Types of Arbitration: An In-Depth Analysis, Challenges and Criticism

By Md. Imran Wahab Views: 14395

Arbitration is a widely recognized and employed alternative dispute resolution mechanism that allows parties to settle their disagreements outside the conventional court system. This process is facilitated by an arbitrator or a panel of arbitrators, who work towards providing a binding decision to the parties involved. Generally, arbitration is characterized by its speed, cost-effectiveness, and confidentiality when compared to litigation. Due to these advantages, it has become a popular choice for resolving disputes in various contexts, including commercial transactions, labour conflicts, international disputes, and consumer matters.

Types of Arbitration

Arbitration can be classified into several categories based on jurisdiction, procedure, and the nature of the dispute. Here are the major types of arbitration with relevant examples and details:

Ad hoc Arbitration: Ad hoc arbitration is conducted without the involvement of an arbitration institution. In this type, the parties agree upon the arbitration procedure, venue, and appointment of arbitrators. Ad hoc arbitration offers flexibility and is generally more cost-effective than institutional arbitration. Example: Two companies involved in a contractual dispute over delayed payments agree to appoint an arbitrator and conduct the proceedings without institutional intervention.
Institutional Arbitration: Institutional arbitration involves the use of arbitration organizations that administer the dispute resolution process. Examples of such institutions include the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), and the Singapore International Arbitration Centre (SIAC). Institutional arbitration offers a more structured and organized process, often with pre-determined rules and procedures. Example: A multinational corporation opts for ICC arbitration to resolve a breach of contract dispute with a supplier in another country.
Domestic Arbitration: Domestic arbitration occurs within a single country and is governed by national laws. It applies when all parties involved are from the same jurisdiction. Domestic arbitration is typically less complex and time-consuming than international arbitration. Example: An Indian company and its local contractor have a dispute over construction delays and resolve it through arbitration under the Indian Arbitration and Conciliation Act, 1996.
International Arbitration: International arbitration involves parties from different countries and is often governed by international treaties such as the New York Convention. This type of arbitration is typically more complex due to the involvement of multiple jurisdictions and the need to consider various legal and cultural factors. Example: A U.S. company and a Japanese manufacturer enter into arbitration under the LCIA rules for a dispute regarding a supply contract.

Commercial Arbitration: Commercial arbitration is used for resolving disputes arising in business transactions, such as breach of contract, joint venture disputes, and intellectual property conflicts. This type of arbitration is particularly common in industries with complex contracts and high-value transactions. A software company and a client disagree over licensing terms and opt for arbitration instead of litigation.
Investment Arbitration: Investment arbitration resolves disputes between foreign investors and host states, often under bilateral investment treaties (BITs). This type of arbitration is designed to protect the interests of foreign investors and ensure a stable and predictable legal environment. An oil company sues a government for expropriating its assets, initiating arbitration under the ICSID (International Centre for Settlement of Investment Disputes).
Labour Arbitration: Labor arbitration settles disputes between employers and employees over collective bargaining agreements, wages, and unfair dismissals. This type of arbitration is often used to resolve disputes in unionized workplaces. A labour union files an arbitration case against a company for wrongful termination of employees.
Sports Arbitration: Sports arbitration is conducted to resolve disputes in the sports industry, including doping allegations and contractual issues. This type of arbitration is often overseen by specialized institutions, such as the Court of Arbitration for Sport (CAS). An athlete appeals a doping ban before the Court of Arbitration for Sport (CAS).
Consumer Arbitration: Consumer arbitration helps resolve disputes between consumers and businesses, typically in cases involving defective products or unfair trade practices. This type of arbitration is often mandated by the terms of service or contract between the parties. A consumer files an arbitration case against an e-commerce company for non-delivery of a product.
Construction Arbitration: Construction arbitration is used to settle disputes arising from infrastructure projects, contracts, and building agreements. This type of arbitration is often complex due to the involvement of multiple parties, large sums of money, and lengthy project timelines. A contractor and a government agency resolve a dispute over cost overruns in a highway construction project through arbitration.
Maritime Arbitration: This type of arbitration is used to resolve disputes related to shipping, cargo claims, and charter agreements. Maritime arbitration often involves specialized rules and procedures due to the unique nature of the industry. A shipping company and a cargo owner dispute freight charges and take the matter to arbitration under the London Maritime Arbitrators Association (LMAA) rules.
Foreign Arbitration: Arbitration that takes place outside the country where enforcement is desired is considered foreign arbitration. This process is governed by the arbitration laws of the designated seat and underpinned by international agreements such as the New York Convention of 1958. Foreign arbitration is crucial for guaranteeing impartiality in international commercial disputes. A notable example is the Vodafone v. India (2020) case, where a tribunal in The Hague decided against India's retroactive tax demand, thus highlighting foreign arbitration's importance in upholding investor protections through bilateral treaties.
Contractual Arbitration: Contractual arbitration offers a method for resolving disputes outside of court, wherein parties consent within a contract to use arbitration to settle future disagreements. This agreement is legally enforceable and generally outlines the specific arbitration rules, applicable law, and designated arbitration institution, if one exists. A common scenario involves an employment contract where both employer and employee agree to arbitrate workplace disputes, which can maintain privacy and expedite resolution compared to traditional court actions.
Emergency Arbitration: Emergency arbitration offers a swift avenue for parties involved in disputes, particularly in international commerce, to obtain urgent interim measures before the primary arbitral tribunal is formally established. This mechanism is particularly valuable when immediate intervention is necessary to avert potentially irreparable damage. Prominent arbitral institutions, including the ICC, SIAC, and LCIA, incorporate provisions for emergency arbitration in their rules. The Amazon v. Future Group (2020) case serves as a notable illustration, where Amazon successfully secured an emergency arbitration award from SIAC to suspend Future Group's $3.4 billion agreement with Reliance, alleging a violation of contractual obligations; this case underscores the utility of emergency arbitration in procuring timely interim relief pending the completion of regular arbitration proceedings.
Flip-Flop Arbitration: Flip-Flop Arbitration resolves disputes by forcing the arbitrator to pick one party's final offer, as is, without changing it. This encourages realistic offers from both sides and is often employed in labour and business negotiations. A good example is MLB salary arbitration, where the arbitrator must choose either the player's or the team's proposed salary, pushing both to be reasonable and preventing long-drawn-out conflicts.
Look-Sniff Arbitration: Look-Sniff Arbitration is an expedited dispute resolution process. The arbitrator quickly reviews submissions ("looks at") and then thoroughly investigates crucial issues ("sniffs out") to reach a decision efficiently, while upholding fairness. Consider, for instance, a construction contract dispute: the arbitrator may initially review key documents and then concentrate on the most significant contractual breaches, leading to a faster resolution than traditional methods.

International Commercial Arbitration: International Commercial Arbitration provides a neutral, adaptable, and enforceable method for resolving commercial disagreements that span national borders, supported by international agreements such as the New York Convention of 1958. Institutions like the ICC, LCIA, and SIAC oversee these arbitrations. A case in point is Cairn Energy v. India (2020), where an arbitral tribunal at The Hague's Permanent Court of Arbitration (PCA) decided in Cairn's favour, granting $1.2 billion in compensation due to a retrospective tax dispute, demonstrating arbitration's significance in settling international commercial conflicts.
Statutory Arbitration: Unlike consensual arbitration, which relies on the agreement of involved parties, statutory arbitration is legally required by a specific law. To guarantee equitable resolutions, it is frequently applied to areas such as labour disagreements, government agreements, and public utility services. In India, for instance, the Industrial Disputes Act of 1947 enables statutory arbitration in labour conflicts, empowering the government to refer disputes to arbitration to avoid interruptions in vital services.
Fast-Track Arbitration or Documents-Only Arbitration: Fast-Track Arbitration, also known as Documents-Only Arbitration, offers a streamlined approach to dispute resolution, prioritizing speed and efficiency. This method commonly relies on written submissions rather than oral hearings to expedite the process and reduce associated costs in commercial agreements. Facing a dispute over late material delivery, a construction company and supplier opted for fast-track arbitration, bypassing formal hearings to expedite resolution. Both parties submitted written evidence like contracts and invoices to the arbitrator, who, within a pre-agreed 30-day period, would review the documents and issue a binding award, offering a swift and cost-effective solution suited for cases with clear factual documentation.
Online Arbitration: Online arbitration provides a completely digital pathway to resolve disputes, with all stages - from claim submission to the issuing of an award - taking place on electronic platforms. A practical illustration is the resolution of cross-border e-commerce disputes, such as disagreements about product quality or payment between international buyers and sellers, through systems like the Korean Commercial Arbitration Board's ODR, which manages case filings, virtual hearings, and document sharing entirely online.
Binding and Non-binding Arbitration: The two main types of arbitration are binding and non-binding, distinguished primarily by the enforceability of the arbitrator's decision. Binding arbitration results in a final, legally enforceable ruling that parties must adhere to, often used in commercial contracts for efficient dispute resolution, bypassing traditional court proceedings. Conversely, non-binding arbitration serves as a recommendation; parties dissatisfied with the outcome retain the right to pursue legal action, a common feature in court-ordered civil dispute resolutions where a subsequent trial is possible.
High-low Arbitration: High-low arbitration involves a pre-arranged agreement between disputing parties that establishes the upper and lower boundaries of a potential award. The arbitrator, operating without knowledge of these pre-set limits, renders a decision solely on the merits of the case. The arbitrator's award is upheld if it falls within the agreed-upon high and low parameters. However, if the award surpasses the maximum limit, the claimant receives only the high amount; conversely, should the award fall below the minimum limit, the claimant is awarded the low amount. To illustrate, consider a personal injury case where the plaintiff and defendant agree to a high-low range of $50,000 to $100,000. An arbitrator's award of $120,000 would be adjusted down to $100,000, while an award of $40,000 would be adjusted up to $50,000.
Specialised Arbitration: Arbitration that is specialized involves the use of experts in a specific field to settle disputes that need specialized or technical knowledge. This form of arbitration is often utilized in areas such as construction, intellectual property, and maritime law, where the complexity of issues requires specialized knowledge that goes beyond general legal principles. For instance, in disputes related to construction, the parties involved may choose specialized arbitration, where the arbitrator has a background in engineering or architecture, thereby ensuring that the technical aspects, such as the structural integrity of the building and the specifics of the contract, are properly assessed.

Advantages of Arbitration:

Confidentiality: Confidential business information is protected in arbitration, as the proceedings are private.
Speed and Efficiency: The arbitration process is often faster than pursuing a case through the courts.
Expert Decision-Makers: Arbitrators are often specialists in the subject matter.
Flexibility: The process is customizable to fit the specific needs of the parties involved.
Finality: Arbitral awards are generally binding with limited appeal options.

Challenges and Criticisms of Arbitration:

Costs: While often cheaper than litigation, institutional arbitration can be expensive.
Enforceability Issues: Some jurisdictions may not enforce arbitration awards effectively.
Limited Appeal Rights: Errors in judgment may not be easily rectified.
Power Imbalance: In consumer and labour arbitration, businesses may have an upper hand over individuals.

Conclusion:

Written By: Md.Imran Wahab