternational nature of the agreement, to leave aside any compelling reference to aspecific legislation, be it Turkish or French, and to apply the international imercatoria.”See, ICC Award NO. 3131, Yearbook Comm. Arb. IV, 1979, p. 110.45must examine the lex arbitri so fixed with regard to its compatibility with mandatory rules at the placeof arbitration, if the place is not in the country whose procedure law is chosen.’24Ifthe parties merely have selected a place of arbitration125 and left open the procedural law,the latter will be the lex loci arbitri, i.e. ,the law of the place of arbitration; if the parties have chosenneither the procedural law nor the place ofarbitration, the law of the place where arbitration actuallytakes place will govern.’262.3. Enforceability of Arbitration AgreementEnforceability is an inherent feature of the arbitration agreement. The Geneva Protocol wasthe first international instrument that addressed the issue of enforceability. The Protocol called forthe Contracting States to recognize the validity of an agreement referring existing or future disputes124 Sigvard Jarvin, “The Sources and Limits of the Arbitrator’s Powers” (hereinafter “TheArbitrator’s Powers”) in J. D M Lew ed., Contemporary Problems in International Arbitration (1986),op. cit., p. 61.125 Parties are free to agree upon the place of arbitration; failing such agreement, the place iseither decided by the arbitration institution (as in ICC arbitration) or the arbitral tribunal (as inUncitral Rules): see Art. 12, ICC Rules and Art. 16, Uncitral Arbitration Rules.126 The New York Convention assumed the law of the place of arbitration as the applicable lawwhere there is no choice by the parties. One ground for non-enforcement of an arbitral award reads:“The composition of the arbitral authority or the arbitral procedure was not in accordance with theagreement of the parties, or, failing such agreement, was not in accordance with the law of thecountry where the arbitration took place”: Art. V 1 (d), New York Convention.46to arbitration’27 and required the tribunals of the Contracting States, when seized of a dispute of acontract containing an arbitration agreement, to refer the parties to the decision of the arbitrators.’28Being a convention on recognition and enforcement of foreign arbitral awards, the New YorkConvention, none the less, confirmed the spirit of the Geneva Protocol and further imposed anobligation on the court ofa Contracting State to refer the parties to arbitration unless the arbitrationagreement is null and void, inoperative and incapable of being performed.’292.3.1. Law Applicable to Arbitration AgreementAs to the law applicable to the arbitration agreement, there seems to be no uniform rules. TheNew York Convention provides in connection with the enforcement of the arbitral award that the lawapplicable to the arbitration agreement is Hthe law to which the parties have subjected it or, failing anyindication thereon, ... the law of the country where the award was made”. Two questions follow:first, is the law applicable to the whole contract also applicable to the arbitration agreement? Second,if the parties have not chosen any law governing the contract or the arbitration agreement, how is thelaw applicable to the arbitration agreement to be decided at the time of enforcement of the arbitrationagreement when the place of the award to be rendered is still undetermined?127 pj 1, Geneva Protocol.128 Art. 4, Id.129 Art. II (3), New York Convention reads: “The court of a Contracting State, when seized ofan action in a matter in respect ofwhich the parties have made an agreement within the meaning ofthis article, shall, at the request of one of the parties, refer the parties to arbitration unless it finds thatthe said agreement is null and void, inoperative or incapable of being performed”.47For the first question, the answer is not necessarily positive. The arbitration agreement maybe in the form ofa submission which is separate in form from the contract. It is conceivable that theparties indicate one law to govern the contract and later another law to apply to the arbitrationagreement. In case the arbitration agreement is a clause of the underlying contract, it is arguable thatthe parties had wished to have a uniform system of law to govern the whole body of the contract. 130Because of the autonomy of the arbitral clause, factors related to a determination of the applicablelaw of the arbitration agreement might be different from those for the contract. For example, as tothe arbitration agreement, an arbitrator may consider to apply the law “which the judge who wouldnormally have been competent would have been obliged to apply”,’3’while, as for determination ofthe law applicable to the substance of the contract, the arbitrator may apply “those rules of conflictof laws which coincide in the places of domicile of both parties” 132 In the famous Dow Chemicalarbitration, the arbitrators held:“[T]he source of law applicable to determine the scope and the effects of anarbitration clause providing for international arbitration do not necessarily coincidewith the law applicable to the merits of a dispute submitted to such arbitration.Although this law or these rules of law may in certain cases concern the merits of thedispute as well as the arbitration agreement, it is perfectly possible that in other cases,the latter, because of its autonomy, is governed -- not only as to its scope, but also as130 See F.R.Germany No. 20, Oberlandesgericht Hamburg, September 22, 1978, YearbookComm. Arb. V (1980), p. 264.131 See ICC Case No. 953, Award made in 1956, S. Jarvin & Y. Derains Collection of ICCArbitral Awards (Kluwer, 1990), op. cit., p. 17.132 Id.48to its effects -- by its own specific sources of law, distinct from those that govern themerits ofthe dispute. This is particularly the case -- unless the parties have expresslyagreed otherwise -- with respect to an arbitration clause referring to the ICCRules” 133As to the second question, i.e., how to determine the law applicable to the arbitrationagreement when the award has not yet been made, some commentators consider that such anagreement is governed by the law of the country where the award will be made.134 Under this view,it is submitted that, where the parties have not selected a place of arbitration, the solution would bethe application of the conflict of law rules of the forum.135This view is shared by the German courts in the above Rugs case,’36 where the German Courtof first instance held that the parties themselves were free to determine the law applicable to thearbitration agreement and failing any indication thereon, the law of the country in which the awardwill be made (“ergehen soil”) will apply.However, in the U.S., the prevailing approach is that the law of the forum governs thearbitration agreement, in the absence of choice of the parties. In Ferrara S.p.A.(Italy) & FratelliMoretti Cereali S.p.A. (Italy) v. United Grain Growers Ltd. (Canada), the U.S. District Court for theSouthern District ofNew York held:See ICC Case No. 4131, Yearbook Comm. Arb., IX, (1984), p. 133.134 A.J. van den Berg, The New York Arbitration Convention of 1958, op. cit., p. 127.135 Id.136 Supra footnote 95.49“Unlike Art. V ofthe Convention, which governs the recognition and enforcement ofarbitral awards, Art. II does not indicate which law is to govern enforceability of anarbitral agreement, but it appears that the drafters intended to impose on the ratifyingStates a broad undertaking’ to give effect of such an agreement unless it offends thelaw or public policy ofthe forum. (...) This result is consistent in these cases with theview that enforceability of an agreement to arbitrate relates to the law of remedies andis therefore governed by the law of the forum” (emphasis in text).’37In Becker Autoradio U.S.A. Inc. (U.S.) v. Becker Autoradiowerk GmbH(F.R.Germ.) et al.‘ the U.S. Court of Appeals (Third Circuit) held:“Thus, the question of whether, in contracts involving commerce, there is anagreement to arbitrate an issue or dispute upon which suit has been brought isgoverned by federal law. Concomitantly, questions of interpretation and constructionof such arbitration agreements are similarly to be determined by reference to federallaw.”The European Convention has adopted a compromise position. It provides that the law ofthe country where the award is to be made applies to cases where the parties have not made a choiceof law; on the other hand, the conflict of law rules of the forum state may also be used to determinethe applicable law in all other cases:Ferrara S.p.A.(Italy) & Fratelli Moretti Cereali S.p.A. (Italy) v. United Grain Growers Ltd.(Canada) 441 F. Supp. 778 (1977), Yearbook Comm. Arb., IV, (1979), U.S. No. 20, p. 332.138 Becker Autoradio U.S.A. Inc. (U.S.) v. Becker Autoradiowerk (3mbH(F.R.Germ.) et al. 585F.2d 39 (3rd Cir. 1978), Yearbook Comm. Arb., V, (1980), U.S. No.26, p. 272.‘ Id., p. 273.50“In taking a decision concerning the existence or the validity of an arbitrationagreement, courts ofContracting States shall examine the validity of such agreementwith reference to the capacity of the parties, under the law applicable to them, andwith reference to other questions(a) under the law to which the parties have subjected their arbitration agreement;(b) failing any indication thereon, under the law of the country in which the award isto be made;(c) failing any indication as to the law to which the parties have subjected theagreement, and where at the time when the question is raised in court the country inwhich the award is to be made cannot be determined, under the competent law byvirtue of the rules of conflict of the court seized of the dispute.”4°Whatever law applies to the arbitration agreement, an emerging consensus seems to be thatthe law applicable to the arbitration agreement is not necessarily the law which applies to the contract.Parties may choose a law to apply to the contract and another to the arbitration agreement. Oncethey have chosen a law applicable to the contract, they should not take it for granted that the samelaw will apply to the arbitration agreement. Rather they should explore the possibility of choosinga specific system of law to govern the arbitration agreement. In the absence of parties’ choice, thelaw applicable to the arbitration agreement may be determined in the circumstances of each case,which may, none the less, be a different law from that applicable to the contract.23.2. Effect ofArbitration Agreement140 Art. VI (2), European Convention.51It is generally recognized that a valid arbitration agreement establishes the jurisdiction of thearbitrators and excludes the competence of ordinary courts. This is true in Germany as the Courtreasoned in the above Rugs case. The German Code of Civil Procedure provides that the court mustdismiss an action which is brought before it in violation of a valid arbitration agreement and refer theparties to arbitration.’4’The New York Convention calls for the court of a Contracting State to stay the courtproceedings and refer the parties to arbitration unless the arbitration agreement is “null and void,inoperative or incapable of being performed”.’42 This position is also recognized in the UnitedStates,’43 France’” and Austria.145 In Canada, the arbitration statutes adopt the Model Law rule onenforcement of the arbitration agreement and so does the court seized of an application for stay ofcourt proceedings.‘141 Sect. 1027 a, German Code of Civil Procedure.142 Art. 11(3), New York Convention.‘‘ Sect. 3, United States Arbitration Act United States Code, Title 9, Chaps. 1, 2 and 3; Sect.2, Uniform Arbitration Act. In Fritz Scherk v. Alberto-Culver, the U.S. Supreme Court consideredthat a contractual provision specifying in advance the forum in which disputes shall be litigated andthe law to be applied is an almost indispensable precondition of the achievement of the orderlinessand predictability essential to any international business transaction, and “a parochial refusal by thecourts of one country to enforce an international arbitration agreement would frustrate thesepurposes”: see Fritz Scherk (German) v. Alberto-Culver Company (U.S.) 417 U.S. 506, YearbookComm. Arb., I, (1976), p. 203.144 Art. 1458, French Code of Civil Procedure.‘ Intl Handbook on Comm. Arb. (Suppl. 1), Austria - 6.146 See, e.g., Art. 8, British Columbia International Commercial Arbitration Act, S.B.C. 1986,C. 14. For court decisions on the enforcement of international arbitration agreement, see QjjifCanada Resources Ltd. v. Arochem International Ltd. (1992), 66 B.C.L.R. (2d) 113, 43 C.P.R. (3d)390 (C.A.); Stancroft Trust Ltd. v. Can-Asia Capital Co. (1990), 39 C.P.C. (2d) 253, [19901 352The United Kingdom Parliament has added a fourth exception to the three conditions set outby the New York Convention. The court could refuse to order a stay of proceedings if it is satisfied“that there is not in fact any dispute between the parties with regard to the matter agreed to bereferred”.147 In Nova (Jersey) Knit Ltd. (U.K.) v. Kammgarn Spinnerei GmbH (F.R.Germ.) 148where, faced with the issue whether there was a dispute as to the claim on bills of exchange, theHouse of Lords reversed the decision of the Court of Appeal, holding jnIr jj that there was nodispute as far as the bills of exchange were concerned and refused a stay of proceedings.149The Chinese position is that the parties are barred from taking the case to the court if thereis an arbitration agreement concluded between the parties.’5° But there are no provisions on stay ofcourt proceedings in case that one party, in breach of an arbitration agreement, takes action in acourt. The Chinese courts seem to be obligated to order a stay of proceedings under the New YorkConvention to which China acceded in 1986. To the contrary, one case illustrates that an arbitrationclause may not bar the Chinese court from exercising jurisdiction. The dispute arose from a salesW.W.R. 665, 43 B.C.L.R. (2d) 341, 67 D.L.R. (4th) 131 (C.A.), leave to appeal to S.C.C. refused[1990] 6 W.W.R. lxvi (note), 49 B.C.L.R. (2d) xxxiv (note), 74 D.L.R. (4th) viii (note) 127 N.R. 80(note) (S.C.C.).147 Sect. 1 (1), Arbitration Act 1975.148 Nova (Jersey) Knit Ltd. (U.K.) v. Kammgarn Spinnerei GmbH F.R.Germ.) 1 Lloyd’s Rep.(1977) 163, Yearbook Comm. Arb., IV, (1979), p. 314.149 Cf ICC Case No 4705 (unpublished, but discussed by S. Jarvin), where the respondent didnot dispute the sum claimed and the interest thereon, the arbitrator defined the issue to be determinedas “the manner in which the admitted debt and interest should be discharged”. See S. Jarvin, “TheArbitrator’s Powers”, op. cit., p. 55.150 See Art. 257, Civil Procedure Law of the People’s Republic of China, adopted on 9 April1991.53contract and involved a foreign party as the defendant. Regardless of the arbitration clause in thecontract, the Shanghai Intermediate People’s Court held:“The defendant, through a series of fraudulent acts, used the device of a contract todefraud plaintiff of payment for goods. This act constitutes a tort and therefor, thecase is no longer a contractual dispute. Accordingly the arbitration clause in thecontract does not apply and because the locus delicti is Shanghai, this court hasjurisdiction by virtue of Articles 185 and 22 of the PRC Civil Procedure Law (TI)[Tentative Trial].”5’The court based its decision on tort grounds. If there had been no fraudulent acts in thecase,’52 the court would probably have decided differently. On the other hand, if the court were moresupportive of international arbitration, it would not have difficulty in finding a basis for upholdingarbitration. It would well rely on the New York Convention to give effect to the parties’ intentionto arbitrate.’53‘‘ China National Technical ImportlExport Corporation v. Industrial Resources Company Inc.(Shanghai Intermediate People’s Court, May 11, 1988), China Law and Practice Vol. 2, 7, p. 26. Anappeal to the Shanghai High People’s Court was rejected on seemingly the same grounds: id., 9, p.29.152 Cf. Prima Paint v. Flood & Conklin 388 US 395, 18 L Ed 2d 1270, 87 S Ct 1801 (1967),where the Supreme Court of the United States held that a broad arbitration clause encompassesarbitration ofthe claim that the contract itself was induced by fraud unless fraud was directed to themaking of the arbitration clause itself.Cf a recent English case involving similar allegations of fraud: Cunningham-Reid and Anotherv. Buchanan-Jardine [1988] 1 W.L.R. 679 (C.A.). In this case, the defendant had contracted to carryout refurbishment work in the plaintiffs’ home. Purchases and services were to be billed to theplaintiff according to invoices. The contract contained an arbitration clause. The plaintiff alleged thatthe defendant had been guilty of fraud in arranging for invoices to be made out by suppliers whichshowed a larger sum was payable than was in fact due and on the basis of such fraud, the plaintiffopposed a stay of proceedings. Under Section 24 (2) of the English Arbitration Act of 1950, the54To sum up, an arbitration agreement which serves as the source of arbitral jurisdiction mustbe valid under the law applicable to it in order for it to be enforced. Determination of the validity ofthe agreement enables a national court to take control of the practice of arbitration. In thisconnection, arbitral procedure seems to be dependent upon the support of the national courts. Butif the parties have careflilly drafted the arbitration agreement and selected an autonomous lawapplicable specifically to the arbitration agreement at the very beginning, they may avoid manyuncertainties and reduce unnecessary litigations over the arbitration agreement.High Court has discretion to rule that an arbitration agreement shall cease to have effect where adispute involves a question of fraud. The case turned on the circumstances under which the courtshould exercise that discretion. The court held that, on the application of the party charged withfraud, a stay ofproceedings normally would be granted so that the matter could be arbitrated, unlessa good reason against arbitration existed, and that even strong prima facie evidence of fraud wouldnot by itself be a sufficient reason for refusing a stay. Woolf L.J. stated at p. 688:“There is no difficulty in this day and age in appointing an arbitrator who is wellcapable of properly determining and trying an issue of fraud of this sort”.The judgment represented a restrictive English judicial approach in exercising the statutorydiscretion. The court should give effect to the intention of the parties who are, in the words ofBingham L.J., “entitled by virtue of the agreement to arbitrate unless good reason exists against thatcourse” (at p. 690).55CHAPTER 3: JURISDICTION AS TO JURISDICTIONIn arbitral practice, challenges occur frequently as to the jurisdiction of the arbitral tribunal,particularly in cases where the defendant anticipates an unfavourable award. Decisions on suchchallenges must be taken at an appropriate time during the procedure. Who is going to make thatdecision, the arbitral tribunal or the court? Who has the final say on arbitral jurisdiction?This chapter discusses answers to these questions. We will examine the principle ofcompetence of competence from different perspectives and discuss its impact on the relationshipbetween the arbitral tribunal and the court.3.1. Who Is to Determine the Competence of the Arbitrators?Once arbitration commences, the respondent cannot stop the proceedings simply by defaultor any other dilatory means. The proceedings will continue, subject to judicial orders to the contrary,until the arbitral tribunal makes a final decision. The respondent is put in no position of negating itsown written promise. The only way to back out would be to challenge the legal validity of thearbitration agreement. For this purpose, the respondent may file suit, seeking an injunction to restrainthe arbitration from proceeding, or he may challenge the arbitral jurisdiction before the arbitrators,claiming, e.g., that the contract in which the arbitration clause is contained is invalid or has terminatedand as a result the arbitration agreement has no effect.56The question arises as to who is to decide these jurisdictional challenges. In the scene ofarbitration, there are at least three decision makers: the court, the arbitral tribunal and the arbitrationinstitution in institutional arbitrations. Let us examine the role of each of these decision makers.(1) The national court is the primary organ ofjustice administration and the final decisionmaker of arbitral jurisdiction. The competence of the courts is the rule, and the competence of thearbitrators the exception for resolving disputes.’54 Being a public judicial organ established by thestate, the court is empowered to exercise judicial powers to resolve disputes and administer justicewithin the territory of the state. Legal problems are thus reserved to the court.For example, in England, traditionally the jurisdiction of the court could not be ousted. Themajor concern might be: first, arbitration used to be conducted by arbitrators who were business elitebut possibly laymen in terms of legal knowledge and experience, and as a result their decisions werenot highly trusted by court judges; second, English law is essentially common law based on courtprecedents, if people other than judges were allowed to administer justice and render decisions freely,it would be more difficult for the public to follow the law and for the state to seek uniformity of lawover the territory.’55For these concerns, a doctrine of ouster was developed in history under English law. Thedoctrine means that the jurisdiction of the ordinary courts on questions of law arising from the154 See Albert Jan van den Berg, “Should an International Arbitrator Apply the New YorkArbitration Convention of 1958?” in Jan C, Schultsz & Albert Jan van den Berg eds., The Art ofArbitration (Deventer: Kluwer, 1982), p. 42.‘ See generally, Clive M. Schmitthoff, “The Supervisory Jurisdiction of the English Courts” inP. Sanders ed., International Arbitration Liber Amicorum For Martin Domke (Martinus Nijhoff/ TheHague, 1967), p. 295.57reference cannot be excluded by agreement of the parties. It was as early as 1746 that the doctrinecame into being and was fully established by the end of the 18th century.’56This English model later experienced reforms. The Arbitration Act of 1950 provided a specialcase procedure, whereby an arbitrator, when directed by the High Court, shall state any question oflaw arising from the course of the reference in the form of a special case for the decision of the HighCourt.’57 The jurisdiction ofthe arbitrator is a question of law and the arbitrator should state a specialcase. In Windsor R.D.C. v. Otterway & Try Ltd., Devlin J. felt that “he [the arbitrator] could not[state a case] ifhe has no jurisdiction; if he has jurisdiction there would seem to be no reason why hecould not remove doubts by stating a case about it”.’58Under the Arbitration Act of 1979, no application may be made to the court with respect toa question of law if the parties to the reference have entered into an agreement in writing whichexcludes the right of appeal.’59 In order for the High Court to have jurisdiction to determine anyquestions of law arising in the course of reference, consent must be had from either the arbitrator orall of the parties to the reference.’6°By abolishing the special case procedure, the traditional supervisory jurisdiction of the courtis less real. The traditional aversion to arbitrators’ decision on their jurisdiction remains at least in the156 Id.157 Sect. 21, Arbitration Act 1950.158 [1954] 1 W. L. R. 1494, cited in Anthony Walton, Russell on the Law of Arbitration (19thed.) (London: Stevens & Sons, 1979), p. 301.Sect.3 (1) (c), Arbitration Act 1979.160 Id., Sect. 2 (1).58domestic context.16’ In international cases, since a stay is mandatory under the Arbitration Act1975,162 jurisdictional questions are first left to the arbitrators.(2) The arbitrators appointed under the arbitration agreement may decide their ownjurisdiction, subject to the law applicable to the arbitration. For example, in Germany, “(a)ccordingto the case law of the German Federal Court, the parties may vest the arbitrators with the power torule in a binding way on the issues of their own jurisdiction.”63The rule was expounded by one opinion of the German Federal Supreme Court ofMarch 3,1955,164 where the Court acknowledged the authority of an arbitral tribunal to rule on the scope ofits own jurisdiction and its ruling would be final and binding on the court.165 By this opinion, anarbitrator sitting in Germany is not only to rule on the scope of the arbitration agreement and hence161 In Wilicock v. Pickfords, [1979] 1 Lloyd’s Rep. 244 (Court of Appeal), Roskill U observed:“One thing is clear in this branch of the law. It has been clear ever since the decisionin Hevman v. Darwin.... An arbitrator cannot decide his own jurisdiction. Thereforewhenever a question arises whether or not there has been a submission to arbitration,an arbitrator cannot in English law decide that issue. The only tribunal to decide it isthe Court...”. Id., p. 245.The case concerned primarily with a domestic dispute or even a consumer dispute and a stayofcourt proceedings was not mandatory: see Peter Gross, “Competence ofCompetence: An EnglishView”, Arbitration International, Vol. 8, No. 2, 1992, p. 209.162 Sect. 1 (1), Arbitration Act 1975.163 See Peter Schiosser, “The Competence of Arbitrators and of Courts”, ArbitrationInternational, vol. 8, no. 2, 1992, p. 199,164 Boelow, Konkurs-. Treuhand- und Schiedserichtswesen (KTS) (1961), p. 26.165 See Karl Heinz Schwab, “The Legal Foundations and Limitations ofArbitration Procedurein the U.S. and Germany” in Pieter Sanders ed., International Arbitration Liber Amicorum For MartinDomke, op. cit., p. 306.59his own jurisdiction but also to decide the issue in a final and binding manner. Once the arbitrator hashis word on the arbitration jurisdiction, the court cannot review or vacate the arbitrator’s decision.Under English law, arbitrators are entitled to examine their own jurisdiction in a provisionalmanner. In Christopher Brown,’66Mr. Justice Devlin observed:“They [arbitrators] are entitled to inquire into the merits of the issue whether theyhave jurisdiction or not, not for the purpose of reaching any conclusion which will bebinding upon the parties -- because that they cannot do -- but for the purpose ofsatisfy themselves as a preliminary matter whether they ought to go on with thearbitration or not. If it became abundantly clear to them, on looking into the matter,that they obviously had no jurisdiction as, for example, it would be if the submissionwhich was produced was not signed, or not properly executed, or something of thatsort, then they might well take the view that they were not going to go on with thehearing at all. They are entitled, in short, to make their own inquiries in order todetermine their own course of action, and the result of that inquiry has no effectwhatsoever upon the rights of the parties.”67This observation represents judicial recognition of the concept of competence of competencein English law and is taken as “binding authority, supporting the general rule in English law on thepower of arbitrators to reach provisional decisions on their own jurisdiction.”168166 Christopher Brown v. Genossenschaft Oesterreichischer [1954] 1 QB 8.167 Id., pp. 12-13.168 See Peter Gross, “Competence ofCompetence: An English View”, Arbitration International,vol. 8, no. 2, 1992, p. 209.60(3) Arbitration institutions have varied degrees of power in determining arbitral jurisdiction.In ICC arbitration, the Court of Arbitration has the power to examine the validity of the arbitrationagreement on a prima facie basis. Any decision as to arbitral jurisdiction shall then be taken by thearbitral tribunal.169 In some other institutional arbitrations the institution decides arbitral jurisdictionon an exclusive basis. In Poland, the Court of Arbitration at the Polish Chamber of Foreign Tradereserves to itself the power to decide on the jurisdiction of the arbitral tribunal. Its rules provide:1. If the respondent is pleading that the Court ofArbitration lacks jurisdiction, theplea shall be ruled upon by the Presidium of the Court.2. If the arbitral tribunal has doubts as to the - not questioned by the parties -jurisdiction of the Court of Arbitration, the presiding arbitrator shall request thePresidium of the Court to rule upon the jurisdiction of the Court.”7°Similarly, China International Economic and Trade Arbitration Commission (“CIETAC”) hasimplemented the institutional power to determine arbitral jurisdiction. According to the ArbitrationRules ofCIETAC, the arbitration commission has power to decide on the validity of the arbitrationagreement and the jurisdiction over arbitration cases.The institutional reservation of the power to decide arbitral jurisdiction is justified to someextent. Normally jurisdictional challenges are raised before the submission of statement of defense.At this stage, the arbitral tribunal has not yet come into existence, particularly when the defendant169 Art. 8 (3), ICC Rules.170 Para. 17, Rules of the Court of Arbitration at the Polish Chamber of the Foreign Trade inWarsaw, cited by M. Rubino-Sammartano, International Arbitration Law, op. cit., p. 330.171 Art. 2, para. 3, CIETAC Arbitration Rules.61delays appointing an arbitrator. Any challenges as to the validity of the agreement and jurisdictionof the arbitration institution are justifiably left to the decision of the institution.This reservation raises questions such as whether, once constituted, the tribunal has the powerto decide its own jurisdiction, and whether the tribunal should refer any jurisdictional issues arisingin the course of arbitration back to the institution for a decision. If the arbitration institution upholdsthe arbitration agreement and decides that the case shall proceed regardless of the challenge, does thisdecision bind the arbitral tribunal? Further, if pleas concern excess of jurisdiction by the arbitraltribunal, should the tribunal report such pleas to the arbitral institution? The answers to thesequestions obviously demand that arbitrators themselves should be vested the power to decided theirown jurisdiction. Otherwise, arbitrators may have to depend upon the arbitration institution forjurisdictional decisions. In this regard, the ICC practice may be more appropriate: the institution mayexamine the jurisdiction on a prima basis, subject to the final decision of the arbitral tribunal.In the efforts to answer the question who has the power to decide arbitral jurisdiction, aprinciple of competence of competence has been developed. This principle gives the arbitral tribunal,rather than the court or the arbitration institution, the power to make a decision as to arbitraljurisdiction.3.2. Competence of CompetenceBy competence of competence, or Kompetenz-Kompetenz in German and Competence dela competence in French, arbitrators may examine and rule on any jurisdictional issues raised before62them. Simply put, arbitrators have jurisdiction to decide their own jurisdiction. The principle seemsto derive from public international arbitration.3.2.1. As an International Legal PrincipleThe principle of competence of competence was created in international arbitration dealingwith matters relating to state affairs. The Alabama Arbitration (1872) was taken as the starting pointof the rule that gives arbitrators the power to determine their own jurisdiction. 172 In this case, towhich the United States and Great Britain were parties, the dispute was whether the arbitrationprovision, included in the Treaty signed by and between the parties on May 8, 1871 at Washington,should cover, apart from the direct losses, the indirect losses suffered by the United States as a resultofthe destruction ofvessels and their cargoes by insurgent cruisers. The arbitration provision reads:“It shall be competent for the Commissioners conjointly, or for the arbitrator or theumpire, if they differ, to decide in each case whether any claim has or has not beenduly made, preferred, and laid before them, either wholly or to any and what extent,according to the true intent and meaning of this Convention.”173The dispute was finally determined through a process of proposals and counter-proposalsbetween the parties and subsequent notification to the arbitrators, who merely declared their decisionon the basis of the consensus that indirect losses be wholly excluded.’74 According to the arbitration172 See Ibrahim Fl. Shihata, The Power of the International Court to Determine its OwnJurisdiction (Martinus Nijhoff I The Hague, 1956), p. 12‘‘ Id.,p. l7andnote2.174 Id., p. 18.63provision, it seems that the arbitrators had the authority from the parties to determine whether theclaim fell within their jurisdiction.Although the Alabama case did not establish a clear-cut rule that the arbitrators have powerto determine their own jurisdiction, the trend continued and influenced subsequent arbitrations. Forexample, in the Walfish Bay Boundary case of 1911, the arbitrator observed:“(I)t is a constant doctrine ofpublic international law that the arbitrator has power tosettle questions as to his own competence by interpreting the range of the agreementsubmitting to his decision the question in dispute. “(emphasis added)175The Alabama Arbitration was also taken as a precedent by the International Court of Justicein adjudication of conflicts between states. In the Nottebohm case, when confronted with thejurisdictional challenge of the court, the judges observed:“Since the Alabama case, it has been generally recognized, following the earlierprecedents, that, in the absence of any agreement to the contrary, an internationaltribunal has the right to decide as to its own jurisdiction and has the power tointerpret for this purpose the instruments which govern the jurisdiction.”76This rule has been followed by arbitrators sitting for international commercial arbitrations,since they have, not infrequently, made references to the general principles of international law. Forexample, in ICC Case No. 1512, the arbitrator held:175 Award of Prida, arbitrator in the matter of the Southernmost Boundary of the Territory ofWalfish Bay (Germany v. Great Britain), id., p. 22, note 4.176 Nottebohm Case (Preliminary Objection), Judgment of 18 November 1953, I.C.J.Reports(1953), pp. 111, 119.64“Whereas, in international arbitration, the arbitrator’s power and duty to decide on thequestion of his own jurisdiction is firmly established in law...”77By reference to the international principle of competence of competence, in practicearbitrators in international commercial arbitration feel no doubt to decide their own jurisdiction.178But in theory whether their decision making power derives from the private agreement or is inherentin arbitration remains a question to be answered.3.2.2. As an Inherent JurisdictionWhen discussing the principle of competence de la competence in public international law,Sir Fitzmaurice questioned the soundness of the principle. He argued that arbitrators cannot bejudges in their own cause and fI.irther claimed that the power of the tribunal to determine anyquestions ofjurisdiction, either raised by one of the parties or by the tribunal proprio motu, is hardlyconsistent with the fundamental principle that the jurisdiction of an international tribunal is derivedfrom and depends on the will of the parties, for “if the tribunal determines a jurisdictional issue itself,it will in most cases do so contrary to the expressed views and wishes of at least one, and possiblyboth, of the parties”.’79177 Second Preliminary Award (of January 14, 1970) made in Case No. 1512, 5. Jarvin & Y.Derains, Collection of ICC Arbitral Awards 1974-1985, op. cit., p. 37.178 See Partial Award ofMarch 17, 1983, ICC Case No. 4402, id., p. 154.179 See Sir Gerald Fitzmaurice, “The Law and Procedure of the International Court of Justice,1951-4: Questions of Jurisdiction, Competence and Procedure”, British Year Book of InternationalLw XXXIV (1958), P. 26.65His conclusion is in support of the inherent power of international tribunals to determine theircompetence:“In the absence of any hierarchical system, or of special agreement, there is no othermethod by which any judicial determination ofjurisdictional issues -- which are afterall legal issues -- can be obtained, if not from the tribunal itself.”180In theory, two arguments have been made in favour of the principle of competence ofcompetence in public international law. One is that the principle is inferred from the agreement ofthe parties. According to this argument, a power could not be exercised by the tribunal if the partiesreserve it to themselves or to another organ.181 The other argument looks at the nature of the arbitraltribunal, i.e., the power is inherent in the arbitral jurisdiction and necessary for the mere thnctioningof the tribunal.182These two views support the principle from different perspectives. These perspectives areclosely linked. Without an agreement to arbitrate, there would be no arbitrai tribunal and it wouldbe pointless to speak of any inherent power of the arbitral tribunal. For the inherent power to takeeffect, there must be an arbitration agreement and the arbitral tribunal must be properly constitutedon the basis ofthe arbitration agreement. Once it is so constituted, it is inherently entitled to decideits ownjurisdiction. Though the arguments are proposed differently, they join in the conclusion thatin international arbitration the arbitrators are empowered to decide their own jurisdiction.180 Id.181 Ibrahim Fl. Shihata, The Power ofthe International Court to Determine Its Own Jurisdiction,op. cit., p. 25.182 Id., p. 26.66In the context of international commercial arbitration, where exists ultimate judicial controlfrom the national courts, the argument for the principle of competence of competence may be soughtfrom a different point ofview. The analogy with arbitration in public international law may not helpto answer the question why arbitrators should be judges in their own cause. This is because in publicinternational arbitration “the supervisory jurisdiction of a national court is absent.”3In international commercial arbitration, the principle of competence of competence wasfostered by rather practical considerations.1One feature of arbitration is its efficiency and economy.If any jurisdictional issues were reserved for the national court and if the arbitrators had to suspendor terminate the arbitral proceeding each time a challenge of their jurisdiction is confronted, the goalsof international commercial arbitration would be defeated. As Justice Devlin observed in ChristopherBrown:“It is not the law that arbitrators, if their jurisdiction is challenged or questioned, arebound immediately to refhse to act until their jurisdiction has been determined bysome court which has power to determine it finally. Nor is it the law that they arebound to go on without investigating the merits of the challenge and to determine thematter in dispute, leaving the question of their jurisdiction to be held over until it isdetermined by some court which has power to determine it. They might then bemerely wasting their time and everybody else’s.”85183 Clive M. Schmitthoff, “The Jurisdiction of the Arbitrator” in Schultsz & van den Berg eds.,The Art of Arbitration, op. cit., p. 292.184 See “Commentary Uncitral Model Law”, 72, Int’l Handbook on Comm. Arb. Supp. 11,January, 1990.185 [1954] 1 QB 8 at 12.67A question that follows is how to reconcile the realization of the goals of internationalcommercial arbitration with a certain degree of court control. Particularly when the validity of thewhole contract in which the arbitration agreement is contained is called into question, should thearbitral tribunal decide the issue of the validity of the contract and that of the arbitration agreement?To solve this problem, a doctrine of separability was created in international commercialarbitration.3.2.3. In Relation to the Doctrine of SeparabilityThe separability doctrine was developed with respect to the relationship between thearbitration agreement and the underlying contract. It means that the arbitration agreement isseparable from the main contract out ofwhich the dispute has arisen.It is easy to understand the separability of a submission agreement because it is written in aseparate form from the contract. The parties reach the submission agreement to refer to arbitrationthe existing disputes in connection with the contract. The time of conclusion of the submissionagreement differs from that of conclusion of the contract. The validity of the contract and the validity68of the submission agreement are clearly two separate issues.186 The arbitrator is able to rely on thesubmission agreement to examine the validity issue of the contract.In the case of an arbitration clause inserted in the contract, the situation is different. Thearbitration clause is included in and forms part of the contract. A question often raised is whetherthe arbitration clause survives the main contract when the latter is determined to be invalid. In otherwords, can the arbitrator rely on the arbitration clause to look into and decide on the validity of thecontract?This question was solved by case law.187 In English law, the doctrine of separability ofarbitration clause dates back to Heyman v. Darwins’88 In France, the French Cour de Cassationdeclared in the Gosset case in 1963 that the arbitration clause included in the contract was separate186 Redfern and Hunter distinguished between partial challenge and total challenge in the case ofa submission agreement:An arbitral tribunal which derives its authority from a submission agreement isunlikely to face a total challenge to its jurisdiction. The purpose of a submissionagreement is to give the arbitral tribunal jurisdiction to determine disputes betweenthe parties. It would be perverse indeed if, having signed such an agreement, one ofthe parties then launched a total challenge to jurisdiction; the only issue ofjurisdictionlikely to arise in such circumstances will be as to whether or not a particular item ofclaim (or counterclaim) is within the scope of the submission agreement.”Alan Redfern & Martin Hunter, Law and Practice of International Commercial Arbitration (London:Sweet & Maxwell, 1986) p. 212.187 See Julian DM Lew, “Determination of Arbitrators’ Jurisdiction and the Public PolicyLimitation on That Jurisdiction” in Julian DM Lew ed., Contemporary Problems in InternationalArbitration op. cit., p. 76.188 Heyman v. Darwins Ltd. [1942] A.C. 356, [1942] 1 All E.R. 337 (H.L.). See Peter gross,“Competence ofCompetence: An English View”, op. cit., p. 205, footnote 1; also see A.L. Marriott,“Arbitrating International commercial Disputes in the United Kingdom”, The Arbitration Journal,September 1989, Vol. 44, No. 3, p. 11. For later development of the idea of separability, see BremerVulkan Schifibau und Maschinenfabrik v. South India Shipping Corp. [1981] 1 Lloyd’s Rep. 253,[1981] 2 W.L.R. 141.69from the contract and, only when the validity of the main contract affects that of the arbitrationclause, will the arbitration clause then become void.’89 Later in 1967, the same doctrine was alsoadopted by the United States Supreme Court in Prima Paint v. Flood & Conklin.’90 A rule has beencreated under the Model Law, providing that any decisions that render the contract null and void shallnot entail ipso jure the invalidity of the arbitration clause.’9’The doctrine of separability ofthe arbitration agreement not only streamlines the relationshipbetween the arbitration clause and the contract in which it is inserted and ofwhich it forms part, butit also establishes the relationship between the arbitral tribunal and the national court in terms ofjurisdiction. If the arbitration clause terminates or becomes null and void with the main contract, itmeans that the disputes arising from the main contract will naturally fall within the jurisdiction of thenational court. The arbitrators would have no power to decide the disputes on the basis of aterminated or invalid arbitration agreement. If the arbitration clause contained in the contract isconsidered to be independent of the contract or severable from the other terms of the contract, thearbitrators relying upon the arbitration clause can still decide on the validity of the contract unless thearbitration clause itself is invalid.The separability doctrine functions to solve the issue of the validity of the contract in whichan arbitration clause is contained. The scope of the doctrine of separability was considered in189 Julian DM Lew, “Determination ofArbitrators’ jurisdiction and the Public Policy Limitationon That Jurisdiction”, op. cit., p. 76.‘9° Prima Paint v. Flood & Conldin 388 US 395 (1967).191 Art. 16 (1), Uncitral Model Law.70Harbour Assce. v. Kansa Gen. Insce. 192 In this case, the allegation was that the contract whichcontained an arbitration clause was illegal. The court considered that the scope of separability of thearbitration agreement only arises for consideration where the challenge is directed at the contract.In the case of a submission agreement, where it was made after the contract was concluded but beforea dispute had arisen, or where a written contract and a separate written arbitration agreementcontained in the separate documents were executed at the same time, an arbitrator appointed in eachcase would be entitled to decide issues relating to the initial invalidity or illegality of the contract,provided that the arbitration agreement was widely drawn.’93 The court also considered the issue ofinitio invalidity of the contract and held that the initial invalidity of the contract and subsequentavoidance ofcontracts for innocent or negligent misrepresentation, undue influence or duress couldbe referred to arbitration.194 However, the court was bound by case law that an issue of initialillegality of the contract was always beyond the jurisdiction of an arbitrator. The application for astay was dismissed.There seems to be a consensus that disputes directed at the validity or existence of thecontract can be referred to arbitration on the basis of the separability doctrine. Claims such as therehas never been a contract,195 the contract has been terminated,’96frustrated and abandoned because192 Harbour Assurance Co. (U.K.) Ltd. v. Kansa General International Insurance Co. Ltd. [1992]1 Lloyd’s Rep. 81 (Q.B. (Corn. Ct)).193 Id., p. 85, 86.194 Id.,p.91.195 Lord MacMillan observed the logic:“If there has never been a contract at all, there has never been as part of it anagreement to arbitrate; the greater includes the less.”Heyman v. Darwins. Ltd. [1942] 72 Lloyd’s Rep. 65 at 73.71the claims are time barred by statute,197 or the contract was induced by fraud,’98 should be referredto arbitration if they are directed at the contract. In cases where the disputes are directed at thevalidity or existence ofan arbitration agreement, the court retains its power to decide the issue. Theguideline should remain that the courts send the parties to arbitration unless the arbitration agreementis, in the words ofthe New York Convention and the Uncitral Model Law, “ null and void, inoperativeand incapable ofbeing performed”.The provisions for enforcement of arbitration agreements under both the New YorkConvention and Uncitral Model Law involve an assumption that national courts retain power todecide the validity of an arbitration agreement, and that if the arbitration agreement is “null and void,inoperative and incapable of being performed”, a national court is not bound to send the parties toarbitration. But these provisions should be read to mean that sending parties to arbitration wherethere are arbitration agreements is the rule and refusal to stay court proceedings is an exception. Itis submitted that international arbitrators should be empowered to decide the validity of thearbitration agreement, unless the parties have reserved such a decision to the court. The separabilitydoctrine enables the arbitral tribunal to examine the validity of the whole contract in which thearbitration clause is contained. The principle of competence of competence functions for the arbitraltribunal to examine the validity and scope ofthe arbitration agreement itself, and its own jurisdiction,with an assumption that the tribunal is inherently empowered to decide the issue once it is properlyconstituted.‘ Roy v. Boyce, 57 B.C.L.R. (2d) 187 (B.C.S.C., 1991).197 Cie Europeene v. Tradax [1986] 2 Lloyd’s Rep. 301 (Q.B. (Com.Ct.)).198 ODC Exhibit Systems Ltd. v. Lee et al 41 B.L.R. 287 (B.C.S.C., 1988).723.2.4. In Relation to the Arbitrators’ ImpartialityArbitrators are chosen from disinterested third parties in international commercial arbitration.They are expected to remain neutral in conducting the arbitration and making decisions.Arbitration laws and conventions consider impartiality so important that they invariablyprovide that, upon proof of bias, an award shall be set aside. For example, the British ColumbiaInternational Commercial Arbitration Act provides that an arbitrator shall, when approached for apossible appointment, disclose any circumstances likely to give rise to justifiable doubts as to hisindependence or impartiality.’99 Parties may challenge those who conduct the process in a partialmanner.20° Suspicion of partiality may lead to the setting aside of the arbitral award.20’199 Art. 12 (1), British Columbia International Commercial Arbitration Apt.200 In Canadian common law, the test for disqualification of arbitrators is “reasonableapprehension ofbias” established by the Supreme Court of Canada in Szilard v. Szasz (1955), S.C.R.3, [1955] 1 D.L.R. 370 (S.C.C.), where the court held:“It is the probability or the reasoned suspicion of biased appraisal and judgement,unintended though it maybe, that defeats the adjudication at the threshold. Each party,acting reasonably, is entitled to a sustained confidence in the independence ofmindof those who are to sit in judgement on him and his affairs”.“[lit is sufficient if there is the basis for a reasonable apprehension of so acting”.201 See Article 34 (2) (iii), British Columbia International Commercial Arbitration Act; for awardsset aside because of partiality, see Ghirardosi v. British Columbia (Minister of Highways) [1966]S.C.R. 376; Winnipeg v. Wilson Furniture [19661 Ltd. [1976] W.W.D. 27 (Man.Q.B.); I.U.D.E. v.Saguenay-Kitimat Co. [1956] 6 D.I.R. (2nd) 156 (B.C.S.C.); Danforth Travel Centre Ltd. v. BritishOverseas Airways Corp. [1972] 3 OR. 633 (Ont.H.C.); Pardee v. Lloyd [1979] 26 Gr. 374(Ont.H.C.); Weller Brothers v. Victoria [1917] 24 B.C.R. 148 (B.C.C.A.).73The New York Convention of 1958 and the Washington Convention of 1965 also requireimpartiality in the conditions for enforcement of arbitral awards.202 The Uncitral Model Lawexpressly demands that arbitrators shall give the parties equal treatment.203Arbitration rules likewise attach great importance to the requirement of impartiality on thepart of arbitrators. They establish qualifications and contain provisions for vacating the office whenbias is evident.204 The ICC rules require a party-appointed arbitrator to be independent of the partyappointing him.205The purpose of these rules is to ensure that international arbitrators are disinterested andimpartial in treating the parties and the case at hand. The statement that arbitrators are judges of theirown cause involves an assumption that they are impartial. They are properly appointed and remainindependent of the parties and free of partiality. In this connection, Professor Schmitthoff noted:“I see no magic in the phrase that a person cannot be a judge in his own cause. Thetrue meaning of this rule is that an arbitrator should not deal with a matter in whichhe conceivably or potentially may have a personal interest because this may cast adoubt on his impartiality.”206Thus if arbitrators are independent of the parties appointing them, and if parties endow thearbitrators the power to deal with any controversy or difference arising from the contract, the wishes202 Art. V 1 (b), New York Convention; Art. 52 (1) (c), ICSfl) Convention.203 Art. 18, Uncitral Model Law.204 See, e.g., Arts. 6, 7, SCC Rules; Arts. 9, 10, Uncitral Arbitration Rules; Art. 3.7, LCIA Rules.205 Art. 2 (4), ICC Rules.206 Schmitthoff, “The Jurisdiction of the Arbitrator”, op. cit., p. 292.74ofthe parties should be respected, provided that the arbitrators exercise their power in good faith.207If the arbitrators deliberately abuse this power to decide their own jurisdiction, by assumingjurisdiction when there is in fact no jurisdiction or rejecting it when there is jurisdiction, their abuseofpower would result in a setting aside of the award. If they have some interests in the case, eitherpersonal or financial interest, they can be disqualified for lack of impartiality.208 The parties’ interestsare nonetheless sufficiently protected.209What happens if, out of their professional orientation, the arbitrators are prejudiced againstcourt proceedings and unconsciously favour arbitration when they decide their own jurisdiction?First, arbitrators must observe the fundamental rule that their power derives from the consensus ofthe parties. If their decision amounts to ulIrn yii assumption ofjurisdiction, it will be subject to asetting aside procedure. 1f for some reason, their decision leads to a suspicion of partiality towardsthe party who advances arbitration,21°the same consequence will follow. The court will have anopportunity to review the arbitral decisions in these cases.On the other hand, it should be pointed out that, by arbitrating, arbitrators do not deprive theparties’ legitimate right to court proceedings. It is the parties who choose arbitration, not the207 Id., p. 293.208 For example, in I.U.D.E. v. Saguenav-Kitimat Co. [1956] 6 D.L.R. (2nd) 156 (B.C.S.C.), anarbitrator had personal interest connected with one of the parties, the B.C. Supreme Court held that“if it appears that the interest revealed, however small, was sufficient to put a reasonable suspicionin the minds of the parties as to the partiality of the arbitrator, then he must be disqualified”.209 Schmitthoff, “The Jurisdiction of the arbitrator”, op. cit., p. 293.210 For the requirement of impartiality, it is a test for the appearance of partiality, not its actualpresence: see generally “The Independence and Neutrality of Arbitrators”, Arbitration InternationalVol. 9, No. 4, December 1992, pp. 3 1-42.75arbitrators. The latter merely performs the arbitrating function in accordance with the parties’ ownwishes.It should also be noted that arbitrators generally are known for their commercial integrity andprofessional reputations. They are concerned about their own integrity in the business community.They are aware of the consequences of deliberate abuse ofjurisdiction. They would rather takecaution in deciding jurisdictional problems and endeavour to see that their award be enforceable ata court of law.2113.3. The Nature of the Decision on Arbitral JurisdictionThe principle ofcompetence ofcompetence has become widely accepted as a general principlein international commercial arbitration. Even in England where traditionally any questions of lawarising in the course ofthe reference were reserved for the discretion of the court, the Arbitration Actof 1979 allowed parties to exclude the judicial review of the award.212 If the parties are permitted toexclude judicial review ofthe award completely, they must a fortiori be able to let arbitrators decidetheir own jurisdiction.213211 In ICC arbitrations, the Rules of Arbitration call for the Court of Arbitration and thearbitrators to “make every effort to make sure that the award is enforceable at law”. See Art. 26, ICRules.212 Sect. 3, Arbitration Act 1979.213 Schmitthoff, “The Jurisdiction of the Arbitrator”, op. cit., p. 293, where it is pointed out thata future arbitration act should permit an exclusion agreement to exclude the application of the rulethat the arbitrator has no power to determine his own jurisdiction.76The first convention that implements the principle of competence of competence appears tobe the European Convention, where it expressly is provided that the arbitral tribunal, when seized ofpleas as to lack of jurisdiction, shall decide its own competence subject to any subsequent courtreview under the law of the place of arbitration.214 Later, the ICSID Convention adopted theprinciple in a clear-cut manner: “The Tribunal shall be the judge of its own competence”.215 TheUncitral Model Law confirmed the principle.216As for national statutes that empower arbitrators in international cases to determine their ownjurisdiction, Canadian,217 German218 and Swiss219 laws may be taken as examples. French law goeseven further:“If the arbitral tribunal has not been seized of the matter, the court should also declinejurisdiction unless the arbitration agreement is manifestly null” 220214 Art. V (3), European Convention.215 Sect. 3, Art. 41(1), ICSID Convention.216 Art. 16 (1), Uncitral Model Law.217 Canadian arbitration acts in the international context are based on the Uncitral Model Law,accepting, inter alia, the principle of competence of competence: see, e.g., Art. 16, British ColumbiaInternational Commercial Arbitration Act.218 Section 1037 ofZivilprozessordnung (Civil Code ofProcedure), ZPO, reads:“The arbitrators may proceed with arbitration and render an award, even if it beclaimed that arbitration proceedings are inadmissible; in particular, even if it beclaimed that no valid agreement to arbitrate exists, that the arbitration agreement doesnot refer to the dispute submitted or that an arbitrator is not qualified to act in thatcapacity.”ZPO 30, 1, 1877, version 12, 9, 1950 (BGBI 533), source: Ottoarndt Glossner, CommercialArbitration in the Federal Republic of Germany (Kluwer, 1984), Appendix 1, pp. 35, 45.219 See Art. 186 1, Chapter 12, Swiss Private International Law Act.220 See Art. 1458, Book IV, French Code of Civil Procedure.77With regard to rules and practices of arbitration institutions, the American ArbitrationAssociation International Arbitration Rules provide emphatically that the arbitral tribunal shall havethe power to rule on its own jurisdiction, including any objections with respect to the existence orvalidity of the arbitration agreement.22’The nature of the arbitrators’ decision is not expressly indicated in these laws and rules. TheGerman case law that expounds a binding decision of the arbitrators may not be followed by otherGerman courts since Germany does not have a system ofbinding precedents.222 The question remainsto be of value as to the nature of the arbitrators’ decision on their own jurisdiction. Assuming thatan arbitral tribunal has given a decision affirming its jurisdiction, is this decision final and binding onthe parties?To answer this question, we can envision three situations. First, the validity of the arbitrationagreement is not in dispute and the arbitral tribunal is properly constituted, the challenge relates tothe scope of arbitral jurisdiction only. Under this situation, the arbitrators’ decision on their scopeofjurisdiction is not final in its true sense because it is clearly subject to court review.223 A universalrule under the New York Convention is that, if the decision goes beyond the scope of the arbitrationagreement, the arbitral award may wholly or partly be refused enforcement.224 Under the ICSIDsystem, if the arbitral tribunal “has manifestly exceeded its powers”, its award may be annulled by an221 Art. 15 (1), AAA International Rules.222 Peter Schlosser, “The Competence of Arbitrators and of Courts”, op. cit., p. 203.223 For court reviews of arbitral jurisdiction, see infra Sect. 5.2.224 Art. V 1 (c), New York Convention.78“ad hoc committee of three persons”.5 The German Federal Court’s view has been criticised on theground that by allowing so extensive a power to arbitral tribunals, arbitrators would be pullingthemselves up by their own bootstraps.6 They would be denying the court’s judicial power over thepractice of arbitration.The second situation is that the validity of the arbitration agreement is not in dispute, but theconstitution of the arbitral tribunal itself is at issue. Can the arbitral tribunal decide such challengesas to its own composition in a binding manner?The current practice seems that the arbitral tribunal may decide such challenges, but itsdecision is subject to judicial review at the place ofarbitration. Under the Model Law, if the decisionwere against the challenge, the challenging party may request the court to decide the issue, whichdecision is final and subject to no appeal.227 In ICC arbitration, e.g., decisions of the Court ofArbitration as to the appointment, confirmation, challenge or replacement of an arbitrator shall befinal.228 Such final institutional decisions seem to be reviewable by the court in setting aside orenforcement proceedings if the constitution of the tribunal is not in conformity with the parties’agreement to arbitrate.229 But court reviews should be limited to questions of procedure, such as225 Art. 52 (1) (b) and (3), ICS1D Convention. For an award annulled on this and anotherground, see “Arbitral Award of October 21, 1983”, Yearbook Comm. Arb. X, 1985, p. 71, and“Annulment Decision of 3 May 1985”, id., Xl, 1986, p. 162.226 See Karl Heinz Schwab, op. cit., p. 306.227 Art. 13 (2) (3), Uncitral Model Law.228 Art. 13, ICC Rules.229 Art. V I (d), New York Convention.79whether the institutional decision was made in conformity with the procedural rules chosen by theparties.23°The third situation is that the arbitral tribunal itself is constituted properly, but the challengegoes to the validity of the arbitration agreement. In this case, on the basis of its inherent power thearbitral tribunal may rule on its own jurisdiction.As to the nature of such rulings, the Uncitral Model Law seems to recognize the preliminarycharacter of the rulings. The arbitral tribunal may rule on the validity of the arbitration agreementeither as a preliminary question or in an award on the merits. If the arbitral tribunal rules as apreliminary question that the arbitration agreement is valid and it has jurisdiction, any party may,within a specifies period of time, request the national court to decide the matter.231Arbitrators may wish to decide the jurisdictional issues in the award which is final and binding,so as to avoid the possibility ofconcurrent court proceedings.232 The jurisdiction of the courts is notousted even by issuance of the final award.233 A party may, within a reasonable time after the230 See generally, J.Y. Art, “Challenge of Arbitrators: Is An Institutional Decision Final?”, 2Arbitration International 261(1986).231 Art. 16 (3), Uncitral Model Law.232 The concern was noted in the discussions of the Draft Model Law: “The parties should notbe deprived of the possibility of objecting to the prolongation of the arbitral proceedings if theybelieved the tribunal had no jurisdiction...”, Article 16 (3) should therefore be amended to read: “onthe request of a party, the arbitral tribunal should be obliged to render a preliminary decision on thequestion ofjurisdiction, so that immediate recourse to the court would become possible”: see UnitedNations Commission on International Trade Law (UNCITRAL), Summary Record of its EighteenthSession, 316th meeting, June 10, 1985, AJCN,9/SR, 316, p. 3, in Uncitral Model Law onInternational Commercial Arbitration Legislative History Vol. 2.233 Rio Alom Ltd. v. Sammi Steel Co. 47 C.P.C. (2d) 251 (Ont. Court of Justice, GeneralDivision, 1991) at 256.80rendition ofthe arbitral decision, move the court to set aside the arbitral tribunal’s preliminary rulingor final award.In practice, arbitrators usually settle the jurisdictional problem in a partial award.234 A partialaward is a final award for the issues decided.235 Their status as final is similar to other final awards,subject to court scrutiny only in the setting aside or enforcement proceedings.This analysis demonstrates that arbitral tribunals have the first word on arbitral jurisdiction.Their decision is conclusive for the purpose of proceeding the arbitration,236 subject only to attackby the parties at the national court. The Model Law’s approach that the decision, if it is made as apreliminary issue, may be attacked immediately at the local court involves a possibility of courtintervention, because it opens the way to court proceedings in the course of arbitration. The rule maybe improved by postponing judicial review of arbitral jurisdiction to the time after the final award isrendered, even when the tribunal decides its jurisdiction as a preliminary issue. Such postponementwould preclude interruption of the arbitration by court proceedings on arbitral jurisdiction.237234 ICC Case No. 4402, Partial Award ofMarch 17, 1983, S. Jarvin & Y. Derains, Collection ofICC Arbitral Awards 1974-1985, op. cit., p. 153, where the arbitrators held:“The issue ofjurisdiction over a party to an Arbitration is a classical setting for apartial award. It can be clearly separated from the other issues in the actual case andeasily be disposed of by the Tribunal without going into the merits of the case. It isclear that a decision of the question ofjurisdiction is helpful for all parties involvedin the Arbitration. At last it is obvious, that the economic advantages call for an earlydecision on the question who is a proper party to the case”(p. 155).235 Id., p. 154.236 Art. 16 (3), Uncitral Model Law.Such an approach is found in the new Netherlands Arbitration Act: see Art. 1052 (4),Netherlands Arbitration Act 1986, discussed by P. Sanders, “The New Dutch Arbitration Act”,Arbitration International, Vol. 3, No. 3, 1987, p. 202.81It is submitted that international arbitrators have the inherent power to deal with their ownjurisdiction, unless this power is expressly reserved to some other organs. For that purpose, they maydecide the validity of an arbitration agreement. Their decision is conclusive for the arbitralproceedings and may only be attacked at a court when the award is rendered.82CHAPTER 4: SCOPE OF ARBITRATION JURISDICTIONBased on the principle of competence of competence, an international arbitral tribunalexamines the arbitration agreement and makes sure that it has jurisdiction. Questions arise as to whatfactors account for arbitral jurisdiction and to what extent the arbitral jurisdiction is effective. Anarbitral tribunal has to decide personal as well as subject matter jurisdiction, i.e., its jurisdiction over1) the parties and 2) the disputes.4.1. Considerations about the DisputantsA thndamental rule of international commercial arbitration is that the procedure takes placebetween the parties to an arbitration agreement. Outside persons, natural or legal, can hardly invokean arbitration agreement in which they have no interest. Because of the favour for arbitration,experience shows that jurisdictions are decided in view of the factual circumstances of the case, therelationship between parties, the extent of interest which outsiders may have in the dispute and theneed of international commerce. Thus the arbitration-between-parties rule may be extended in itsapplication.4.1.1. Parties to the Arbitration AgreementIn most arbitrations, it is easy to identiij the parties to an arbitration agreement. It usuallyis clear from the contract itself. If a party signs the contract, it becomes party to the arbitration clause83contained in the contract. It is not always so simple in practice. In some cases, the arbitral tribunalhas to determine whether the lack of a signature may still entitle a party to arbitrate.For example, in ICC Case No 3779 three contracts were concluded between a Swiss sellerand a Dutch buyer. All three concerned the same type ofmerchandise and included an arbitral clausereferring to arbitration under the Arbitration Rules of the ICC. The third contract was not signed,and before shipment was effected, it was cancelled by the Respondent Dutch buyer who complainedthat the goods delivered under the first two contracts were defective. The Swiss seller claimeddamages against the buyer in respect of the cancellation of the third contract. The Dutch buyercounter-claimed in respect of its losses under the first two contracts.The issue here was whether the third contract was valid because it was not signed.Incidentally, the arbitrator determined whether the Respondent assented to the arbitration clauseincluded in the contract. While noting that the third contract was not signed, the ICC arbitratorpointed out that it was not protested against within a reasonable time either. The arbitrator fi.irtherconsidered the business relationship of the parties:“Although the contracts are independent from one another from a juridical point ofview, the three contracts form a group from an economic point of view.”“If, in principle, silence does not mean acceptance, this meaning is, however,attributed to it in view of the circumstances, in particular, the previous businessrelations of the parties.”238 Award ofAugust 13, 1981, No. 3779, Jarvin & Derains, Collection of ICC Arbitral Awards,op. cit., pp 138-146.84“Consequently, within the context of their juridical relation and according to theirobligations of good faith, the exception of incompetence does not apply.”239The arbitrator declared himself competent and ordered the Respondent to pay damages forthe cancellation of the third contract. The fact that the Respondent did not sign the third contract(including the arbitration clause) was not the only decisive factor. The intention of the parties toarbitrate was examined in view of the previous business relations of the parties, as well as theRespondent’s lack of prompt protest.4.1.2. Capacity and NationalityThe issue of capacity of the parties is so important that the New York Convention singles itout as one factor affecting the validity of the arbitration agreement. If the parties “were, under thelaw applicable to them, under some incapacity”,240 the validity of the arbitration agreement is calledin question and the arbitral award may be refhsed recognition and enforcement.A typical example that illustrates the capacity ofthe parties is a Chinese company which is notlegally empowered to deal with foreign trade, but does business and concludes an arbitrationagreement with a foreign company. The current Chinese foreign trade system does not allow everycompany to do business with foreign partners. Companies that wish to conclude internationalbusiness transactions must first be approved by the government. Without such an approval, no239 Id., p. 139.240 Art. V (1) (a) of the New York Convention provides that enforcement of the arbitral awardmay be refused if “the parties to the agreement referred to in article II were, under the law applicableto them, under some incapacity, or the said agreement is not valid under the law to which the partieshave subjected it or, failing any indication thereon, under the law of the country where the award wasmade.”85companies or individuals can legitimately engage in direct trading with foreign businesses.24’Ifa non-authorized company enters into arbitration with foreign partners, it is conceivable that the arbitrationagreement would be tainted with some invalidity and a defense may be made against the arbitralaward on the basis of such invalidity.The issue ofcapacity is often related to the ability of international arbitral tribunals to subjecta sovereign state to its jurisdiction. The question is whether the principle of sovereign immunityapplies to international arbitration. Under international law, the principle of sovereign immunity isbased on equality between sovereign states. No sovereign state shall be subjected to the jurisdictionof the courts of another state, unless otherwise consented.242 Since arbitral jurisdiction is based onthe agreement of the parties, when a sovereign state enters into an arbitration agreement, it shouldbe implied in the arbitration agreement that the state voluntarily accepts the jurisdiction ofinternational arbitration. The state acts as a private person and waives its right to immunity.243Waiver of sovereign immunity is presumed under the ICSID Convention. The ICSIDConvention provides that when the parties, including the state party or any constituent subdivisionof the state, have given their consent to arbitrate in the International Centre for Settlement of241 “The Chinese parties to international commercial arbitration are always Chinese legal entities,i.e., the Chinese foreign trading corporations, enterprises and business organizations which have theright to do international business” (emphasis added). See Tang, “The PRC Example”, op. cit., p. 47.242 J.G. McLeod, The Conflict ofLaws (Calgary: Carswell, 1983), p. 68.243 See S.E.E.E. v. Yugoslavia, Netherlands No 2, Yearbook Comm. Arb., I, (1976), pp.195-198; also see SPP Arbitration Award ofFthruary 16, 1983 in ICC Case No. 3493, Jarvin & Derains,Collection ofICC Arbitral Awards, op. cit., pp. 124-138; Yearbook Comm. Arb. Vol. IX (1984), pp.111-115, where the Arab Republic ofEgypt was held party to a joint venture agreement and boundby the arbitration clause contained in the joint venture agreement.86Investment Dispute (ICSID), no party may withdraw its consent unilaterally.244 Waiver of sovereignimmunity is irrevocable and the state party is barred from raising pleas of immunity in the context ofICSID arbitration.Under the European Convention on International Commercial Arbitration, legal personsconsidered by the law which is applicable to them as ‘legal persons of public law” have the right toconclude valid arbitration agreements.245 It is also assumed that a state waives its sovereign immunityby entering into an arbitration agreement.The rule of waiver of immunity has entered into national legislations on internationalarbitration. For instance, the Swiss Law on International Arbitration provides:“If a party to the arbitration agreement is a state or an enterprise or organisationcontrolled by it, it cannot rely on its own law in order to contest its capacity to be aparty to an arbitration or the arbitrability of a dispute covered by the arbitrationagreement” 246By concluding an arbitration agreement, a state party should be considered as having waivedits immunity from suit and execution, because an implied term of an arbitration agreement is that theparties voluntarily will perform the arbitral award. The state party cannot revoke its own promiseto arbitrate or to execute an arbitral award.Another issue concerns the nationality ofthe parties. lithe parties to an arbitration agreementare of the same nationality and the transaction does not go beyond their national border, can an244 Art. 25 (1), ICSID Convention.245 Art. 11(1), European Convention.246 Art. 177 (2), Swiss Federal Private International Law Act relating to International Arbitration.87international arbitration institution assume jurisdiction? The ICC essentially deals with disputes ofan international character,247however, the Court ofArbitration may also take cases between of a noninternational nature by virtue of an arbitration agreement.248 The issue was raised in Japan Time v.Kienzle Frame249, where the French Court of Appeal reviewed an ICC award, considered theallegation that the ICC should not have accepted jurisdiction since both parties were French and thearbitration was not international, and dismissed the recourse as not founded.In CIETAC arbitration, disputes that are submitted must have foreign related interest. Twostandards are used: one is that the place ofbusiness of parties is in different countries; the other isthat the subject matter of the transaction is of transnational nature.25° In the latter case, even if both247 “The function ofthe court is to provide for the settlement by arbitration ofbusiness disputesof an international character in accordance with the rules” (emphasis added): Article 1. ICC Rules.248 “The Court of Arbitration may accept jurisdiction over business disputes not of aninternational business nature, if it has jurisdiction by reason of an arbitration agreement”: see Art. 1,Internal Rules of the Court of Arbitration.249 Court of Appeal, Paris (11 July 1980) (unpublished), see Graig, Park & Paulsson,International Chamber of Commerce Arbitration (New York, London, Rome: Oceana Publications,Inc., 1990), Part III, S. 11.02., footnote 3.250 Cf The British Columbia International Commercial Arbitration Act expressly provides, in Art.1 (3), the scope of international arbitration: “An arbitration is international if(a) the parties to an arbitration agreement have, at the time of the conclusion of thatagreement, their places of business in different states.(b) one of the following places is situated outside the state in which the parties have theirplaces of business:i) the place of arbitration if determined in, or pursuant to, the arbitrationagreement;ii) any place where a substantial part of the obligations of the commercialrelationship is to be performed;iii) the place with which the subject matter of the dispute is most closelyconnected, or(c) the parties have expressly agreed that the subject matter of the arbitration agreementrelates to more than one state”.88parties are Chinese parties, the dispute is still capable of settlement by CIETAC arbitration if it arisesfrom a transnational transaction.25’ Disputes between two Chinese parties which are related toforeign interests are within the CffiTAC jurisdiction.252Early international conventions were oriented towards disputes between parties of differentnationalities.253 Conventions in more modern times either leave the nationality issue open, or adopt,instead, the criterion ofplace ofbusiness.2 Thus, disputes between two or more parties of the samenationality can be settled through international arbitration, provided that mandatory rules on nationalcourt jurisdictions are not derogated from. Such arbitrations usually involve some extent of foreignrelated interest, e.g. the subject matter of the dispute, performance or enforcement of the arbitrationagreement is closely connected with other countries.2554.1.3. Group of Companies251 Nanjing Oiche Zhengyi An [Nanjing Automobile Arbitration Case] (unpublished), where bothdisputants are Chinese foreign trade entities but the dispute arose from delivery of automobiles to aconstruction plant in a Mid-Eastern country.252 Art. 1, CIETAC Arbitration Rules.253 See, Art. 1. Protocol on Arbitration Clause, Done at Geneva on Sept. 24, 1923; Art. 1.Convention on the Execution ofForeign Arbitral Awards, Done at Geneva on Sept. 26, 1927254 See Art. 1, European Convention; Art. 1, Uncitral Model law.255 Sect. 202 of the U.S. Arbitration Act provides in part: “An agreement or award arising outof such relationship which is entirely between citizens of the United States shall be deemed not to fallunder the Convention unless that relationship involves property located abroad, envisagesperformance or enforcement abroad, or has some other reasonable relation with one or more foreignstates”. For a case involving such foreign interests, see Fuller Company (U.S.A.)v. Compagnie DesBauxites de Guinee (U.S.A.) 421 F. Supp. 938 (1976) (U.S. District Court, Western DistrictPennsylvania), Yearbook Comm. Arb., III, (1978), p. 287.89Transnational corporations are vertically integrated into a group of companies in order to gaingreater competitive power and meet the needs of global business. In making business deals, suchgroups of companies may be represented by one of the companies and the business contracts thussigned might, prima facie, not reflect the agreement of the whole group to submit to arbitraljurisdiction.In the Dow Chemical Case,256 four claimants requested ICC arbitration against a Frenchcompany. The four claimants, the U.S. parent Dow Chemical Company and its daughter andgranddaughter companies in France and Switzerland, were companies within one group. Thecontracts that contained ICC arbitration clauses were signed by the two subsidiaries in Swiss, but theparent company as well as the French subsidiary participated in the negotiation, performance andtermination of the transactions. The tribunal considered the law applicable to the contracts as wellas the arbitration agreement, examined the facts about the negotiation, performance and terminationof the contracts, distinguished the case at hand with a previous ICC award in which the arbitraltribunal refused to extend an arbitration clause signed by one company to another company of thesame group,257 and referred to other international arbitral awards.258 As to the arbitration clause, thetribunal held:256 Case No. 4131, Interim Award of Sept. 23, 1982, Jarvin & Derains, Collection of ICCArbitral Awards, op. cit., pp 146-153.257 Case No. 2138 of 1974, Journal du droit international 1975 934. The refusal of extension isbased on the factor “that it was not established that company X would have accepted the arbitrationclause if it had signed the contract directly”: see Jarvin & Derains, p. 152.258 See infra US award.90“Considering, in particular, that the arbitration clause expressly accepted by certainof the companies of the group should bind the other companies which, by virtue oftheir role in the conclusion, performance, or termination of the contracts containingsaid clauses, and in accordance with the mutual intention of all parties to theproceedings, appear to have been veritable parties to these contracts Qt to have beenprincipally concerned by them and the disputes to which they may give rise. “(emphasisoriginal)259The arbitrators were concerned particularly with the mutual intention of all parties to thearbitration proceedings and the needs of international commerce in declaring jurisdiction. Thetribunal was of the view that “rules of international arbitration should be responsive to the needs ofinternational commerce” 260The tribunal also examined the validity of their decision under French law and found that theirdecision “contradicts no principle nor any of international ‘public policy’ in particular, that of theFrench legal system”.261In the U.S. arbitration to which the arbitrators referred,262 the arbitrators took into accountthe interest of the sister company in the dispute. The disputes between an owner and a chartererinvolved claims of the charterer under a charter party. One of the two questions decided by the259 Jarvin & Derains, op. cit., p. 151.260 Id., p. 152261 Id262 Society ofMaritime Arbitrator Inc., New York, Partial Final Award No 1510, ofNov. 28,1980, Yearbook Comm. Arb., VII, (1982), p. 151.91partial award was whether the charterer was entitled to introduce the claims of the sister companiesofthe same family in the proceedings. The charter party contained an arbitration clause as follows:“Any dispute arising during execution of this charter party shall be settled in NewYork Owners and Charterers each appointing an Arbitrator - Merchant or Broker -and the two thus chosen, if they cannot agree, shall nominate a third arbitrator -Merchant or Broker - whose decision shall be final. Should one of the parties neglector reflise to appoint an Arbitrator within twenty one days after receipt of request fromthe other party, the single Arbitrator appointed shall have the right to decide alone andhis decision shall be binding on both parties. For the purpose of enforcing awards,this agreement shall be made a Rule ofCourt”.263This arbitration clause governs disputes between the owner and the charterer only. Indeciding that the charterer could bring forward claims on behalf of its sister companies, the tribunalexamined the connection of interest and held:“It has been argued by some that the charter party arbitration clause simply providesfor the adjudication of disputes between Owner and Charterer and that no other partymay enter the proceedings unless it does so with the express consent of the two sonamed. This is surely so as respects third parties not in any way associated with theparties to the Charter party. However, it is neither sensible nor practical to excludethe claims ofcompanies who have an interest in the venture and who are members ofthe same corporate family. The practicality of such an approach is apparent. Themajor shipping organizations often charter through a subsidiary company, ship their263 Id., p. 152.92cargoes through another and sometimes consign them to other related companies. Toconsider the arbitration clause as one which limits the right to arbitrate to thechartering subsidiary and to no other company within the same corporate familyinvolved in the ventures is to narrowly restrict the parties apparent intention toarbitrate their differences.I!2M(emphasis added)The considerations about the customs of international trade for the purpose of assumption ofarbitral jurisdiction have received support of some national courts. The interim award of ICC CaseNo 4131 in the Dow Chemical arbitration was upheld, when contested before the Court of Appealin Paris by the defendant.265 Particularly, inter alia, the Court held:“Following an autonomous interpretation of the agreement and the documentsexchanged at the time of their negotiation and termination, the arbitrators have, forpertinent and non-contradicted reasons, decided, in accordance with the intentioncommon to all companies involved that Dow Chemical France and Dow ChemicalCompany have been parties to these agreements although they did not actually signthem and that therefore the arbitration clause was applicable to them as well.”2The concept of group of companies will have repercussions on the future development ofinternational commercial arbitration in respect of transnational corporate practice. The concept is anew invention and needs to be substantiated. What constitutes a group is unsettled and to whatextent the concept can be applied is unknown. But the approach of the arbitrators to the264 Id., p. 153.265 Jarvin & Derains, Collection of ICC Arbitral Awards, p. 146.266 Id93interpretation of the intention of the relevant parties should be appreciated. They look to theobjective link ofthe relevant parties to the arbitration agreement in issue, their degree of participationand interest in the venture as well as the need of international business practice. By facing thecomplex reality oftransnational trade and investment and meeting the needs of international business,the concept may represent a trend toward a broader interpretation of an arbitration agreement andthe intention of the relevant parties.4.1.4. Multi-RespondentsArbitration may take place between several claimants and one respondent and also betweenone claimant and several respondents. These respondents may be parties to the original underlyingcontract, e.g., in a joint venture contract involving several partners; they may also become parties tothe contract in the performance of the contract, as, e.g., in an assignment of contract. The rule thatinternational arbitrators follow in determining the standing of the respondent parties is whether theyconsent to arbitration.ICC Case No. 4402 267 involved two Defendants: First Defendant (F.D.), a French company,and Second Defendant (S.D.), parent of F.D.. The dispute arose from an operation agreementconcerning the exploration and exploitation of certain oil fields in a Central American Country. Forthese operations, S.D., the parent company, especially had created F.D. who signed the OperationAgreement which contained an arbitration clause referring the ICC Arbitration.267 Partial Award ofMarch 17, 1983, ICC Case No. 4402, Yearbook Comm. Arb., IX, (1984),pp 138-141.94The Claimants contend that this behaviour of S.D. and the contractual relationships betweenthemselves and S.D. at the time when the Operating Agreement and some other documents weresigned, constitute enough evidence for an implicit agreement to arbitrate under the ICC Rules. Thethree arbitrators did not resort to the concept ofgroup of companies but held that “such relationshipsare not sufficient to overcome the requirement of an actual signature to the agreement containing thearbitration clause.”268 They denied jurisdiction as far as S.D. is concerned and decided that thearbitration proceedings will continue between the claimants and F.D. only.269In this case, the arbitrators did not take into consideration the conduct of the S.D. in thenegotiation or performance of the contract, or the need of international commerce. The arbitratorssitting in Geneva looked to the applicable law, the law of Switzerland, found that a written documentcontaining either a compromise or an arbitration clause is mandatory under the Swiss law, and laidemphasis on the actual signature of the parties to the arbitration agreement.In other situations such as partnerships, successions, merger or assignment, the strict rule ofa signed-up party may not apply. In another ICC arbitration,27°the arbitrators were faced with aquestion whether the four founding states of a supranational organization (AOl) were bound by thearbitration clause included in a “Shareholders Agreement” between the organization and a U.K.268 Id., p. 141.269 It is interesting to note that the Chairman of ICC’s Court ofArbitration had made an urgentdecision before the case went to the Arbitrators. The decision was in the affirmative that there wasa prima facie agreement to arbitration also for S.D., parent of F.D. (Yearbook Comm. Arb., VIII,(1983), pp 204-206). Under the ICC Rules, such a prima facia decision is subject to the decision ofthe arbitrators as stated in Art. 8. para 3 of the ICC Rules ofArbitration.270 Case No 3879, Interim Award of 5 March 1984, Yearbook Comm. Arb., XI, (1986), pp 127-134.95company by which they created a “joint stock company”. The arbitrators detennined the nature ofAOl as a supra-national organization and akin to a general partnership. The arbitrators looked intothe substance of the relationship between the organization and the founding states and held:“In certain circumstances, those who have not signed an arbitration clause arenevertheless bound by it [...]. This is true for the successor in title or any othersuccessor,[. . .J or for an assignee. A partner is bound by the arbitral clause enteredinto by a general partnership ofwhich he is a partner, and the contracting party mayrely upon the arbitration clause if he brings his action against the partner instead ofbring it against the partnership.”“It does not follow from the requirement of the written form that the clause must beconcluded in the name of the party to the proceedings.”This is true because the obligations under the substantive law of the partnership agreementare obligations not only ofthe partnership, but also obligations of each of the partners. The partnersare bound by the obligation to arbitrate.It is the same in a case of total assignment. Generally the assignee undertakes all thesubstantive obligations of the contract including the obligation to arbitrate.27’ Ifthe assignment is notduly effected, the assignor might be held liable to arbitrate. For example, in a sales dispute before271 ICC Case No 1803, Yearbook Comm. Arb., V, (1980), pp. 177-185; also see ICC Case No.2626 (1977), where the arbitrators held:According to the prevailing opinion, an arbitration agreement is not valid onlybetween the parties, but imposes itself also on their universal successors and on theirassignees and on whoever takes over their contractual position. The only exceptionto this is when the arbitral agreement is drafted in a way that it excludes thesuccessors of [sic] assignees.”(cited by M. Rubino-Sammartano International Arbitration Law (Kluwer, 1990), p. 183)96CIETAC,2the assignment appeared to have been effected when a tri-partite agreement was signedto change the seller to another company. The tribunal found that the agreement did not constitutean assignment but merely an arrangement for obtaining the necessary export permits. The originalseller was held liable for the non-delivery of the contracted goods.4.1.5. Joinder of PartiesA single international transaction may be so closely connected with other transactions that itsperformance is subject to those other transactions. In a back-to-back sale of goods, for instance, thebuyer who was going to resell the goods had to depend on the seller’s performance before he couldmake deliveries to his buyer. The transaction was arranged with two contracts between the personin the middle, his downstream buyer and upstream seller respectively. These two contracts usuallyhave identical clauses except price, time of delivery and names of the parties. The person in themiddle makes profit out of the price difference between the two contracts. Other transactions thatare likely to attribute disputes to third parties include construction transactions, leasing transactionsand charter parties. In construction cases, disputes might arise from the contractual relationshipbetween the owner and the prime contractor or the separate relationship between the constructor andthe sub-contractors. All these cases may involve third parties liabilities.In cases involving third parties, the question whether the third party is subject to thejurisdiction of an arbitral tribunal over the main dispute will depend upon the consent of the third272 Dianzi Jisuanqi Lingjian Huokuan Zhengvi Zhongcai An Caijue Shu [Arbitration Award forthe Electronic Calculator Payment Dispute] (Beijing, Mar. 14, 1988), CIETAC ed. Zhonguo GuojiJingji Maovi Zhongcai Caijueshu Xuanbian [Selected Awards of China International Economic andTrade Arbitration] (1963-1988) (Beijing: China People’s University Press, 1993), pp. 151-157.97party and the other parties. If all three parties agree upon arbitration by one single tribunal, thetribunal’s jurisdiction is effectively founded. If there is no agreement by the third party or the otherparties, the tribunal lacks the power to join the third party in the arbitration proceedings. This is dueto the nature of international arbitral jurisdiction. Voluntary submission will be valid only when thesubmission is consensual. There should be no element of compulsion. A non-voluntary submissionwould result in an invalid arbitral award.273In practice, this rule generally is followed. In an ICC arbitration,274 claimant A and defendantB entered into a contract whereby B undertook to supply A with a certain amount of ladies boots.On the same date, B entered into an identical contract with a Romanian State trading enterprise C,who was to supply the same quantity of boots to B. When C defaulted, A instituted arbitrationproceedings against B demanding damages for late delivery and defective goods. B sought to joinC into the arbitration. The arbitrators rejected B’s request partly on grounds that B was not C’s agent.Legally speaking, the contract between A and B is separate from and independent of thecontract with B and C, but, commercially speaking, these contracts form a closely connected stringthat is complementary.275 Obviously without C’s full performance, the middle person B cannot fulfilits obligation to perform under its contract with A.276 B’s liability is actually attributable to the thirdparty C. B wishes to turn to C for damages, but it has to subject its claims to the stipulations of its273 Art. V (1), New York Convention.274 ICC Case No. 3880, Jarvin & Derains, Collection of ICC Arbitral Awards, pp. 159-161.275 Id., p. 161.276 However such non-performance of third parties does not generally constitute force majeure,id., p. 160.98contract with C. If the contract also contains an arbitration clause, it may institute separate arbitralproceedings; if the contract has selected another forum, it has to base his proceedings upon the forumselected; if the contract is silent as to dispute resolution methods, it might have to sue in a foreigncountry.Even if the contract contains an arbitral clause identical with that contained in the firstcontract with A, B faces the problem whether the arbitral tribunal will consist of the same person(s).With two different tribunals, B faces the risk of inconsistent fact-findings and different conclusionson the same or related questions of law277 because different tribunals may form different views on thesame issues. Further, B may face difficulties of time when its case with C is contingent on the resultof its case with A.278 In any event, with two proceedings, B has to incur more expenses for thepursuit of actions.279The difficulty with third parties in arbitral proceedings has not been solved fi.illy under nationallaws or international practices. In U.S. case law, the inability of the arbitrators or national courts tojoin third parties in an arbitration is mainly based on the principle of consensualism. Since arbitrationis a creature of contract, the court cannot bring third parties to the privately arranged procedure277 Mustill & Boyd, Law and Practice of Commercial Arbitration, op. cit., p 110.278 Id. For a case whether pendency ofanother arbitration renders an arbitrator incompetent, seeICC Case No 2272, Jarvin & Derains Collection of ICC Arbitration Awards, p. 11, where theagreement between A & B provided for ICC arbitration, while the agreement between B and Cprovided for arbitration by the Brussels Trade Tribunal. A sought ICC arbitration against B, Bsought Brussels Trade Tribunal arbitration against both A and C and challenged ICC arbitrator’sjurisdiction on grounds of pendency of Brussels Tribunal case. The ICC arbitrator rejected B’scontention and decided that there cannot be pendency unless the two proceedings take place betweenthe same parties, concerning the same facts and for the same purposes. When those condition aremet, it is the first judge before whom the case is brought shall be competent.279 Id., Mustill & Boyd, p. 110.99without consent of the parties to the proceedings.28°Unless the law of arbitration develops to breakthrough the four corners of the partes’ agreement and permit joinder of parties by arbitrators, thirdparties remain outside the jurisdiction of international arbitrators.28’4.1.6. Consolidation ofArbitrationsThe same difficulty exists in the case of consolidation of arbitrations, whereby two or morearbitral proceedings are united into one proceeding. For consolidation to take place, in theory, theparties to two or more proceedings must agree to have one arbitration by one arbitral tribunal. InEnglish common law, the arbitrators cannot order consolidation without the consent of all the parties:“The concept ofprivate arbitrations derives simply from the fact that the parties haveagreed to submit to arbitration particular disputes arising between them and onlybetween them. It is implicit in this that strangers shall be excluded from the hearingand conduct ofthe arbitration and that neither the tribunal nor any of the parties caninsist that the disputes shall be heard or determined concurrently with or even in280 See Weyerhaeuser Co. v Western Seas Shipping Co. 743 F 2d 635 (9th Cir. 1984), Cert.denied, 469 US 1061 (1984); also see Ore E Chemical Corp. v. Stinnes Interoil. Inc. 606 F. Supp.1510 (S.D. N.Y. 1985).281 The new Dutch Arbitration Act allows a third party to request to join the arbitral proceedingsand permits the party who claims to be indemnified by a third party to serve a notice ofjoinder on thethird party, but in both cases the tribunal may only permit this third party to participate if he accedes,with written agreement with the parties, to the arbitration agreement: see Art. 1045 (2) (3),Netherlands Arbitration Act. See generally, P. Sanders, “The New Dutch Arbitration Act”,Arbitration International, Vol. 3, No. 3, July 1987, p. 200.100consonance with another dispute, however convenient that course may be to the partyseeking it and however closely associated the disputes in question may be.”282In practice, this traditional theory of non-consolidation is compromised by the need toconsolidate arbitration. In the United States, the court may order consolidation of arbitrations wherethe parties are not the same if the issues are substantially the same and if no substantial right isprejudiced.283Under some national legislations, consolidation may be ordered by the court, but regard mustbe had to the agreement of the relevant parties. For example, the B.C. International CommercialArbitration Act provides in Article 27 (2):“Where the parties to 2 or more arbitration agreements have agreed, in theirrespective arbitration agreements or otherwise, to consolidate the arbitrations arisingout of those arbitration agreements, the Supreme Court may, on application by oneparty with the consent of all the other parties to those arbitration agreements, do oneor more of the followings:(a) order the arbitrations to be consolidated on terms the court considersjust and necessary;(b) where all the parties cannot agree on an arbitral tribunal for theconsolidated arbitration, appoint an arbitral tribunal in accordancewith section 11(8);282 See Oxford Shipping Co. Ltd v Nippon Yuesen Kaisha [Q.B.D. 1984] 3 All E.R. 835 at 842.283 Martin Domke, The Law and Practice of Commercial Arbitration (Callaghan & Company,Illinois, 1968), p. 272.101(c) where all the parties cannot agree on any other matter necessary toconduct the consolidated arbitration, make any other order itconsiders necessary. “(emphasis added)The practice in Hong Kong presents a different approach. The court is clearly empoweredto consolidate arbitrations. The court may order consolidation if in two or more arbitrations it finds:“(a) that some common question of law or fact arises in both or all ofthem, or(b) that the rights to relief claimed therein are in respect of or arise out ofthe same transaction or series of transactions, or(c) that for some other reason it is desirable to make an order under thissection”284The Court may order the arbitrations to be heard at the same time, or one immediately afteranother, or may order any of them to be stayed until after the determination of any other of them.285The power of the Court to consolidate arbitrations is provided under the provisions governingdomestic arbitrations. This power extends to international arbitrations if (and only if) the partiesagree in writing to be governed by the provisions for domestic arbitration.286 Otherwise aninternational arbitration is governed by the Uncitral Model Law.287The new Netherlands law of arbitration adopts a more permissive approach:284 Hong Kong Arbitration Ordinance, Chapter 341, Part II, Sect. 6B. (1).285 Id.286 Id., Sect. 2M.287 Id., Sect. 34A (1).102“If arbitral proceedings have been commenced before an arbitral tribunal in theNetherlands concerning a subject matter which is connected with the subject matterof arbitral proceedings commenced before another arbitral tribunal in the Netherlands,either party may. unless the parties have agreed otherwise, request the President ofthe District Court in Amsterdam to order a consolidation of the proceedings.”(emphasis added)288The approach seems to be based on the need of consolidation rather than the mere consentof all the parties to the arbitral proceedings. Although the Uncitral Model Law does not includeprovisions on consolidation because of the consensus of “no real need” to make such an jnclusjon,289the need to consolidate arbitrations sometimes seems manifest. The concerns are two-fold. First, twoor more proceedings inevitably will incur more time and incur more expense. This can hardly servethe purpose ofa speedy settlement. Second, these separate proceedings with different tribunals likelywill result in divergence in the decisions on the rights and obligations of the parties concerned.290These concerns should be dealt with by national legislations. If national laws provide consolidationprocedures, parties involved in a chain of international businesses may submit to consolidated arbitralproceedings. Where the tribunal is the same in the two or more arbitral proceedings, it should be288 Art. 1046 (1), Netherlands Arbitration Act 1986.289 See “First Working Group Report”, UN. Doc. No. A/CN. 9/2 16, H.M. Holtzmann and J.E.Neuhaus, A Guide to the Uncitral Model Law on International Commercial Arbitration: LegislativeHistory and Commentary (Deventer: Kluwer, 1988) (hereinafter “A Guide to Model Law”), p. 312.290 For example, in Textile Workers Union ofAmerica v. Scottex Corporation 344 F. Supp. 243(S.D.N.Y. 1972), where two arbitrations arrived at diverse decisions and the court ordered a newconsolidated arbitration with one arbitrator: see F,B.MacKellar, “To Consolidate or Not toConsolidate: A Study of Federal Court Decisions”, The Arbitration Journal, December 1989, Vol.44, No.4, p. 15.103allowed to consolidate the proceedings. Where the tribunals are different, the national court shouldassist the constitution of the tribunal in the absence of the partie& agreement.4.2. Considerations about the Claims4.2.1. Preliminary Institutional ExaminationsUnder some systems of international institutional arbitration, the institution conducts apreliminary examination of the arbitral jurisdiction before constitution of the arbitral tribunal. TheICC practice shows that in determining the issue of prima fi agreement to arbitrate, the court’sreview is limited to contractual documents or the written arguments submitted by the parties.291 TheCourt is not in a position to determine whether a claim submitted to the Court comes within thearbitration agreement. Nor does it have authority to hear such arguments as to whether the agreementis defective, non-existent, lacks the consent of the parties. Such matters are to be decided by thearbitral tribunal.In CIETAC arbitration, when the claimant files an application for arbitration with theSecretariat of CIETAC, the latter will, as a matter of practice, examine whether: there is anarbitration clause included in the contract or a special submission; the claimant and the purportedrespondent are parties to the contract and/or the arbitration agreement; the application for arbitrationis properly signed by the claimant or its attorney; the parties have provided detailed addresses and291 See Craig, Park & Paulsson, International Chamber ofCommerce Arbitration, op. cit., PartIII. 5. 11.02.104other administrative matters.292 These examinations are prima ±ie. The secretary does not go intoeach item of a claim and determine whether arbitral jurisdiction exists. Such work is left entirely tothe arbitrators.The Stockholm Chamber of Commerce provides a similar practice. If it is obvious thatarbitral jurisdiction is lacking, the claimant’s request for arbitration will be dismissed; if it is notobvious that jurisdiction is lacking, the request will then be communicated to the respondent.293Other arbitral institutions, especially in common law countries, seem to proceed without apreliminary institutional examination. The Rules for International Commercial Arbitration andConciliation Proceedings ofBCICAC require that the notice of request for arbitration include, amongother things, “a reference to the arbitration clause or separate arbitration agreement relied upon, areference to the contract out of or in relation to which the dispute has arisen, the general nature ofthe claim and an estimate of the value of the dispute and the remedies sought” 294 Arbitralproceedings commence on the date on which the notice of request for arbitration is received by therespondent.295 Under the AAA International Rules, the administrator will, upon receipt of the noticeof arbitration, further acknowledge the commencement of the arbitral proceeding.296 The London292 See CIETAC Rules for Secretarial Work in Cheng Dejun ed. Foreign Arbitration and Law,Vol. I, op. cit., p. 383.Arts. 10, 11, SCC Rules.294 Art. 17 (3) (c) (d) (e) (d), Rules for International Commercial Arbitration and ConciliationProceedings in the British Columbia International Commercial Arbitration Centre (“BCICAC Rules”).295 Id., Art. 17.(2).296 Art. 2 (3), A.AA International Rules.105Court of International Arbitration also does not examine the prima fie agreement. Any objectionwith respect to the existence or validity of the arbitration agreement is to be decided by the tribunal.297No matter whether there is any preliminary institutional examination, arbitrators appointedunder the arbitration agreement examine the claims at hand in view of the parties’ agreement toarbitrate.4.2.2. Terms of ReferenceIt is the arbitrator’s task to examine the specific items of a claim and see whether they fallunder the agreement. The ICC arbitration is characterized by the so-called “terms of reference” indetermination of the extent of claims.298This document will record, jnir a summary of the parties’ respective claims and adefinition ofthe issues to be determined? The document shall be signed by both the parties and thearbitrators; if one party refuses to sign the document, the Court of Arbitration may approve thedocument and the arbitration may proceed.30°297 Art. 14, Rules of London Court of International Arbitration (adopted to take effect from 1January 1985) (“LCIA Rules”).298 This practice ofTerms ofReference is also followed by the Italian Society for Arbitration andthe Euro-Arab Chambers of Commerce: see Art. 19, Rules of the Italian Society for Arbitration (inforce since October 1, 1985) and Art. 23.7, Rules of Conciliation. Arbitration and Expertise of theEuro-Arab Chambers of Commerce (in force since January 10, 1983), cited by M. RubinoSammartano International Arbitration Law, op. cit., pp. 331, 332.299 Art. 13 (1) (c) (d), ICC Rules.°° Art. 13 (2), id.106The Terms ofReference is analogous to a submission agreement to refer existing disputes toarbitration in the sense that both defines the extent of disputing issues. The difference lies in thetiming and formalities of the document. While the submission agreement is an arbitration agreementto refer existing disputes to arbitration, drawn up solely between the disputing parties at the timewhen existing disputes cannot otherwise be solved, the Terms ofReference is a procedural documentsigned by both the arbitrator and the parties to frame the issues, either substantive or procedural, tobe decided by the arbitrator. It is not an arbitration agreement in its true sense.301 Should there beno arbitration agreement in the first place, there would be no Terms ofReference for the Court ofArbitration would have refused the request for arbitration at the initial stage.302In common-law arbitral practice, instead of the Terms ofReference, a procedure of pre-trialconference is adopted. For example, the AAA Commercial Arbitration Rules provide:“At the request of any party or at the discretion of the AAA, an administrativeconference with the AAA and the parties and/or their representatives will bescheduled in appropriate cases to expedite the arbitration proceedings” 303301 However, one view considers the Terms ofReference as having the nature of an arbitrationagreement: “The Terms ofReference, drafted in compliance with the arbitration agreement, may atthe same time state the agreement of the parties or amend or complete the arbitration agreement”:see ICC Case No. 4304 (1986), cited by M.Rubino-Sammartano International Arbitration Law, op.cit., p.313; also see ICC Case No. 6531 (1991), Yearbook Comm. Arb. XVII (1992), pp. 221-225,where it is considered that the Terms ofReference constitutes an agreement to arbitrate.302 “Where there is no prima facie agreement between the parties to arbitrate or where there isan agreement but it does not specifj the International Chamber ofCommerce, and if the Defendantdoes not file an Answer within the period of 30 days provided by paragraph 1 of Article 4 or refusesarbitration by the international Chamber of Commerce, the Claimant shall be informed that thearbitration cannot proceed”: Art. 7, ICC Rules.303 Art. 10, AAA Commercial Arbitration Rules (March 1, 1986). Also see Art. 20, BCICACRules for Domestic Commercial Arbitration Proceedings: “The parties shall meet the arbitrator within107For international arbitration, the rules in common-law countries do not provide such a prearbitration procedure, but they generally give discretion to the arbitrators who usually conduct theproceedings in whatever manner they think fit, provided that the parties are treated with equality.304With this discretion, the arbitral tribunal may proceed directly to the hearings. It may alsoarrange a pre-arbitration meeting to define the issues or determine the procedure to be followed. Forthat purpose, the tribunal may invite the parties to write an agreement to the same effect as the TermsofReference. Flexibility is achieved.4.2.3. Extent of ClaimsIn determining the extent of claims, the arbitrators are concerned with the arbitrability of thesubmitted disputes305 and their scope of authority. In cases where arbitrable and non-arbitrabledisputes are intertwined and hardly can be separated, particular caution must be exercised by thearbitrators. For instance, in disputes involving joint ventures, claims may include, among other things,a request for dissolution of the joint venture. Should the arbitral tribunal decide the issue ofliquidation and order the commencement of liquidation proceedings?7 days of the date of the arbitrator’s appointment for an pre-arbitration meeting to identify the issuesin the dispute, to discuss the procedure to be followed in the arbitration, to establish time periods fortaking certain steps and to deal with any other matter that will assist the parties to settle theirdifferences or to assist the arbitration to proceed in an efficient and expeditious manner. TheBCICAC may recommend a list of those issues and matters to be discussed or resolved at thismeeting but the parties and the arbitrator are not bound by that recommendation”.°‘ See Art. 19, BCICAC for International Commercial Arbitration and Conciliation Proceedings;Art. 5, London Court of International Arbitration Rules; Art. 16, AAA International Rules.305 For the issue of arbitrability, see supra Sect. 2.2.2.108This is a practical question that has arisen in CLETAC arbitration.306 According to the Lawofthe PRC on Joint Ventures Using Chinese and Foreign Funds and the Implementing Rules of thatlaw, liquidation is a matter to be handled by the board of directors.307 When the joint entity isterminated, the board of directors shall propose liquidation procedures and principles, selectliquidators and report to the competent authorities for examination and supervision.308 In practice,such liquidation proceedings are rarely so organized because the board of directors has fallen apartand one party, especially the breaching party, may take no interest in liquidation.In view ofthis situation, the CIETAC arbitrators usually render an interim award to the effectthat the enterprise be dissolved and liquidation proceedings commence according to the Joint VentureLaw. They are not prepared, however, to appoint the liquidators or to oversee the liquidationproceedings.Some claims are so closely related to issues beyond the arbitral competence, that they canhardly be clarified without consideration ofthe related issues. This is particularly true in transactionsinvolving third party guarantees, e.g., performance loans or bank guarantees, for these guarantees areissued by a third party in favour of one of the parties to the transaction.306 See Wang Chunxue ed. Zhonguo Jinji Zhongcai He Susong Shiyong Shouce [ChinaEconomic Arbitration and Litigation Practical Manual] (Beijing: China Development Press, 1993),p. 312.307 Cf. Under the British Columbia Company Act, winding up is divided into voluntary windingup, which is done by special resolution of the company, and court ordered winding up, in which theliquidator is appointed by the court: see Arts. 291, 294, 295 and 298, British Columbia Company Act,R.S.B.C. 1979, C. 59.308 Art. 103, ImDlementing Rules of the PRC Joint Venture Law.109In considering these issues, arbitrators usually are cautious about their own authority and mayacknowledge their limitation of authority in their decisions. For example in ICC Case No. 3267,°the issue arose as to whether performance bonds should be considered as remaining in force. Thearbitrators made conclusions based on an extensive review of the factual circumstances. Theirconclusions were qualified as prima facie,31°without prejudice to the rights and obligations under theguarantee bonds.4.2.4. New and Counter ClaimsAmendment of claims commonly happens in practice either because the original claim wasframed, in race oftime, in a general manner or because the factual circumstances have changed fromthe time of application for arbitration to the hearing.31’ The same may apply to new claims andcounter-claims.The arbitral tribunal has to consider whether the amended claims, new claims or counterclaims fall within its jurisdiction. This is particularly true in ICC arbitration where the Terms ofReference which defines the necessary claims to be decided might impose a limitation as to the scopeofclaims.312 These claims, if allowed, mean an extension of the arbitrator’s jurisdiction.313 CautionPartial award made (June 4, 1979) in Case No.3267, Jarvin & Derains, op. cit., pp. 76-87.310 Id., p. 86; also see Partial Award ofDecember 23, 1982. Case No 3896 (Original in French),id., pp. 161-164, where the arbitrator considered calls under performance guarantee by defendantduring arbitral proceedings.“ E.g. in the prominent ICC Case No 1803, the situation changed almost daily after the termsof reference were formulated; accordingly, amendment was made to the application: see Award madein ICC Case No. 1803 in 1972, Jarvin & Derains, op. cit., p. 42.312 Art. 16, ICC Rules.110must be had to deal with these claims when challenges arise.314 The party who objects them may havegood legal grounds for the objection and “is unlikely to agree to extend the jurisdiction of the arbitraltribunal, however much he may be pressed to do so”.315Mention should be made of the effect of counter-claims in cases where the respondentchallenges the validity of the arbitration agreement. By definition, a counter-claim is a claim madeagainst the claimant for the purpose of setting off the obligation the counter-claimant owes to theclaimant or seeking other relief. One of the purposes of a counter-claim is to dispose of substantiverights and obligations under a certain legal relationship. A counter-claim most likely will subject thecounter-claimant to the jurisdiction of the arbitrator even in cases where she has made expressreservations.The situation differs from the case of defense only. If a respondent makes a defense on thesubstance while protesting the arbitral jurisdiction, it might risk being held as having waived the rightto object and hence losing its case subsequently in either the setting aside or the enforcementproceedings. The case is still arguable that the defense is made passively in order to protect his owninterest. In case ofcounter-claims, the mere fact ofcounter-claiming may be considered as voluntarysubmission.313 Redfern & Hunter, op. cit., p. 211.314 For an example of how arbitrators treat counter-claims cautiously, see ICC Case No 3540,where a Yugoslav defendant raised an incidental counter-claim, seeking an interim award to beenforceable provisionally. The arbitrators dealt with both objections: the exceptio nonadimpleticontractus, and, subsidiarily, a set-off see Award made October 3, 1980, Case No 3540 (Originalin French), Jarvin & Derains, op. cit., p. 105.315 Redfern & Hunter, op. cit., p. 211.1114.2.5. Withdrawal of ClaimsMost arbitration rules seem to leave open the issue ofwithdrawal of claims, but it is dealt within the CIETAC Arbitration Rules. When a settlement is reached by the parties themselves, theclaimant should apply for withdrawal of the claims. If the withdrawal application is made before thetribunal is established, the decision will be made by the chairman of the conmiission, otherwise thedecision will be made by the tribunal.316Withdrawals take place either upon settlement or through other mutual agreement. The issueconcerns arbitral jurisdiction in the remote situation where a withdrawn case is brought afresh to thearbitration institution. For example, in an ICC arbitration involving five contracts between a Belgianenterprise and an Iranian factory, the Iranian defendant took part in the procedure with reservationson the competence of the arbitrator. After the first hearing, both parties agreed to withdraw fromICC jurisdiction and to start a new h procedure with the same tribunal. The agreed time for thetribunal to render a decision was three months, which could be prolonged four times. When informedof this change, the ICC Court of Arbitration deleted the case from its registry. However, theprolongation was not agreed formally upon and the tribunal’s mandate expired under Iranian law.Subsequently the claimant sought a new arbitration before the ICC Court of Arbitration, based onthe original agreement. The sole arbitrator considered the respondent’s protest that there was noexisting agreement to arbitrate, and the appointment of a sole arbitrator was contrary to the originalarbitration agreement. The arbitrator found that he had been duly appointed, but he held that theestablishment of the ad hoc arbitral tribunal had superseded the original arbitration clause referringto ICC, that the withdrawal from ICC arbitration had both parties’ unreserved approval, and316 Art. 31, CIETAC Rules.112“that the ICC Court of Arbitration, drawing the logical conclusion from thisrenunciation, removed the case from its calender in its session of January 1977, endingtherewith officially its jurisdiction over the dispute of the parties.”317Accordingly, the arbitrator declared that no valid arbitration clause existed at the time and hewas incompetent to hear the claim.Two observations can be made from this case. First an arbitration agreement superseded bya subsequent arbitration agreement no longer exists and cannot be relied upon to institute newarbitration proceedings, and second, a withdrawal without reservation might deprive a party of theright to rely on the original arbitration agreement. The decision in this case was made by thearbitrator appointed by the ICC Court of Arbitration. Obviously the Court of Arbitration must haveadmitted the case on the basis of the original arbitral agreement, otherwise the case would not havebeen dealt with by the arbitrator in question. This case also illustrates that the arbitral tribunal is theorgan to decide its jurisdiction.To sum up, an arbitral tribunal must base its jurisdiction upon the agreement of the parties.In examining the scope of arbitral jurisdiction, the tribunal should take into consideration the intentionof the relevant parties to the arbitration agreement for the purpose of establishing personaljurisdiction, and the extent and types of claims in order to establish its subject matter jurisdiction.Both the personal and subject matter jurisdiction shall come within the boundary of the arbitrationagreement. The rule may have to be extended to adapt to the needs of international commerce, butsuch extension shall not be unqualified. For a party to be subjected to an arbitration agreement, there317 Award made October 26, 1979 in ICC Case No. 3383, Jarvin & Derains, op. cit., p. 105.113must be consent, either express or implied. The trend appears to allow arbitrators to read the consentofthe relevant parties from their conduct and degree of interest in the case. Unless the law changes,arbitrators cannot join outsiders into the arbitral proceedings.114CHAPTERS: JUDICIAL REVIEW OF ARBITRAL JURISDICTIONOne of the limitations of arbitral jurisdiction is its inability to be divorced from national judicialreview. Efforts have been made in this century to limit the scope of court review of arbitral awards,but exclusion ofjudicial review of arbitration in toto seems impractical and is controversial.This Chapter considers the pros and cons of judicial review of arbitral jurisdiction. Thecontext ofjudicial review in general will be set out so as to bring the issue into perspective.5.1. Judicial Review In GeneralIn litigation, judicial review is a recourse to a higher court against decisions of a lower court.Questions ofboth substance and procedure may be the subject of review. The result may be settingaside of the decision or a remission. Since commercial arbitration involves a judicial element, itfollows that arbitral decisions are subject to judicial review to ensure that justice is properly done.5.1.1. Dual System of Judicial ReviewInternational arbitral awards are subject to judicial reviews at the place of arbitration and theplace where enforcement ofthe arbitral award is sought, resulting in a dual system ofjudicial review.This dual system is recognized by international conventions on arbitration agreements or arbitralawards.The Geneva Protocol of 1923 was the first international convention dealing with internationalarbitration through the recognition of arbitration clauses. This protocol does not deal with attacks115on arbitral award, but provides for the enforcement of an arbitration agreement subject to oneexception:“Such reference shall not prejudice the competence of the judicial tribunals in case theagreement or the arbitration cannot proceed or becomes inoperative” 318Thus the Geneva Protocol recognizes the power of the state courts to take back thearbitrator’s jurisdiction when the agreement is ineffective.The Geneva Convention was the first international attempt to create uniform rules on theenforcement of foreign arbitral awards. The convention provides positive requirements that a foreignarbitral award must meet for the purpose of enforcement. It also provides negative requirements that,upon proof, a foreign arbitral award can be refused enforcement. The burden of proof rests upon theparty who is seeking enforcement of the arbitral award.The Geneva Convention permits judicial review in the country of the seat of arbitration andrequires:“that the award has become final in the country in which it has been made, in the sensethat it will not be considered as such if it is open to opposition, appel or pourvoi encassation (in the countries where such forms of procedure exist) or if it is proved thatany proceedings for the purpose of contesting the validity of the award arepending” 319This provision imposes a finality requirement on the arbitral award on the assumption that thestate court in the seat of arbitration retains the power ofjudicial review regarding arbitral awards318 Art. 4, Geneva Protocol.319 Art. 1 (d), Geneva Convention.116rendered within the country. This assumption is further recognized in Article 2 which provides,among other things, that recognition and enforcement of the award shall be refused if the court issatisfied:“that the award has been annulled in the country in which it was made” 320Through these rules, the Geneva Convention recognizes judicial review of arbitral awards inthe country of origin. The non-final nature of the arbitral award or the annulment of the arbitralaward in the country where the award was made will result in non-recognition and non-enforcementof the award in the foreign states.The New York Convention shifts the burden ofproofto the party against whom enforcementis sought, but follows the same assumption in respect ofjudicial review. If it can be proved that theaward is not binding or has been set aside by the country of origin, enforcement of the award may berefused. 321The New York Convention also permits the enforcing court to examine ex officio the subjectmatter arbitrabiity ofthe dispute and compatibility of the award with public policy under its own law.The dispute must be arbitrable under the law of the enforcement country, and enforcement of theaward must not be contrary to the public policy of that country.322320 Art. 2 (a), Geneva Convention; Article 2 (b) is concerned with proper notice of arbitrationand capacity of party to present the case, (c) deals with excess authority of the arbitral tribunal.321 Art. V (1) (e), New York Convention.322 Id., Art. V (2).117While the Geneva Convention and the New York Convention do not regulate judicial reviewin setting aside procedures, the European Convention and the Uncitral Model Law expressly providegrounds for setting aside arbitral awards in the country of origin.Under the European Convention, grounds for judicial review are similar to those of the NewYork Convention in enforcement proceedings. Setting aside procedures may take place in thecountry in which the award was made or under the law ofwhich the award was made.323 There arefour reasons for setting aside an award: (1) invalidity of the arbitration agreement; (2) violation ofdue process; (3) excess of authority by the arbitrators; and (4) irregular composition of the arbitraltribunal or the arbitral procedure. For Contracting States of the European Convention that are alsoparties to the New York Convention, Article V (1) (e) of the New York Convention applies solelyto setting aside on the above four grounds.324 These grounds limit judicial review primarily toprocedural matters.Similar to the European Convention, the Model Law provides in Article 34 a setting asideprocedure as a sole recourse against the arbitral award. The setting aside procedure takes place onthe limited grounds which are a recreation of Article V of the New York Convention.Legislative history of the Model Law suggests that a variety of additional grounds wereoffered for the setting aside procedure, including, e.g., discovery of new facts or evidence. Thesegrounds were rejected by the Working Group. Instead, the grounds listed under Article V of the NewYork Convention were adopted for setting aside under the conclusion that “[t]hat solution would323 Art. DC (1), European Convention.324 Art. IX (2), European Convention. Art. V (1) (e) of the New York Convention allows nonrecognition and non-enforcement of the arbitral awards on the ground that the award has not becomebinding or has been set aside or suspended in the country of origin.118facilitate international commercial arbitration by enhancing predictability and expeditiousness andwould go a long way towards establishing a harmonized system of limited recourse against awardsand their enforcement” 325The relationship between setting aside and enforcement can be easily discerned. Once anaward is set aside in the country of origin, it becomes a nullity and can no longer be relied upon forenforcement purposes in any other countries. The setting aside procedure has a far-reaching globaleffect on the enforcement procedure.A question arises as to where the award should be set aside, or which court can set aside anaward. In Kanto Yakin Kogvo Kabushiki-Kaisha v. Can-Eng Manufacturing Ltd.,326 the applicantKYK, a Japanese corporation, sought recognition and enforcement of an award rendered in Japanagainst Can-Eng Ltd., an Ontario corporation. The respondent challenged the recognizability andenforceability of the award and also requested setting aside of the award before the Ontario Courtof Justice (General Division). The court rejected both the challenge and the request and orderedrecognition and enforcement. With respect to the request for setting aside, the court seems toconsider that Article 34 ofthe Model Law applies to the request.3 The court actually applied Article34 (3) when it rejected the request based on the lapse of the limitation, i.e., “more than three months325 “Third Working Group Report” AJCN.9/233 (28 March 1983) in Holtzmann and NeuhausA Guide to Model Law, op. cit., p. 936.326 Kanto Yakin Kogyo Kabushiki-Kaisha v. Can-Eng Manufacturing Ltd. 4 B.L.R. (2d) 108(Ontario Court of Justice, General Division, 1992).327 The Ontario International Commercial Arbitration Act, 1988, S.O. c. 30, incorporates intothe law ofOntario the Uncitral Model Law on International Commercial Arbitration adopted by theUnited Nations Commission of International Trade Law id., p. 119.119have elapsed since the respondent received the award” 328 This application seems to be incorrectbecause under the Model Law as adopted by Ontario International Commercial Arbitration ActArticle 34 applies only if the place of arbitration is in the territory ofOntario.329A correct reading of the Model Law is found in Schreter v. Gasmac Inc.,330 where, inconsidering recognition and enforcement under the Model Law of an arbitral award rendered in theState of Georgia, the court held:“The Model Law applies to international commercial arbitrations conducted inOntario or elsewhere, but the only articles which apply to arbitrations conductedoutside Ontario are arts. 35 and 36, as well as arts. 8 and 9 which deal with othercourt functions where there is an arbitration agreement.”33’328 Id., p. 123. Art. 34 (3) of the Model Law reads: “An application for setting aside may notbe made after three months have lapsed from the date on which the party making that application hadreceived the award or, if a request had been made under article 33, from the date on which thatrequest had been disposed of by the arbitral tribunal”.329 Art. 1 (2) ofthe Model Law reads: “The provisions of this Law, except articles 8, 9, 35 and36, apply only if the place of arbitration is in the territory of this State”. The four exceptions areArticle 8, providing reference to arbitration in a matter governed by a valid arbitration agreement,Article 9, providing for the compatibility of a request for interim measures of protection with theagreement to arbitrate, and Article 35 and 36 dealing with recognition and enforcement of arbitralawards.Schreter v. Gasmac Inc. 89 D.L.R. (4th) 365 (1992, Ontario Court, General Division).331 Id., p. 370.120Thus setting aside proceedings may take place only in the place of arbitration or under the lawunder which the arbitration has taken place. The enforcing court is not in a position to set aside aforeign award.332Another question remains as to the extent to which an arbitration award should be judiciallyreviewed. Should the court re-visit the merits of the case and substitute its decision for the arbitrationaward? This question brings us to the issue of the scope ofjudicial review.5.1.2. Judicial Review on the Merits ExcludedInternational conventions that deal with judicial review of arbitration either in setting asideor enforcement proceedings do not allow re-opening of the merits of the arbitration case. Instead,they provide judicial remedies against irregular arbitral procedures.Under national laws, it is also recognized that in the context of international arbitration themerits of the case is not to be reviewed by the court. While domestic arbitration awards often maybe reviewed on the substance, international arbitral awards generally are immune from substantivereview by the court.333332 In a case where a Danish award is sought to be enforced in Germany, the German partydefended against enforcement and also requested the setting aside of the award. Enforcement wasrefused based on various grounds under the New York Convention, but the request for setting asidewas turned down. The Court of Appeal held that in F.R. Germany a foreign arbitral award can onlybe refused recognition, and that it cannot be set aside. A setting aside decision would mean animpermissible interference with foreign arbitration: see F.R. Germany No. 14, OberlandesgerichtKoIn, June 10, 1976, Yearbook Comm. Arb., IV, (1979), p. 258; also see F.R.Germany No. 12,Bundesgerichtshof, 12 February 1976, Yearbook Comm. Arb., II, (1977), p. 242, where the GermanSupreme Court reversed an annulment decision of the Court of Appeal, holding that setting asidedoes not apply to awards made in other states under other than German law.See W. L. Craig, “Uses and Abuses ofAppeal from Awards” Arbitration International Vol.4, No. 3, p. 205.121For example, in British Columbia domestic commercial arbitration is regulated by theCommercial Arbitration Act, S.B.C. 1986, c.3, while international commercial arbitration is governedby the International Conmiercial Arbitration Act, S.B.C. 1986, c. 14. Under the CommercialArbitration Act, arbitral rulings or awards are not subject to the Judicial Review Procedure Act,334but they are subject to substantive judicial review in the absence of an exclusion agreement.335 Anyparty may, with consent ofthe other parties or with leave of the court, take the arbitrated case to thecourt on any question of law arising out of the arbitral award. The court may grant leave for appealin cases where“(a) the importance of the result of the arbitration to the parties justifies theintervention of the court and the determination of the point of law may prevent amiscarriage ofjustice, (b) the point of law is of importance to some class or body ofpersons ofwhich the applicant is a member, or (c) the point of law is of general orpublic importance” •336The International Commercial Arbitration Act incorporates the provisions of the UncitralModel Law and limits judicial review to the setting aside procedure on the listed procedural grounds,excluding substantive review of questions of law.Art. 31.1, Commercial Arbitration Act, S.B.C. 1986, c. 3.The Act provides that parties may, after an arbitration has commenced, effectively excludein writing the jurisdiction of the court to determine questions of law or review an appeal: Art. 34.336 Art. 31(2), Commercial Arbitration Act.122This rule of non-judicial review on the merits of the arbitration case is recognizedinternationally. For example, in AB Gotaverken (Swedish) v. General National Maritime TransportCompany (Libya)337,the Swedish Supreme Court held:“Under Sect. 6 of the Foreign Arbitration Agreements and Awards Act [whichimplements the New York Convention in Sweden] a foreign arbitral award shall bevalid in this country subject to certain conditions. These conditions concern variousprocedural irregularities. Consequently, when a request for enforcement of a foreignarbitral award is considered, there should, in principle, not be a review of thesubstance of the award”.Thus the extent ofjudicial review of arbitral decisions is limited. The court is not to secondguess or step in the substantive decision of the arbitrators. Extensive judicial review will frustrate thebasic purpose ofarbitration, which is to dispose of disputes quickly and avoid the expense and delayof extended court proceedings.339 However, the court is available to double check the arbitralprocedure at both the place of arbitration and the place where the enforcement of the award is sought.5.1.3. Judicial Review on ProcedureAB Gotaverken (Swedish) v. General National Maritime Transport Company (Libya)Supreme Court, August 13, 1979, No. So 1462 Svea Court of Appeal (5th Dept.) in Stockholm,December 13, 1978, Sweden No. 1, Yearbook Comm. Al.,., VI, (1981), pp. 237-242.Id., p. 240.Parsons & Whittemore Overseas Co. v. Societe Generale de l’Industrie du Papier (Rakta) 508F. 2d 969 (1974, US Court of Appeals, Second Circuit).123The majority of nations maintain a limited extent ofjudicial review of the arbitral procedure.Under French law, for instance, less demanding standards are designed for judicial review ofinternational arbitral awards. There are only five grounds under which international arbitral awardscan be set aside.34° These five grounds are similar to the list of grounds for enforcement of foreignarbitral awards under the New York Convention, with the exception of the express provision of“international public policy” •341In English law, the question whether there is an exclusion agreement affects in principle theextent ofjudicial review of arbitral awards. Under the 1979 Arbitration Act, the right of appeal onany question of law arising out of an award can in some circumstances be excluded by an exclusionagreement.342 As far as international arbitration is concerned, an exclusion agreement is effectivewhen it is made either before or after the arbitration has begun, unless it falls under the specialcategory of arbitrations.343 Where there is an effective exclusion agreement,344no appeal to the courtArts. 1502, 1504, French Code of Civil Procedure.341 See infra Sect. 5.2.3.342 Sect. 3, 4, 1979 Arbitration Act.The special category ofdisputes include those arising out of shipping, insurance or commoditycontracts, in which case an exclusion agreement is valid when it is made after the commencement ofthe arbitration proceedings or the questions of law are governed by a law other than English law:Sect. 4.It has been held that, by referring to ICC arbitration, Art. 24 (2) of the ICC Arbitration Rulesoperates as an effective exclusion agreement: see Arab African Energy Corp Ltd. v. OlieprodektenNederland BV [1983] 2 Lloyd’s Rep. 419; Marine Contractors Inc. v. Shell Petroleum DevelopmentCo. of Nigeria Ltd. [1984] 2 Lloyd’s Rep. 77 (C.A.). Art. 24 (2) of the ICC Rules reads: “Bysubmitting the dispute to arbitration by the International Chamber ofCommerce, the parties shall bedeemed to have undertaken to carry out the resulting award without delay and to have waived theirright to any form of appeal insofar as such waiver can validly be made”.124on a question of law may be made except with the consent of all the parties to the arbitration.345Where there is no exclusion agreement, the arbitral award is subject to appeal to the High Court withconsent of all the other parties to the arbitration or with leave of the court.On the determination of such appeals, the English court may by order “(a) confirm, vary orset aside the award; or (b) remit the award to the reconsideration of the arbitrator or umpire togetherwith the court’s opinion on the question of law which was the subject of appeaI”.3In the United States, federal statutes generally provide that a court has power to set aside anaward only where it was procured by corruption or fraud, where there was evidence of an arbitrator’spartiality, where the arbitrator refused to hear pertinent evidence, postpone a hearing upon goodcause shown or where otherwise guilty ofmisconduct prejudicing the rights of the parties, or finally,where arbitrators exceeded their powers or so imperfectly executed them that a final and definiteaward was not made.347The US courts have also refused to review any questions of law or findings of facts.348 The“Manifest disregard of law” defense349 will not be construed as a license to review the record ofSect. 3 (1).346 Sect. 1 (2) (3), 1979 Arbitration Act.Sect. 10, US Arbitration Act.The question ofwhether the arbitrators have misconstrued a contract is not subject to judicialreview: see National Metal Converters, Inc.. (U.S.A.) v. I/S Stavborg (Norway) (500 F.2d 424),Yearbook Comm. Arb., I, (1976), U.S. No. 2, p. 202.Wilko v. Swan, 346 U.S. 427, 436, 74 S.Ct. 182, 187, 98 L.Ed. 168 (1953).125arbitral proceedings for errors of fact or law in international arbitration.35°Errors of fact or law arenot grounds for setting aside an award.35’The model oflimited judicial review accepts the need ofjudicial review of arbitral awards; onthe other hand, such review is restrictive in scope. Most often the review is targeted at the fairnessofthe procedure. The court examines whether there is a valid arbitration agreement; the tribunal isconstituted properly; due process has been respected; the arbitrators assumed their jurisdictionproperly; and public policy is observed. All these elements are related primarily to the procedure ofthe arbitration. The purpose is to ensure that justice is not miscarried on a procedural basis.5.1.4. No Judicial ReviewAn extreme pattern under national laws is the exclusion ofjudicial review of internationalarbitral awards. Belgium is an example. The Belgium Judicial Code provides:“The Belgian Court can take cognizance of an application to set aside only if at leastone of the parties to the dispute decided in the arbitral award is either a physicalperson having Belgian nationality or residing in Belgium, or a legal person formed in350 Parson & Whittemore Overseas Co., Inc.. v. Societe Generale de L’Industrie du Papier(Rakta) 508 F. 2d 969 (1974) (US Court of Appeals, Second Circuit).351 “Arbitrators are judges chosen by the parties to decide the matters submitted to them, finallyand without appeal. As a mode of settling disputes, it should receive every encouragement fromcourts of equity. If the award is within the submission, and contains the honest decision of thearbitrators, after a full and fair hearing ofthe parties, a court of equity will not set it aside from error,either in law or fact”: Burchell v. Marsh, 58 U.S. (17 How.) 344 at 349.126Belgium or having a branch (une succursale) or some seat of operation (un siegequelconque d’operation) there” 352The main argument for this pattern is that international arbitrations frequently take place ina neutral state which, under an “interest analysis”, often has less interest in an international arbitralaward rendered in its territory than the jurisdiction in which enforcement of the award is sought.353Consequently, judicial review, which is often used for purely dilatory purposes, should be excludedin the country of origin with respect to a completely international arbitral award.The Belgian model has posed much concern in the international arbitral community. Underone extreme view, such international awards which cannot be set aside by courts of the country oforigin are “stateless” awards and do not fall under the New York Convention for the enforcement offoreign awards.354Under another more moderate view, shifting judicial control to the court of enforcement maygo against the goal of international arbitration which aims at a fair settlement of disputes in a neutralplace. Exclusion ofjudicial control at the place ofarbitration may increase the probability that judicialcontrol will be exercised in enforcement proceedings by a court sharing the nationality of one of theparties. “This is because enforcement will be sought in jurisdictions where the losing party has assets352 Art. 1717 (4), Belgian Judicial Code (Sixth Part: Arbitration, adopted 4 July 1972 andamended 27 March 1985).Craig “Uses and Abuses of Appeal from Awards” op. cit. p. 202.Van den Berg, “Non-Domestic Arbitral Awards under the 1958 New York Convention”, 2Arbitration International 191, 213 (1986).127and there is a strong probability that a party’s assets will be located either in his home or in the homejurisdiction of the winner” .“Proponents of non-judicial review at the place of arbitration would argue that such awardsas rendered in Belgium are enforceable under the New York Convention. The New York Conventionapplies to awards without judicial review.3 Though it does imply that an award is to be made underthe law of the seat of arbitration,357 it does not imply that an award must be first reviewed by thecountry in which it was made. Arbitrations taking place in Belgium are, in the absence of choice ofprocedure law, subject to the Belgian Judicial Code, which a priori operates to the effect of non-judicial review in cases involving no Belgian interests.Further, with respect to judicial assistance of arbitral proceedings, under the Judicial Code,the Belgian courts are still able to render assistance in the context of appointment of arbitrators,taking of evidence or granting provisional measures.358 The only difference seems to be that the NewYork Convention Article V (1) (e) which addresses setting aside or suspension will no longer be aground of defense in the enforcement of arbitral awards rendered in Belgium.359Craig, “Uses and Abuses of Appeal from Awards”, op. cit. p. 202.356 See J.Paulsson, “Arbitration Unbound in Belgium”, 1 Arbitration International (1986), p. 72.Art. V (1) (a) reads in part: “... or the said agreement is not valid under the law to which theparties have subjected it or, failing any indication thereon, under the law of the country where theaward was made”; Art. V (1) (e) reads: “The award has not yet become binding on the parties, or hasbeen set aside or suspended by a competent authority of the country in which, or under the law ofwhich, that award was made”.358 J.Paulsson, op. cit., p. 71.Except in one rare situation where the parties have chosen a procedural law other than thatof Belgium and the chosen procedural law allows setting aside of awards rendered under it: see J.Paulsson, op. cit., p. 69, footnote 8.128The approach of lifting judicial control at the seat of arbitration seems feasible from theeconomic point of view, provided that the arbitral tribunal does justice properly. A dual system ofjudicial review would increase litigations over arbitral awards and incur more expense and legal costs.Where the arbitral award involves a manifest miscarriage ofjustice, the injured party may besubject to unreasonable risks and difficulties in order to defend against enforcement of the awardwherever the winning party seeks enforcement. Injustice cannot be repaired, for the award cannotbe set aside by the enforcement court. The Belgian model may create more problems than it solves.The Belgian system is not the only one that excludes judicial review. The Chinese system alsoexcludes judicial review of arbitral awards, though the motive of the legislation is different. Anarbitral award rendered in China is subject to judicial review not for the purpose of setting aside, butfor the purpose ofenforcement. If it can be proved, e.g., that there is no arbitration agreement or noproper notice of arbitration proceedings, the court will deny enforcement.36°The Chinese court does not set aside or vacate arbitral awards. The theory is that once anaward is rendered, it is final and binding, subject to no judicial review.36’ No party may bring anyaction before a court or bring an appeal for revision of the arbitral award before any otherorganization.362 The parties must execute the award within the period provided for in the award; ifthe award does not provide for a period of performance, it must be performed immediately.363° Art. 260, PRC Civil Procedure Law.361 Art. 259, PRC Civil Procedure Law.362 Art. 36, CIETAC Arbitration Rules.Art. 38, id.129The court may only refuse enforcement of the award subject to conditions. An awardrendered in China would be legally valid after it is issued. The same risks and difficulties as in theBelgian case would arise where justice is miscarried.If judicial review is wholly excluded, realistically speaking, it is not helpful for the properconduct of international arbitration, for a loophole is to be created for any injustice which cannot becured.5.2. Review ofArbitral JurisdictionWith respect to judicial review of arbitral jurisdiction in particular, a national court seized ofan application for judicial review will examine such questions as whether the jurisdiction is valid,whether there is excess ofjurisdiction and whether such jurisdiction is contrary to the public policyof the state.5.2.1. Validity of Arbitral JurisdictionArbitral jurisdiction operates on the assumption that the parties have validly agreed toarbitrate. This assumption enables a national court to review the validity ofjurisdiction by examiningthe validity of the arbitration agreement.The court is to decide the ultimate issue whether the parties have truly agreed to arbitrate.If they have not, then the agreement is tainted. The assumption is defeated and arbitral jurisdictionconsequently is invalid.130This approach is provided by the New York Convention, whereby any incapacity of the panesor any invalidity of the arbitration agreement is a ground for defence against enforcement of thearbitral award.3M It is also a ground for setting aside an award under the European Convention andthe Model Law.365 Accordingly, in situations where there is no arbitration agreement, or where thearbitration agreement is not duly concluded or does not meet formal requirements, the award eithermay be set aside or refused enforcement. The fi case,3which marks the first widely reportedsuccessful challenge to an international award made by ICC arbitrators in France under the New CodeofCivil Procedure,7shows how the issue ofthe validity of the agreement to arbitrate affects arbitraljurisdiction.In a joint venture project between SPP, a Hong Kong company, and EGOTH, an Egyptiancompany, the contract was approved by the Egyptian Ministry of Tourism with the word followingthe Minister’s signature “approved, agreed and ratified by the Minister of Tourism”. The project waslater cancelled by the Egyptian government. SPP sought ICC arbitration against both the ArabRepublic of Egypt and EGOTH according to the arbitration clause in the contract. The ICCarbitrators held by a majority that the Egyptian Government was a party to the contract, and thereforewas bound by the arbitration clause included in the contract and awarded that the EgyptianGovernment pay damages to SPP.Art. V (1) (a), New York Convention.365 Art. IX (1) (a), European Convention; Art. 34 (2) (a) (i), Uncitral Model Law.366 Yearbook Comm. Arb., IX, (1984), p. 111.367 Redfern & Hunter, op. cit., p. 328.131In a later action to set aside the award before the Court of Appeal in Paris, the EgyptianGovernment contended that it was not a party to the contract and that the signature of the Ministerwas merely administrative, approving the project. The French court agreed and set aside the ICCaward.368This case illustrates that there can be no valid arbitral jurisdiction if there is no agreement toarbitrate. The arbitrators’ holding that there is arbitral jurisdiction can be vacated by the court.5.2.2. Excess ofArbitral JurisdictionIn case there is a valid arbitration agreement, the reviewing court will, upon request, examinewhether an arbitral tribunal exceeds its mandate by dealing with matters not submitted to it orwhether the tribunal fails to deal with all the issues referred to it. In the first situation, if the findingis yes, the award may in whole or in part be set aside or reftised enforcement, depending uponwhether those part of the award which exceed the jurisdiction of the tribunal can be separated fromthose which fall within the arbitral jurisdiction.369In the second situation, failure of the arbitral tribunal to deal with all the issues submittedgenerally will not result in the award being annulled or refused enforcement since the issues dealt within the award are within the authority of the arbitrator. Under many arbitration rules there is an368 Yearbook Comm. Arb., X, (1985), p. 487.369 Art. V (1) (c), New York Convention; Art. 34 (2) (a) (iii), and Art. 36 (1) (a) (iii), UncitralModel Law.132immediate remedy for the tribunal, upon request, to make an additional award to cover the left-overclaims.370 Here we are concerned with the issue of excess of arbitral jurisdiction.Excess ofjurisdiction often is raised as a defense against recognition and enforcement. Theissue is subject to the discretion of the reviewing court. For example, a contractual clause saying “anyclaim for arbitration formulated after 6 months from the date of arrival ofthe goods at the final stationor port ofdestination is null” may be interpreted as meaning any submission to arbitration has to bemade within six months after arrival of the goods; therefore after this period, an arbitral tribunal isno longer competent.371 It may also be viewed as not expressis verbis excluding the competence ofthe arbitral tribunal.372This brings us to the question ofhow a national court should interpret contractual terms withrespect to the authority of arbitrators. Facing a contractual clause limiting damages and thearbitrators’ decision granting damages, should a court examine the soundness of the arbitrators’decision on the basis of excess of authority? The answer should be negative because the defense ofexcess of authority should be narrowly construed. In Parsons the contract provides that “[n]eitherparty shall have any liability for loss of production”, the arbitrators, nevertheless, awarded damagesfor loss of production.373 The US Court of Appeals held that the defense of excess of authority370 See, e.g., Art. 37, Uncitral Arbitration Rules.371 See F.R.Germany No. 12, Bundesgerichtshof, 12 February 1976, Yearbook Comm. Arb., II,(1977), p. 242, where the Court ofAppeal refused enforcement of a Romanian award on the groundthat the arbitrators had exceeded the terms of arbitration agreement.372 Id. This is the view of the German Supreme Court, which remitted the case to the Court ofAppeal on this ground.Parsons & Whittemore Overseas Co. v. Societe Generale de l’Tndustrie de Papier (Rakta), 508F. 2d 969 (1974) (U.S. Cout ofAppeals, Second Circuit), p. 976.133should be construed narrowly and “a narrow construction would comport with the enforcement-facilitating thrust of the Convention” The Court then considered that it was “not apparent” thatthe arbitral tribunal ignored this contractual limitation; rather, “the arbitration court interpreted theprovision not to preclude jurisdiction on this matter”, and rejected this defense.In Fertilizer Corporation of India et al. (India) v. 11)1 Management, Inc. (U.S.),375 the partieshad clearly excluded consequential damages, but the arbitrators found fhndamental breach on the partof IDI, concluded that in such a situation the limitation of damages no longer applied, and rendereda large award based almost exclusively on consequential damages. The District Court stated:“Without engaging in an in-depth anaiysis of the law of contract in the United States,we cannot say with certainty whether a breach of contract found to be material or‘fundamental’ would abrogate an express clause limiting damages to those other thanconsequential. The answer, however, is irrelevant. The standard of review of anarbitration award by an American court is extremely narrow...”376Relying on the rule of limited judicial review, the court concluded that it would not substituteits judgment for that of the arbitrators.- Id.Fertilizer Corporation of India et al. (India) v. IDI Management. Inc. (U.S.) US No. 39, USDistrict Court, Southern District ofOhio, Western Division, 9 June 1981, Yearbook Comm. Arb.,VII, (1982), p. 382.376 Id., p. 388.134This narrow judicial review of the authority of arbitrators is also affirmed in the Canadianjudicial context. In Ouintette Coal,377 Quintette sought to have an unfavourable award set aside onthe ground that the arbitral tribunal had exceeded its power. The Court ofAppeal set the standardfor judicial review in this case:“The ‘concerns of international comity, respect for the capacities of foreign andtransnational tribunals, and sensitivity to the need of the international commercialsystem for predictability in the resolution of disputes’ spoken of by Blackmun J. areas compelling in this jurisdiction as they are in the United States or elsewhere. It ismeet [sic] therefore, as a matter of policy, to adopt a standard which seeks topreserve the autonomy of the forum selected by the parties and to minimize judicialintervention when reviewing international commercial arbitral awards in BritishColumbia. That is the standard to be followed in this case.”378According to this standard, the Court of Appeal affirmed the rejection decision of the lowercourt and refused to set the award aside.If the award manifestly goes beyond an express limitation of the arbitral clause, the Canadiancourts are not reluctant to refuse recognition. This is the case in Aamco.379 The arbitration tookplace under a franchise agreement which included an arbitral clause as follows:‘“ Quintette Coal Ltd. v. Nippon Steel Corp. 50 B.C.L.R. (2d) (B.C. Court of Appeal, 1990)207.378 Id., p. 217.Aamco Transmissions Inc. v. Kunz (Saskatchewan Court of Appeal, 1991) 97 Sask. R. 5.135“All disputes... shall be settled by binding arbitration.. .except for termination byAAMCO which is based in whole or in part, upon the fraudulent acts ofFranchiseeor Franchisee’s failure to deal honestly and fairly with any customer of the center orFranchisee’s failure to accurately report his gross receipts to AAMCO...”38°The franchise was terminated by the franchiser, Aamco, because of the franchisee’s failure tofile business reports and pay franchise fees. In confirming the chambers judge’s unreasoned decisionto refuse registration of the award, the Saskatchewan Court of Appeal was of the view that “thefranchiser drew the contract and must now accept the clear words of it and is also subject toambiguities being resolved contra prpferentem”.3Enforcement was refused because the issues inthe award were held beyond the scope of arbitration and therefore not arbitrable.The burden to prove excess ofjurisdiction lies with the party who rejects enforcement. Therejecting party must prove to the satisfaction of the court that arbitral jurisdiction has been exceeded.In Schreter v. Gasmac Inc.,382 the claim for indemnity for product liability insurance and theacceleration ofthe royalty payments were allegedly beyond the submission because the insurance wasrequired under a separate agreement in which there was no arbitration clause, and the royalty, payableover an extended period under the contract, was alleged not to be accelerated. The Ontario courtconsidered that these issues were decided by the arbitrator under the law of the State ofGeorgia. Thecourt held that the defendant has not discharged its burden of proof that under the applicable Georgialaw the arbitral tribunal was incorrect in its conclusion.380 Id., p. 6.381 Id., p. 7.382 Schreter v. Gasmac Inc. 89 D.L.R. (4th) (Ont. Court, General Division, 1992) p. 379.136It follows from the reasoning in this case that if the parties had proved to the satisfaction ofthe court that the arbitral decision was incorrect under the applicable law, the court would have todeny the enforcement of the award. Consequently, it would be hard for the court to draw adistinction between examination ofjurisdiction and substantive review of the arbitral decision. Thecourt would have to re-visit the merits of the case.In reviewing the scope of arbitral jurisdiction, a court should distinguish such review from asubstantive review ofthe award. Review ofexcess ofjurisdiction focuses on whether the tribunal hasexceeded its mandate rather than the substantive correctness of the tribunal’s decision.5.2.3. Public Policy in Relation to Arbitral JurisdictionThe concept ofpublic policy varies from one state to another. It is difficult to give a uniformdefinition of public policy because the concept involves a varying degree of public interest of eachstate. Some states may take its basic interest as embodied in the concept; others may refer to generalprinciples of honesty, fairness and natural justice. Public policy considerations may even extend tothe validity of the agreement to arbitrate and the requirement of arbitrability.For example, the German court is of the view that the validity of the arbitration agreementis part of German public policy. In a case between a German shipping company and a Japaneseshipyard, the German party sought damages against the Japanese party on tortious grounds. Thelatter challenged the court’s jurisdiction based on the arbitral clause in the shipbuilding contract. Ina decision in favour of arbitration, the German court considered whether the arbitration agreement137which was valid under foreign law corresponded to German public policy.383 The court consideredthe provision of Sect. 1025 (2) of the German Code of Civil Procedure as part of German publicpolicy.384The requirement of arbitrability is distinguished from public policy under the New YorkConvention in Article V (2). However, arbitrabiity may also pertain to public policy, as in the caseofAndi-NSU Auto Union A.G. (F.R.Germanv) v. S.A. Adelin Petit & Cie (Belgium).385 This casewas decided before the amendment of the Belgian Judicial Code. The dispute arose from an exclusivedistributorship agreement for the distribution of German cars in Belgium and Luxembourg. Beforethe end of the contract term, Audi terminated the exclusive agreement and initiated arbitration inZurich pursuant to the arbitration clause in the agreement. Petit started an action in a Belgian court.Audi challenged the jurisdiction of the court on the basis of the arbitration clause and also requestedenforcement ofthe arbitral award rendered in Zurich. Both the challenge and request were rejected.On appeal, the court of appeal affirmed the lower court’s decision on grounds that according to theBelgian Law ofJuly 27, 1961 (as modified on April 13, 1971) concerning the Unilateral TerminationofConcessions for Exclusive Distributorship of an Indefinite Time, disputes arising therefrom cannotbe submitted to arbitration before the end of the contract, and that recognition would be contrary to383 F.R.Germany No. 34, Hanseatisches Oberlandesgericht (Court of Appeal), Hamburg, 17February 1989, Yearbook Comm. Arb., XV, (1990), p. 455.384 Art. 1025 (2) ofthe German Code ofCivil Procedure reads: “The arbitration agreement is notvalid ifone ofthe parties has used any superiority it possesses by virtue of economic or social positionin order to constrain the other party to make this agreement or to accept conditions therein, resultingin the one party having an advantage over the other in the procedure, and more especially in regardto the nomination or the non-acceptance of the arbitrator.”385 Andi-NSU Auto Union A.G. (F.R.Germany) v. S.A. Adelin Petit & Cie (Belgium) YearbookComm. Arb., V, (1980), p. 257.138Belgian public policy. An appeal was further made to the Supreme Court (Court of Cassation). Audiasserted that the appeal decision lacked precision since it did not make clear whether the refusal torecognize the award in question was based on an incompatibility with Belgian public policy or on thenon-arbitrability of the dispute. The Supreme Court affirmed the reflusal on seemingly the same twogrounds as non-arbitrability and violation of public policy.386Public policy may operate to prevent an award or part of it from being recognized andenforced if the recognition would violate the statutory or customary rules of the state. If an awardorders one of the parties to do an act prohibited by the local law, enforcement may be denied.387 Ifan arbitral tribunal sitting in a civil law state awarded, for the purpose of encouraging the debtor topay within the prescribed period, an increase of the rate of interest payable after the specified periodoftime from the date ofthe award, such a decision would be considered as an impermissible penaltyand would not be recognized in common law countries.388Following the distinction between domestic arbitration and international arbitration, there hasbeen a distinction between public policy at the domestic level and public policy at the internationallevel. The latter is more narrowly construed in its application.386 Cf. In Parsons, the U.S. Court of Appeals held that “the mere fact that an issue of nationalinterest may incidentally figure into the resolution of a breach of contract claim does not make thedispute not arbitrable”: Parson & Whittemore Overseas Co. v. Societe Generale de l’Industrie duPapier (Rakta) 508 F.2d 969 (1974, US Court of Appeals, Second Circuit), p. 975.387 Art. 801(1), Japan Code of Civil Procedure; Art. 13, Arbitration Act of the Republic ofKorea of 1966 (amended in 1983).388 See Laminoirs-Trefilieries-Cableries de Lens S.A. (France) v. Southwire Company (U.S.),U.S. No. 32, United States District Court, Northen District ofGeorgia, January 18, 1980,Yearbook Comm. Arb., VI, (1981), p. 247.139For example, in U.S. judicial pronouncements, public policy defense under the New YorkConvention is construed narrowly. Enforcement of foreign arbitral awards may be denied on publicpolicy ground “only where enforcement would violate the forum state’s most basic notions ofmoralityand justice”. Public policy should not be read as “a parochial device protective of national politicalinterests”, but should be viewed as having a “supranational” nature.The French jurists went further to a concept of “international public policy”. This concepthas entered into the New French Code ofCivil Procedure.39°An international arbitral award renderedin France shall be set aside if it is contrary to international, instead of domestic, pubic policy.391Likewise, in enforcement of foreign arbitral awards the public policy is not the domestic public policy,but “the public policy of international law of the State where the decision is invoked”.392What is “international public policy” or what is “public policy of international law” remainsunclear. A number of states would rather favour a narrow construction of the local public policy inthe context of international arbitration. For example, a limited concept of public policy in the interestof international trade applies to the recognition of foreign arbitral awards in Germany. “From theviewpoint of German procedural public policy, the recognition of a foreign arbitral award canSee Parsons, op. cit., p. 974.° Art. 1502 (5), French Code of Civil Procedure.391 Id., Arts. 1502 and 1504.392 Denis Coakley Ltd. (U.K.) v. Ste Michel Reverdy (France), France No. 6, Cour d’appel ofReims (Civil Chamber), 23 July 1981, Yearbook Comm. Arb., IX, (1984), p.401.140therefore only be denied if the arbitral procedure suffers from a grave defect that touches thefoundation of the State and economic functions”.393In Canada, it is also the local, rather than international, public policy that the court takes intoconsideration. Imposition ofpublic policy on foreign arbitral awards is, in the words of Feldman J.,“to guard against enforcement of an award which offends our local principles ofjustice and fairness in a fundamental way, and in a way which the parties couldattribute to the fact that the award was made in another jurisdiction where theprocedural or substantive rules diverge markedly from our own, or where there wasignorance or corruption on the part of the tribunal which could not be seen to betolerated or condoned by our courts”.(emphasis added)394This local public policy would not authorise the court to have an extensive review of arbitralawards. If the court is to reopen the merits ofthe arbitral case under the guise of ensuring conformitywith the local public policy, the enforcement procedure under the New York Convention or theModel Law would be brought into disrepute.395 A court should use restraint in considering publicpolicy under local law.By reviewing the validity of the arbitration agreement, the scope of arbitral jurisdiction, theregularity of the arbitral procedure and the compatibility with the narrowed concept of public policy,a national court retains control over the practice of international commercial arbitration taking placeF.R.Germany No. 30, Bundesgerichtshof [Federal Supreme Court], 15 May 1986, YearbookComm. Arb., XII, (1987), p. 489.See Schreter v. Gasmac Inc., 89 D.L.R. (4th) (Ontario Court, General Division, 1992), p.379.Id.141at home and abroad. This control necessarily guarantees justice in the commercial world done byinternational arbitrators.142CONCLUSIONWe can draw three conclusions for this paper:(1) International arbitral jurisdiction operates in an autonomous manner. Based on suchprinciples as separability of the arbitration agreement and competence of competence, internationalarbitrators effectively may determine their jurisdiction and exercise such jurisdiction within the scopeof the arbitration agreement. Even in cases where challenges of their jurisdiction exist, arbitratorsmay decide their own jurisdiction and proceed to an award.Although arbitral jurisdiction is limited to the agreement of the parties, the trend representedby such concept as “group of companies” emphasizes the intention of the relevant parties reflectedin their course of dealings and give effect to such intention. The trend clearly shows that internationalarbitrators not only resolve disputes, but also make important contributions to the development ofinternational commerce and international law. They uphold the customary rules of the businessworld, respect the need of international commerce and even create rules in their awards.(2) If viewed from outside the arbitral procedure, international arbitral jurisdiction is notcompletely autonomous. It is subject to the scrutiny ofnational courts. International arbitrators haveonly the first word on their jurisdiction, not the last. If they wish to make an award which is valid andenforceable under law, they have to be certain that their jurisdiction over both the parties and disputesis valid.Since the purpose of international commercial arbitration is a speedy and fair settlement ofdisputes, both international arbitrators and national courts should cooperate to meet that purpose.A complete arbitral autonomy free of any court intervention would seem unwise because it does not143take advantage of the coercive power of the state to facilitate and uphold arbitration and to guaranteefairness and justice. On the other hand, if any jurisdictional question arising in the course ofarbitration should first be litigated in the national courts, it would defeat the true purpose ofarbitration.The trend towards narrower judicial review and minimum court intervention in arbitrationhelps to reduce litigation over arbitration agreements and awards. A wise approach is to push for amore autonomous system of international commercial arbitration with the national laws to fill in thegaps and the national courts to facilitate and support the arbitral proceedings.With respect to filling in gaps of arbitration, national laws as well as international conventionsshould develop to deal with such common-place problems as multi-party arbitrations, so as to servethe needs ofmodern international business practices and meet the purpose of international arbitration.Such gaps as joinder ofparties and consolidation of arbitrations may well be filled, in the absence ofthe parties’ agreement, by national legislators and national courts.(3) Efforts should be made at the very beginning of arbitration, i.e., at the time when thearbitration agreement is designed, in order to foster a more autonomous system of arbitraljurisdiction, and to minimize court intervention of arbitration. 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