Written By Lincoln Caylor
Third Parties
The hallmark of arbitration is that it is by agreement. To bring a claim, a party must have an arbitration agreement in place with the respondent. It follows from the consensual nature of arbitration that an arbitral tribunal has no jurisdiction over third parties who are strangers to the arbitration agreement, and this limit on an arbitration tribunal's jurisdiction can have serious consequences in a fraud context. For example, although an arbitral tribunal can order freezing orders, interim injunctions, etc., these orders are only enforceable against the parties to the arbitration. A claimant could seek a freezing or Mareva order from the arbitral tribunal to prevent a respondent from dissipating assets, but that order would not be enforceable against third parties like the respondent's bank.[1] To bind third parties and better prevent dissipation, a claimant must go before the courts and obtain a judicial freezing order.
A party may be able to go directly to court and request an urgent freezing order if necessary. However, where urgency is not made out, the party might first have to obtain permission from the arbitral tribunal before seeking a freezing injunction in court. Particularly if the claimant waits until after the arbitral process begins before seeking to freeze the respondent's assets, it could need permission from the tribunal, which would tip off the respondent and risk dissipation. Claimants should therefore front-load the work where there is urgency, and obtain judicial freezing injunctions during in the period before a tribunal is constituted.
Pre-hearing Discovery Rules
Another important feature of arbitration is the more limited pre-hearing disclosure and discovery rules. Particularly in fraud claims, inadequate or unreliable disclosure can be a significant problem when proceeding by way of arbitration. Procedurally, although an arbitral tribunal has broad powers to conduct the arbitration "in such a manner as it considers appropriate",[2] party disclosure is often simplified compared to the regimented procedural rules of the courts. In an international arbitration, both the claimant and the respondent should be aware that they may have to prove their case solely with documents or testimony within their own possession or under their control.
Even where more comprehensive disclosure is ordered by an arbitral tribunal, there is no prescribed sanction for failing to follow arbitral procedural orders, such as striking a defence or dismissing a claim which would be available in court. Obtaining evidence from third parties can also cause difficulties, since in many jurisdictions there is no express power for arbitral tribunals to issue letters of request directly to a foreign court or a person outside the jurisdiction where the arbitration is held. Parties should therefore be prepared to go to court and seek assistance where they require evidence or a witness that is located outside the arbitral tribunal's jurisdiction.
Limited Grounds for Judicial Appeal of Awards
One of the main purposes of arbitration is to avoid recourse to the courts, particularly in the international context where parties may not be keen to have their dispute decided by foreign courts. Court involvement is purposefully limited “ it follows that the grounds for judicial appeal of an arbitral award are also limited. An international arbitral award cannot generally be appealed on either errors of facts or errors of law; instead, a party must bring an application for judicial review or an application to set the award aside on certain limited grounds (including, for example, where the award was obtained by fraud).
Where one party does not comply with an arbitral award, the other party can seek a court judgment to enforce it. In limited circumstances, a foreign award can be enforced even if it is set aside in the jurisdiction where it was made (i.e., where the party can show the award was set aside by a partial, unfair court in the foreign jurisdiction). Enforcement of a foreign arbitral award is usually more straightforward than enforcing a foreign judgment, and can be done by way of application rather than through an action. Once sanctioned by a domestic court, an arbitral award can be enforced in the same way as a judgment.
Resolution or Vindication?
Arbitration can provide a means of resolving disputes that may be less public, less expensive, more efficient than litigation, and which often provide more flexibility to the parties. However, arbitration also presents unique challenges stemming from its private nature, including the tribunal's inability to bind third parties, enforce interlocutory orders, and compel evidence from outside its jurisdiction. A fraud claimant should also remember that the arbitrators are paid for by the parties. Likewise if justice in the form of vindication through the legal process is the goal, arbitration may be a less attractive option. An arbitrator may be less willing than a judge to make hard findings that a party's evidence is not credible, or that a party is a fraudster.
Bennett Jones