International Arbitration and Precedent-Based Legal Systems

As a method of dispute resolution, international arbitration is sometimes criticised as stifling the development of precedent.

In an article, titled “Each Problem that I Solved Became a Rule, which Served Afterward to Solve Other Problems: Is International Arbitration Stifling the Development of Precedent-Based Legal Systems”, CMS tackle this thorny issue, and consider why arbitration is regarded as a threat to precedent-based systems and whether those concerns are reasonable.

Why is International Arbitration a Threat?

The authors note the following:

  • The nature of the arbitral process means that, in the vast majority of cases that proceed to arbitration, the use of the courts is excluded entirely (in contrast to other forms of alternative dispute resolution, which might be said to be more complementary to court litigation).
  • As arbitration is a private mechanism, any ‘problem’ solved by an arbitral tribunal will not become a ‘rule’. Instead, any ‘rule’ created by an arbitral tribunal will only be binding on the parties to that particular arbitration. This means that, even if a case involving an issue of material significance to a particular industry or area of the law proceeds all the way to an arbitral hearing, the resulting award carries no precedential value (even if published), and therefore does not contribute to the development of the common law.
  • The above issues are thought to be exacerbated in certain areas of law by virtue of the fact that international arbitration has become a popular (if not standard) method of settling disputes in select sectors, such as shipping, energy, construction and infrastructure.

Is the Threat Reasonable?

The authors refer to the oft-quoted statements from Beverley McLachlin, the former Chief Justice of Canada, who stated: “[t]he trend is clear. Fewer and fewer construction cases are reaching the courts where the law is developed… construction disputes are being sent to mediation, arbitration…” and to the following statement from former Lord Chief Justice of England and Wales, Lord Thomas, in 2016:

“…across many sectors of law traditionally developed in London, particularly relating to the construction industry, engineering, shipping, insurance and commodities, there is a real concern which has been expressed to me at the lack of case law on standard form contracts and on changes in commercial practice”.

Such statements have been countered by others, and there is no clear consensus amongst judicial commentators. Following a review of the statistics published by various arbitral institutions, the authors conclude that:

“We therefore find ourselves in the rather unsatisfactory position of being unable to say, with any degree of certainty, whether international arbitration does or does not pose a threat to the development of precedent-based systems. However, what is clear from the foregoing is that certain eminent commentators do consider this issue to be one of concern, particularly in relation to certain industries, sectors or areas of law.”

See also the views expressed by Clyde & Co in their two part analysis – the first, “Precedents in Arbitration – A Practical Position Part 1”, where sources of precedent are considered, and the second, “Precedents in Arbitration – A Practical Position Part 2”, which looks at the way practitioners and arbitrators create and use precedent and consider whether this system of informal precedent creates consistency.

For a detailed, theoretical (and interesting) examination of the issue see “Toward a Theory of Precedent in Arbitration” by W. Mark C. Weidemaier, originally published in William & Mary Law Review (51 Wm. & Mary L. Rev. 1895 (2010)). The Abstract gives a flavour of the content:

“Do arbitrators create precedent? The claim that they do not recurs throughout much of the arbitration literature. Instead, arbitration often is viewed as an ad hoc forum in which arbitrators do justice (at best) within the confines of particular cases. As an empirical matter, however, it is increasingly clear that, in some arbitration systems, arbitrators often cite to other arbitrators, claim to rely on past awards, and promote adjudicatory consistency as an important system norm. Much like courts, then, arbitrators can (but do not always) create precedent that guides future behavior and provides a language in which disputants, lawyers, and adjudicators can express and resolve grievances.

This Article provides a theoretical foundation for understanding the conditions under which precedent will (or will not) arise in arbitration. It identifies three considerations that may account for the development of precedent across a range of arbitration systems: (1) whether the system is structurally conducive to the creation of precedent; (2) whether arbitral precedent benefits the parties by filling gaps in (or displacing) state-supplied law; and (3) whether arbitrators are likely to be viewed as legitimate producers of law within the relevant context. After explaining the relevance of these considerations, the Article explores how they might apply in different arbitration contexts and sets forth a research agenda capable of shedding light on arbitration not only as a mechanism for resolving disputes, but also as a mechanism for generating robust systems of privately made law.”

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Hong Kong Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.


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