Anthony Daimsis
Chapter 6: Heuristics Misshape Reasoning and Increasing Costs
[Cite as: Daimsis, Anthony in: “Finances in International Arbitration: Liber Amicorum Patricia Shaughnessy”, Edited by Sherlin Tung, Fabricio Fortese, Crina Baltag, Wolters Kluwer]
Anthony Daimsis
- 6.01 Introduction
This publication’s theme focuses on the costs of arbitration.
One of the many advantages touted by arbitration enthusiasts is that it offers a faster and cheaper method to resolve disputes. But as many know, this belief does not always translate into reality. Often, the reason why arbitration is neither faster nor cheaper is one party exploiting another party’s knowledge gap, or, equally regretful, all parties suffering from a knowledge gap.
The trouble with knowledge gaps is that they cost money to fill either by ‘learning on the job’ or by unnecessary motions, requests and submissions all of which cost time to produce, assess and decide upon.
This chapter attempts to fill some of these knowledge gaps by offering parties and decision-makers thoughts on specious arguments that are sometimes difficult to combat.
The separability doctrine, watered down to a simple heuristic, leads to misunderstanding separability’s true objective.
Separability, the principle that an arbitration agreement is separate from the larger contract in which it is contained (and itself treated as a separate contract), is one of the first lessons taught to International Arbitration initiates. The doctrine is often a jarring lesson to newcomers but quickly imprints itself onto the recruits’ psyche to form an essential part of the new knowledgebase distinguishing those who know International Arbitration from those who do not.
This section questions the separability doctrine. In particular, at least insofar as the Model Law[1] includes it, this chapter argues that the separability doctrine is of limited application intended only to safeguard an arbitral tribunal’s jurisdiction.
Arbitration has so puffed up the separability doctrine that inductees assume that each time an arbitration agreement is contained inside a contract, the doctrine applies. But this exaggerated belief is dangerous. And wrong.
This section begins by explaining the separability doctrine. It then provides the historical context explaining why the doctrine exists. Finally, this section examines the wording the Model Law uses and explains how this language reveals separability’s limits.
At its simplest, the separability doctrine, when it applies, posits that an arbitration clause included within a larger contract is a separate contract. This means that when parties agree to a contract, which includes an arbitration clause, the parties have actually agreed to two contracts. The first is the larger ‘container’ contract. The second is the arbitration contract.
The consequence is stark but important. Although the clause embodying the arbitration agreement seems inextricably linked to the container contract in which it is housed, if treated separately, the arbitration agreement’s existence does not depend entirely on the container contract’s existence.[2]
The separability doctrine did not always exist, but it soon became essential for arbitration to function when a tribunal faced the following dilemma. A party wishing to shirk its promise to arbitrate could launch a devastating argument that might sound something like this: Since our main argument is that the contract (container contract) is invalid, if we prevail, then by necessity any arbitral tribunal set up pursuant to a clause inside an invalid contract is not properly empanelled to render a decision.
The argument is a powerful one.
If arbitration agreements were not independent of the contracts to which they related, then their legality could suffer the same alleged illegality that the container contract suffered. This could allow, for example, a party to circumvent the arbitral process simply by raising doubts about the container contract’s validity.
The doctrine was needed, therefore, to guard against this powerful tactic and, thus, emerged the theory of the independence of the arbitration agreement. English law refers to it as the separation doctrine or doctrine of separability, whereas United States (US) law speaks of severability. The civil law, most notably France, discusses it under the heading autonomie de la clause compromissoire (and compromis). French law emphasizes the independence of the arbitration agreement whereas English and US law emphasize the separateness of the agreement from the underlying contract.[3] While separability goes by various names its purpose is the same: to safeguard an arbitral tribunal’s jurisdiction by enforcing the parties agreement to arbitrate.
Separability has helped courts to conclude that, inter alia, terminating a commercial contract does not, automatically, bear on an agreement to arbitrate – the agreement to arbitrate survives to ensure that an arbitral tribunal may resolve any outstanding disputes emanating from the terminated commercial contract.[4] The US Supreme Court has equally recognized that, owing to the separate nature of an arbitration agreement, it is not enough for a party to argue that it was fraudulently induced into entering a commercial contract to deprive an arbitral tribunal of its competence; the party must also prove that the arbitration agreement was entered into under a fraudulent belief.[5] These are just some of the many examples showing the true purpose of the separability doctrine: safeguarding an arbitral tribunal’s jurisdiction.
[C] Model Law Embraces a Limited Separability
The Model Law recognizes the separation doctrine at its Article 16(1) by explaining:
The arbitral tribunal may rule on its own jurisdiction including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. [emphasis added]
In a few sentences, the Model Law’s wording captures separability’s purpose and implicit limits: when an arbitration agreement’s existence or validity is called into question, for that purpose, one may separate an arbitration agreement from the contract’s other terms and treat it as an independent agreement.
Unfortunately, although separability imprints itself on the psyche of arbitration specialists, it seems to do so rather imperfectly. Initiates remember ‘separability’ but do not always respect its true purpose and limits.
A good, if not dramatic description of the doctrine from the former President of the International Court of Justice is a good example of what I mean:
When the parties to an agreement containing an arbitration clause enter into that agreement, they conclude not one but two agreements, the arbitral twin of which survives any birth defect or acquired disability of the principal agreement.
Indeed, as a heuristic, Stephen Schwebel offers a very useful shortcut to understanding separability’s basics. But attributing this simple ‘separability’ example to the more complex separability doctrine leads to a common cognitive bias trap known as attribution substitution.[7]
Briefly, attribution substitution sees an individual substituting a more complex understanding of separability (its original purpose and limited application) for a simpler understanding of the doctrine (here, Schwebel’s explanation of separability).
In the field of law, whether through formal precedent or informal consistency, what makes holding this incomplete position even more dangerous is how it gets repeated as gospel. And history reveals how powerful gospel is, even when it is illogical and unsupported in fact.
To summarize on the separability doctrine, if one holds true to its original purpose and implicit limits, the defence to a party who seeks to shirk its promise to arbitrate by arguing that the very vitiates of consent to the main contract derivatively vitiates consent to the arbitration promise is not to simplistically state that arbitration agreements are always separate from the main contract. Taking this line of defence sidesteps the issue by suggesting the attack is irrelevant since ‘the arbitral twin survives any…acquired disability of the principal agreement’. But this is simply not true. The ‘arbitral twin’ may very well suffer from the same defect.
Instead, to the extent that one party is trying to shirk its arbitration promise by arguing a defect to the main contract whose effect is to deny an arbitral tribunal its jurisdiction, to the extent that the defect is limited to the main contract, one may separate the arbitration promise from the other contractual promises in order to safeguard the arbitral tribunal’s jurisdiction.
Correctly applying the separability doctrine avoids important difficulties. For one, if an arbitration agreement really was ‘always’ separate from the contract in which it was contained, then, properly, it should have its own applicable law. And unless parties include a choice of law to their arbitration agreement, as a separate contract, a decision-maker should apply conflicts of law analysis (or rules of private international law) to determine the applicable law.
And yet, we know this is rarely how it works.
Instead, more often decision-makers use one of three methods to determine what law applies to the arbitration agreement: (1) borrowing the law from the principle contract, (2) using the New York Convention’s Conflict rule by analogy, or (3) the ‘validation’ principle.
[1] Borrowing the Law from the Principle Contract
Some civil law jurisdictions[8] , as well as common law decisions,[9] take a pragmatic view of the problem. In essence, these jurisdictions take the position that business parties who enter into contracts, which may include arbitration clauses, intend to have their entire contract governed by one law unless the parties indicate otherwise.
Under this view, to the extent that it is necessary to know what law governs the arbitration agreement, the answer is a simple one: a rebuttable presumption that the same law governing the principle contract shall govern the arbitration agreement. The presumption is rebutted when that law invalidates the arbitration agreement. At this point, a court should apply the law with the closest or most real connection to the contract.
Under the law of Quebec, the steps are similar except that the order follows, in the absence of a specific designation: the law of the principal contract, unless that law invalidates the agreement, in which case it is the law of the seat.
[2] Using the New York Convention’s Conflict Rule by Analogy
Under the New York Convention (and Model Law), the provisions dealing with recognition and enforcement of arbitral awards are looked to by analogy to determine the law that applies to an arbitration agreement. This analogy to New York Convention Article V(1)(a) leads to the law of the seat as the law that governs the arbitration agreement.
New York Convention Article V(1)(a) reads:
Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:
(a) The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made. [emphasis added]
In international arbitration, an award is deemed made at the seat.[10] Consequently, the analogy to V(1)(a) goes something like this. To the extent we need to know what law governs an arbitration agreement since we have a rule under the New York Convention to tell us what law to look to when determining an arbitration agreement’s material validity, we should use this same rule to determine what is the proper law to an arbitration agreement.
[3] The ‘Validation’ Principle
The third method suggested by authors like Gary Born (and first used by jurisdictions like Switzerland) is known as the validation principle. In a nutshell, this principle assumes that parties would never intend to choose a law that would invalidate their arbitration agreement. And so, when parties do not expressly state the applicable law to their arbitration agreement, any potential law that might apply (given the transaction) is in play. For example, either party’s home state, the place of arbitration, the enforcement jurisdiction, among other relevant laws are open to a decision-maker to apply. The idea is, given the assumption, to the extent that any of these laws would validate the arbitration agreement, in the absence of a specific designation, a decision-maker should apply one of these laws that validates the arbitration agreement.
The separability point just made also rears its head within the context of the United Nations Convention on Contracts for the International Sale of Goods (CISG). The CISG itself makes clear that it applies only to an international sale of goods. An arbitration agreement is not a good and when it is a negotiated term, it is not sold or purchased. As a starting point then, scholars who insist that the CISG does not apply to arbitration agreements make a good point. But on closer scrutiny, this point is questionable.
Beginning with the easy point, the CISG does not apply to submission agreements for the simple reason that as a stand-alone contract to submit current disputes to arbitration, such a contract is not a sale of goods. But what about an arbitration clause in a sales contract in which the parties agree to submit future disputes to arbitration? Why should the CISG not apply to this clause, given that it sits inside a contract for the sale of goods? After all, CISG Article 4 tells us that the CISG governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. To the extent that a clause in a contract of sale affects the rights and obligations of the seller and the buyer, the CISG tells us that it applies. Now, this same provision does go on to explain that the CISG does not govern the validity of any term found in the contract. What this means is that the CISG takes no position on whether a particular clause, like an exclusion of liability clause, a confidentiality clause, or an arbitration clause is valid vis-à-vis the applicable law. The CISG merely answers whether the parties agreed to that particular clause that made its way into the contract of sale. In short, the CISG does apply to the formation of a contract of sale, including all clauses found within the contract of sale, including the arbitration agreement.
Yet, relying on the heuristic that when parties to contracts containing arbitration agreements agree to not one by two contracts, some fall prey to the cognitive dissonance that leads them to state that arbitration clauses, even when incorporated into the main CISG contract, are considered separate contracts [because of the separability doctrine] and hence fall outside the CISG’s scope.
This reasoning is troubling. It requires applying a different contract formation law to a clause in a contract governed by the CISG, which itself specifically deals with the formation of a contract. If instead, the limited separability applied, then, unless a party claimed that the sale of goods contract was invalid, separability would not apply, and we could revisit the question of whether the CISG applies to the arbitration agreement. And here we could track what CISG Article 4 tells us: Yes on formation, no on validity. In brief, the CISG’s provisions on formation would answer whether the parties agreed to a contract that includes an arbitration clause, but as to whether the arbitration clause itself is valid, one could turn to relevant laws concerning the arbitration agreement’s validity, both formal and substantive.
Furthermore, the CISG itself appears to understand the correct and limited role separability plays. As a starting point, CISG Article 19(3), in providing examples of what types of terms in contracts materially change offers, explains:
- (3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.[11] [emphasis added]
What we see is the CISG drawing no distinction between dispute settlement clauses and other clauses possibly found in contracts.
CISG Article 81 drives the point home even more succinctly by explaining that a dispute resolution clause, like any other clause that ought to survive avoidance, does survive the CISG’s avoidance remedy:
- (1) Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due. Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract.[12]
CISG Article 81(1) confirms that the separability doctrine applies when the avoidance remedy, which technically ends the obligations of a buyer and seller, is invoked. Here, notwithstanding that the contract containing the arbitration clause ceases to exist, an arbitral tribunal’s jurisdiction is safeguarded.
So far, separability, if only partially understood can lead to arguments that are not always easy to sort through. Undoubtedly, separability is not easy and its consequences are sometimes more difficult, but they really should not be.
Another topic that uses up unnecessary time is the belief that the victim of a breach has a ‘duty’ to mitigate its losses. This is simply not true. And those who believe it simply miss the mark.
[A] No Duty to Mitigate Exists
The notion that a party who has suffered a breach of contract has a duty to mitigate its losses seems emblazoned into the minds of jurists, both young and old, heralding from prominent civil law and common law jurisdictions, alike. For the purposes of this chapter, I shall focus on how this notion has even imprinted itself onto the minds of some influential commentators on International Commercial Law.[13] This section explains how and why this assumption is difficult to support. In short: no such duty exists and one should spend no time arguing it.
This section adopts a Hohfeldian[14]-rights analysis to explain why no duty to mitigate exists since, to exist, a legal duty must relate to a corresponding legal right. Commentators and judicial decisions stating that the victim of a breach of contract owes a duty to the breaching party to mitigate losses assume that the breaching party enjoys a right. But as any first-year law student knows, a right once breached, leads to consequential sanctions. This latter point – consequential sanctions – is the missing element to a mitigation analysis and why one should never speak of a duty to mitigate. As explained below, although not an anodyne notion, mitigation is at most a breaching party’s privilege to plead when defending against a claim. Put another way, unless the breaching party argues mitigation, no automatic consequences run against parties who choose not to mitigate. In this way, it is difficult to declare the need to mitigate a true duty.
[B] Mitigation as a Principle of Contract Law
Mitigation’s core idea holds that a party who suffers an injury should not intensify that injury.
A party may intensify the injury through action or inaction.
The first category sees the injured party taking steps that aggravate the injury. In the second category, we see the injured party omitting steps, which if taken, would have avoided further injury. Traditionally, decision-makers apply a standard of reasonableness (in contrast to perfection) to assess the injured party’s mitigatory actions for both acts and omissions. But it is a far cry to convert a principle of contract law into a duty.
Although the mitigation principle is not exclusive to contract law, with contributory negligence serving a somewhat similar role in tort law and delict, this chapter restricts itself to mitigation within the context of contract law.
Another reason to exclude contributory negligence from a discussion on contractual mitigation is the circularity of including a negligence discussion, which assumes an existing duty when this section’s main point argues no duty to mitigate exists. Court decisions determining that parties who negligently contribute to their injuries have failed to mitigate their damages, commit an error of principle by assuming that the victim of a breach owes a duty to the breaching party. This reasoning, which has infected many decisions and possibly serves to explain aspects of the mitigation confusion, is an error of principle that this chapter will not repeat.[15]
Instead, this chapter will endeavour to show that at its highest, the mitigation principle creates an exercisable option for victims of breaches who desire the entirety of their losses. This option is available only if the breaching party proves that the victim of the breach did not reasonably attempt to minimize avoidable losses. This option is conditional.
In its purest sense, a duty can exist only where a corresponding right also exists. But far too often people use the word ‘right’ when what they mean is something entirely different.
So what is a right and what is a duty?
[D] Language Directing Reasoning
Whether imprecise terminology leads to imprecise thinking or the inverse, what seems to lie at the centre of the thinking from those who believe, without supporting evidence, that the victim of a breach owes a duty to mitigate is imprecision of terminology. In this case, assuming a duty exists without a corresponding right.
Black’s Law Dictionary defines duty as a legal obligation that is owed or due to another and that needs to be satisfied; an obligation for which somebody else has a corresponding right. Importantly, we see in this basic definition the correspondence between rights and duties.
CISG Article 77, the provision that deals with mitigation, does not speak of a ‘duty’ to mitigate. It simply states:
A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated.[16]
Despite this, some commentators declare a ‘duty’ exists. However, they offer no support for this declaration, for the simple reason that they cannot.
Indeed, inserting a duty where the text speaks of none is a direct affront to the CISG’s interpretative principle found in its Article 7. In particular, it contradicts an autonomous reading and feeds into the dreaded ‘homeward trend’.[17]
The Secretariat commentary[18] is equally misleading as it suggests the wording in CISG Article 77 tracks the wording in CISG Articles 85-88.[19] But one must draw a distinction between CISG Article 77 on the one hand and CISG Articles 85-88 on the other. Whereas the latter specifies that the victim of the breach ‘must take steps’, it says nothing about what happens if steps are not taken. In this sense, it is a veritable obligation to act. This lies in stark contrast to 77 that uses the softer language ‘must take measures’ but more importantly explains that failing to take measures only matters if the breaching party raises it. And in this sense, it is not a veritable obligation to act.
A fair criticism directed to many academic papers asks whether a given topic is a solution in search of a problem. And so, to avoid this condemnation, let me explain why assuming a duty exists in CISG 77 matters.
A default arbitration award or judgment is one where the defending party does not appear. And so, the defending party has not pleaded that the victim of the breach has failed to mitigate. If mitigation were really a duty that the victim of the breach owed, then a decision-maker, despite an absentee defendant, could still reduce the damages it intended to award the victim of the breach, if the decision-maker were of the view that no mitigatory steps had been taken. And to the extent that a decision-maker was to do this, under CISG Article 77, the decision-maker would have misread the CISG. But when leading works on the CISG claim that CISG Article 77 imposes a ‘duty’, it is easy to see why a decision-maker might reach this faulty conclusion. Time and money wasted.
Despite cases and authorities confirming that review under international arbitration statutes is not open to tinkering, international arbitration practitioners and academics continue to struggle with whether parties may modify the grounds to review arbitration awards under the Model Law.[20] While the answer to the question is ostensibly an easy one – parties may not alter the scope or grounds of review under the Model Law – the question persists for good reason. Party autonomy’s limits in international commercial arbitration are not neatly demarcated against State sovereignty. Not even under the Model Law.
Counsel are often asked whether, in effect, it is possible to retain the benefits of arbitration while also maintaining the right to appeal an award, a simple ‘no’ does not usually cut it. A pragmatic client may ask that if a pillar of arbitration is party autonomy, why may parties not agree to expand (or for that matter, restrict) grounds of review? It is a sensible question on which time and money is spent.[21]
In a 6-3 decision, the US Supreme Court[22] held that parties may not expand the grounds for judicial review. Despite this decision, the question continues to linger within modern arbitration jurisdictions like Canada. There are various explanations for this. First, decisions from one country generally do not bind other countries. Second, the Court in Hall Street was interpreting provisions of the US Federal Arbitration Act that govern domestic arbitration and therefore, on its face, distinguishable from international arbitration. Third, this issue straddles the line between party autonomy and legislative definiteness. It is easy to see how party autonomy and contractual freedom, principles that many view as cornerstones of arbitration, ostensibly overlap with rigid legislative provisions found in international arbitration instruments, like those regulating judicial review. If it is true that arbitration is party-driven and party autonomy drives the process, then absent an obvious prohibition on expanding judicial review, parties and their counsel understandably infer that expanding review fits neatly within these limits. Fourth, mistaken pronouncements from Model Law jurisdictions have further blurred the dividing line. The decision of the Ontario Court in Noble China Inc. v Lei[23] is a prime example and a focus of this section, and has held undisturbed for over 20 years.
In Nobel China the parties opted to limit the grounds of judicial review (as opposed to expanding them), thereby restricting the application of Model Law Article 34. In scrutinizing the Model Law’s Analytical Commentary, particularly regarding its treatment of mandatory and non-mandatory provisions, Lax J. concluded that because Model Law Article 34 does not use mandatory language, the parties were free to expand or restrict its application.[24] Consequently, the Respondent Lei could not move to have the award reviewed under Model Law Article 34 (the provision allowing courts to review arbitration awards) because the parties had restricted this provision’s application in their arbitration agreement. This conclusion is irreconcilable with the purposes of the Model Law– the very instrument the analysis relied on–because the Model Law’s provisions delineating party freedom and defining court intervention are not co-extensive. In assuming that they were, Justice Lax’s analysis fell short of the Model Law’s purposes. Furthermore, she omitted to account for Model Law Article 5, which concerns the limit of court intervention.
[A] The Model Law Prohibits Expanding Judicial Review
The Model Law is the legislative blueprint used to govern international commercial arbitration in over one hundred jurisdictions. UNCITRAL intended that this Model Law would reify uniformly accepted norms on International Commercial Arbitration; its thirty-six provisions are the efflorescence of this intent. Model Law Article 34 governs the setting aside of international arbitration awards made in the arbitration’s juridical seat. The term ‘setting aside’ is the Model Law’s terminology analogous to the judicial review process familiar to common law jurisdictions (also known as vacating) or the homologation procedure known in civil law jurisdictions. In effect, under Model Law Article 34, a court may review and effectively annul an award on two broad bases: due process and public policy. Due process grounds include a party’s inability to present their case, impropriety in-process and legal incapacity. The public policy ground allows a court to annul an arbitration award if the subject matter is not arbitrable, or where it believes that sanctioning the award would offend essential laws of the lex fori.
Courts are expected to interpret both the due process and public policy grounds restrictively and notably, must not review arbitration awards on their merits. To sidestep this last proscription, parties incorporate into their arbitration agreements expanded court review of awards based on the possibility that an arbitral tribunal may incorrectly assess facts or misapply the law. While parties rely on party autonomy and contractual freedom to justify this expansion, it finds no support in the text of the Model Law or the Analytical Commentary. It is important to recall that the Model Law is not a convention or treaty. Legislatures are free to adopt it in part or in whole and are equally free to amend its provisions. This is important because it underlines that if legislatures wished to allow parties to broaden the review process, they could very easily do this.
Model Law Article 5 deliberately and succinctly circumscribes a national court’s right to intervene in disputes falling under the Model Law. The provision states, ‘In matters governed by this Law, no court shall intervene except where so provided in this Law.’ The reference to ‘Law’ is a reference to the implementing legislation bringing into force the Model Law. In brief, this provision directs courts to refrain from intervening in the arbitral process, except to the extent that the Model Law allows. For example, the Model Law allows a national court to intervene where provisional relief or the gathering of evidence is needed. However, when it comes to judicial review, Model Law Article 34(1) states, ‘Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of this article.’ Paragraph (2) is restricted to the two broad grounds discussed above and paragraph (3) explains the time limit to advance an application for setting aside.
When read together (as they should be) the application of Articles 5 and 34 is straightforward. A national court may set aside an award using only the grounds listed in paragraph (2) and in accordance with the time limit set out in paragraph (3) of Model Law Article 34.
[B] Where the Court Got It Wrong
It is imperative to understand Model Law Article 19’s scope as it lies at the heart of Justice Lax’s decision in Noble China.
Model Law Article 19 reads:
Determination of rules of procedure
- (1) Subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.
- (2) Failing such agreement, the arbitral tribunal may, subject to the provisions of this Law, conduct the arbitration in such manner as it considers appropriate. The power conferred upon the arbitral tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence.
When Model Law Article 19 speaks to parties’ freedom to agree on the procedure of the arbitration’s proceedings, it is critical to understand what the words procedure and proceedings entail. It is precisely because Justice Lax misunderstood these words and their context within Article 19 that she concluded incorrectly that ‘art. 34 is not a mandatory provision of the Model Law. Parties may therefore agree to exclude any rights they may otherwise have to apply to set aside an award under this article.’[25]
In examining the Analytical Commentary, Justice Lax stateed the following:
The Commentary enumerates other articles in the Model Law which are mandatory provisions and from which the parties may not derogate. Article 34 is not among them. Moreover, a review of these provisions reveals that each contains the familiar mandatory language of ‘shall’, whereas other provisions in the Model Law contain the familiar permissive language of ‘may’. The mandatory language of ‘shall’ appears nowhere in Article 34, except in regard to the three-month limitation period for bringing an application to set aside an award which is not in issue here.[26]
However, this section of the Commentary lists only the provisions that concern the procedure of the arbitration, that is, its internal functioning. This is quite separate from the process by which national courts may involve themselves at the enforcement or setting aside stage under the Model Law.
Arbitration proceedings are but one aspect of the arbitration process. This process, which includes the arbitration proceedings, also includes matters outside the arbitration proceedings, for instance, court actions to set aside awards or to enforce them. Together, this is the legal framework under which the arbitral process functions. As the Model Law explains, arbitration proceedings begin when the Respondent receives the statement of claim (Model Law Article 21) and end up on the making of the award (Model Law Article 33). However, there is much more to the arbitral process. Once proceedings are over and an award made, without the court system’s imperium, wining parties would have no method to ensure fulfilment of the terms of their awards, absent a contractual remedy that would involve court action. Model Law Article 34 is outside the section of the Model Law that governs the proceedings, which is why Justice Lax’s assessment was inappropriate.
When discussing setting aside, we are out of the world of arbitration proceedings and into the world of court actions. What Justice Lax’s decision sanctions is the parties’ right to amend statutory actions like the one included in Model Law Article 34. Taking her logic to its limits, one could argue that parties are also free to exclude the provisions on enforcement found at Model Law Article 36. Indeed, she acknowledges this, most probably inadvertently, when she wrote:
It is worth bearing in mind to whom the Model Law applies and for whom the ICAA was enacted. The parties who submit to the provisions of the Model Law are business people, in most cases, sophisticated business people, whose business is conducted internationally. These are commercial disputes. Noble and Lei were in no way compelled to resolve their dispute by arbitration. Nor were they compelled to arbitrate under the ICAA and the Model Law. They chose to do so. In making this choice, they were each capably advised and represented by experienced and respected firms of solicitors. It would have been a simple matter for Noble and Lei to have provided in para. 6 of Schedule A to their settlement agreement or in their rules of procedure: ‘No matter which is to be arbitrated is to be the subject matter of any court proceeding other than a proceeding to enforce or to set aside the arbitration award.’ What they in fact agreed to does not, of course, include the italicized words (the reported case did not actually italicize any words). Or, they could have agreed to arbitrate under domestic law, in which case, they could not, as a matter of law, bargain away their rights to set aside an award by virtue of s. 3 of the Arbitrations Act, 1991, S.O. 1991, c. 17 (the ‘Arbitrations Act’). In choosing an international commercial arbitration, they obtained the benefit of deciding on the rules which were to govern their arbitration. The rules to which they agreed exclude recourse to the courts except to enforce an award.[27]
An obvious difficulty with her decision is this. If the parties’ arbitration agreement had instead read ‘no matter which is to be arbitrated is to be the subject matter of any court proceeding’, then applying her logic – namely that the Commentary enumerates other articles in the Model Law which are mandatory provisions and from which the parties may not derogate with Model Law Articles 34 and 36 not among them — then in her view parties to arbitrations subject to the Model Law may agree never to enforce arbitration awards, even though her words suggest otherwise! What makes this logic particularly troublesome is that her logic would apply equally to the New York Convention, the treaty on which the enforcement provisions of the Model Law are based.
Arbitration is classified as an alternative to courts. If the word ‘alternative’ is to have any meaning it must mean that parties to arbitration can expect something different from the court. Court proceedings are rigid and can cost a lot of time and money. If arbitration seeks an efficient, cost and time effective process, then it is imperative to control the cost and time spent on needless arguments. This chapter has attempted to highlight some of these needless arguments with the hope that future practitioners will not argue them, or if they do, their opponents and decision-makers may swiftly reject them.
[1] UNCITRAL Model Law on International Commercial Arbitration (1985) (as adopted by the United Nations Commission on International Trade Law on 21 June 1985) (Model Law).
[2] See Anthony Daimsis and Marina Pavlovic in Marvin J. Huberman (ed.), A Practitioner’s Guide to Commercial Arbitration (Toronto: Irwin Law, 2017) at p. 15.
[3] John C. Kleefeld et al. Dispute Resolution: Readings and Case Studies, 4th edn (Toronto: Emond Publishing, 2016) at p. 523.
[4] Harper v. Kvaerner Fjeellstrand Shipping A.S., 1991 CanLII 1735 (BC S.C.).
[5] Prima Paint v. Flood & Conklin, 388 U.S. 395 (1967).
[6] Stephen M. Schwebel, ‘The Severability of the Arbitration Agreement in International Arbitration: Three Salient Problems’, Cambridge : Grotius Publications Limited, 1987. 1, 5 (1987).
[7] ‘Heuristics and Biases’, The Psychology of Intuitive Judgment Edited by Thomas Gilovich, Cornell University Dale Griffin, Stanford University Daniel Kahneman, Princeton University (pp. 8-9).
[8] Quebec’s civil code Article 3121 (1991, c. 64, a. 3121; I.N. 2014-05-01.) reads:
In the absence of a designation by the parties, an arbitration agreement is governed by the law applicable to the principal contract or, where that law invalidates the agreement, by the law of the State where arbitration takes place.
[9] Sul America v. Enesa Engenharia [2012] EWCA Civ 638 (England); BCY v. BCZ [2016] SGHC 249 (Singapore).
[10] See Model Law Article 31(3).
[11] United Nations Convention on Contracts for the International Sale of Goods (CISG), S. Treaty Doc. 98-9 (1983); A/CONF.97/18 (1980); 19 ILM 668 (1980); 52 Fed. Reg. 6262-6280, 7737 (1987); 1489 UNTS 3; Article 19(3).
[12] CISG Article 81(1).
[13] See, Schlechtriem & Schwenzer, Commentary on the UN Convention on the International Sale of Goods, 3rd edn (Oxford: Oxford University Press, 2010) at p. 1043; Franco Ferrari, International Sales Law – CISG in a Nutshell (USA: Wes Academic Publishing, 2014) at p. 314; John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 4th edn (Netherlands: Kluwer Law International, 2009) Article 77, generally. In contracts to other leading authorities, Professor Honnold recognizes the imprecision of stating Article 77 creates a duty.
[14] Wesley Newcomb Hohfeld, ‘Some Fundamental Legal Conception as Applied in Judicial Reasoning’, 23 Yal L.J. 16 (1913-1914).
[15] Some civil law jurisdictions use similar reasoning by using faute de la victime in French law (victim’s fault) or Mitverschulden in German law (fault of both parties). See G.H. Treitel, Remedies from Breach of Contracts: A Comparative Study (Oxford: Oxford University Press, 1988) who offers a helpful overview, but who, in the end cannot resist describing negligent contribution as a related species of mitigation.
[16] CISG Article 77.
[17] The homeward trend, described by many CISG scholars, is the admonition that jurists should avoid reading the CISG through the lens of these jurists particular domestic law. A basic example is this. CISG Article 14 speaks of ‘offers’. Nevertheless, a jurist from a common law jurisdiction should not assume that the word offer as used in the CISG has the same meaning as ‘offer’ in that jurists home jurisdiction.
[18] Commentary on the Draft Convention on Contracts for the International Sale of Goods prepared by the Secretariat / UN DOC. A/CONF. 97/5.
[19] See, footnote 1 to Secretary Commentary.
[20] Gary B. Born, International Commercial Arbitration (Netherlands: Kluwer Law International 2009) at pp. 2553 et seq.
[21] To date, I have drafted six separate legal opinions on this.
[22] Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576.
[23] (1998), 42 O.R. (3d) 69, 87 (Ont. Gen. Div. Nov. 4, 1998).
[24] Although not traditional in Canadian law, section 13 of the ICAA sanctions recourse to the Analytical Commentary for interpretive purposes.
[25] At p. 94 of judgment.
[26] At p. 90 of judgment.
[27] At p. 88 of judgment.
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