22 September 2010
What is arbitration?
Arbitration is a legal framework designed for the resolution of disputes outside of the courts. In arbitration, the dispute is heard by appointed arbitrators, by whose decision the parties agree to be bound. It is a private, confidential process and, if all goes well, it avoids the need to involve the courts in any jurisdiction and the publicity that goes with a court action.
The parties in dispute must have agreed, in writing, to arbitrate (rather than litigate) the dispute between them. The parties’ agreement to arbitrate is usually set out within the terms of a contract between the parties, or it may be agreed separately. For example, a reinsurance contract may include an arbitration clause which provides that the parties have agreed that any and all disputes arising out of the reinsurance contract shall be referred to arbitration. The exact procedure to be followed in the arbitration will vary depending upon the “seat” of the arbitration and the jurisdiction that ultimately prescribes the procedural law of the arbitration. It is very important to make it clear in the arbitration clause both where the arbitration hearing is to be held and which procedural laws are to apply, so as to avoid any preliminary disputes in that regard.
We should point out that the law that the parties choose to govern the contract between them need not be the same as the law they choose to control the arbitration procedure. If a counterparty insists that a particular law (perhaps one with which it is most familiar) govern the contract, a reasonable (but potentially significant) compromise may involve the counterparty agreeing to Bermuda arbitration.
At this juncture we should also stress that the Bermuda court has great respect for arbitration agreements. Once an agreement to arbitrate in Bermuda has been reached, and set out in writing, the Bermuda court will look favorably upon such an agreement and will take whatever steps may be necessary to enforce the agreement, including issuing an anti-suit injunction where one party commences proceedings in a foreign court. Note that this is not necessarily the case in the U.K., following the decision last year of the European Court of Justice in West Tankers v. RAS Riunione Adriatica di Sicurta SpA, confirming that anti-suit injunctions should not be brought to restrain court proceedings in another EU Member State, even where such proceedings are brought in breach of an agreement to arbitrate.
Bermuda Arbitration Procedure
Bermuda companies and entities doing business in Bermuda and/or contracting with Bermuda entities should have a general understanding as to how the Bermuda arbitration process works so that they are in a position to negotiate an arbitration clause that suits them at the time of negotiation of the contract.
So, what does Bermuda arbitration involve and why should you consider including a Bermuda arbitration provision in your arbitration agreement? Arbitration in Bermuda may fall under one of two legislative regimes: the Bermuda Arbitration Act 1986 (“1986 Act”) and the Bermuda International Conciliation and Arbitration Act 1993 (“1993 Act”). Broadly speaking, domestic arbitrations may fall under the 1986 Act while international commercial arbitrations held in Bermuda will likely fall under the 1993 Act, unless the parties agree otherwise. We will focus here on international arbitrations falling under the 1993 Act. The 1993 Act enacts the UNCITRAL (United Nations Commission on International Trade Law) Model Law, which was drafted by a working group of representatives from over forty states with the intent to produce a uniform law governing arbitral procedure designed specifically for international commercial arbitration. It looked to place emphasis on party autonomy, restricting the interference by the courts to an absolute minimum. As such, the process for international arbitrations in Bermuda closely mirrors the process applied in other model law jurisdictions including Canada and certain U.S. states.
While the model law gives the parties freedom of choice with regard to the exact procedure to apply to the arbitration, it provides minimal rules which will apply in default of agreement by the parties. For example, the parties are free to determine the number of arbitrators, failing which three arbitrators shall constitute the tribunal. The parties are also free to determine the procedure for appointing the arbitrator or arbitrators, failing which the Model Law provides that each party shall choose one arbitrator and then the two arbitrators will choose the third. In the absence of specific agreement by the parties, the arbitral tribunal may, subject to the provisions of the Model 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.
Generally, the arbitration will be commenced by one of the parties demanding arbitration in writing, followed by some form of exchange of pleadings, document disclosure, the exchange of witness statements and expert reports, and a hearing.
Why Bermuda Arbitration may be Preferable to Arbitration Elsewhere
There are various reasons why a Bermuda business, or a foreign entity doing business in Bermuda, should consider agreeing to arbitrate in Bermuda, applying Bermuda procedure.
First, the process will usually be “front weighted” in that the parties are expected to particularize their claims at the outset. In contrast, in a U.S. style arbitration, the parties may provide only a brief outline of their respective positions at the outset, to be followed by long, detailed pre-hearing briefs incorporating all of the relevant facts obtained during document discovery and depositions. Discovery in a Bermuda arbitration is generally limited to documents (no depositions) and the scope will be limited to those documents relevant to the issues in dispute. After witness statements (and, in some cases, expert reports) are exchanged, the parties will submit written legal argument in advance of the hearing.
Second, if one or both of the parties is located in Bermuda, it may be convenient for the hearing to take place in Bermuda. Witnesses may be based in Bermuda or, if the witnesses and/or parties are in both the U.S. and the U.K., Bermuda may be the cheapest and/or most convenient middle ground.
Third, there is a growing pool of arbitrators in Bermuda who may be appointed for Bermuda arbitrations. One of the benefits of arbitration over litigation is that the parties are able to have their dispute heard by those with hands-on industry experience. If the dispute arises out of a contract involving Bermuda business and a Bermuda market, an arbitrator with Bermuda experience may be invaluable. To the extent that one or more of the arbitrators appointed are based elsewhere, there is rarely an issue when it comes to persuading them to come to Bermuda for hearings. Also, if one or more of the parties needs the assistance of the court, the Bermuda Commercial Court judges are very well equipped to deal with international commercial matters involving arbitration.
Fourth, the Bermuda bar is also very experienced in international commercial arbitration. An advantage of a Bermuda arbitration over a London arbitration is that the fused legal profession employed in Bermuda avoids the need for parties to engage both solicitors and barristers and therefore keeps the legal costs in check.
Fifth, the grounds for appealing an arbitration award in Bermuda are more limited than in the UK where an arbitration award may be appealed on a point of law in certain circumstances. While this may be seen as a disadvantage, most parties enjoy the finality that comes with arbitration and look to avoid the time and cost of proceeding through an appeal process.
Finally, the arbitration tribunal has the discretion to make an order in respect of costs and, following the English rather than the U.S., model, the unsuccessful party will normally be ordered to pay the successful party’s costs. This brings with it a valuable negotiating tool as both parties are more sensitive to each other’s costs during the course of the arbitration and may be brought to the negotiating table more quickly if material facts emerge in discovery that are harmful to their case.
This is only a very brief overview of some of the many factors which should be addressed when considering Bermuda arbitration. If you would like more information, please feel free to contact the writer.
Susannah J. Wakefield
Attride-Stirling & Woloniecki
Email: susie.wakefield@aswlaw.com
Phone: +1 441 294 0134.
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