What is Arbitration? A Beginner’s Guide to Understanding Dispute Resolution

Arbitration is a well-established method of resolving disputes outside the traditional courtroom. Arbitration involves an impartial third party, known as an arbitrator, who listens to both sides of a dispute and makes a binding decision. This alternative dispute resolution mechanism is particularly valued for its efficiency, confidentiality, and flexibility. 

From commercial disagreements in business to labour relations, arbitration offers a swift and fair way to settle conflicts, ensuring that parties can move forward without the prolonged stress and expense of litigation. In this beginner’s guide, we explore the concept of arbitration and its significance in various sectors. 

What is Arbitration?

Arbitration is a form of alternative dispute resolution that involves resolving disputes outside of the court system. It is a widely accepted method for resolving commercial disputes. 

Most commercial agreements have an arbitration clause, where the parties agree to submit their disputes to one or more arbitrators. An arbitrator is an impartial and qualified third party appointed by or on behalf of the parties. Arbitration Awards are legally binding as court decisions. 

How Arbitration is Different from Litigation and Mediation?

Arbitration is different from other forms of dispute resolution, such as mediation and litigation. In mediation, a neutral third party (known as a Mediator) is appointed to assist the parties in the process of negotiation. 

A Mediator is a skilled person who helps the parties reach a consensus on their disputes. However, unlike arbitration, a Mediator’s decision is not binding on the parties.

In litigation, disputes are settled in court, where both parties present their case before a Judge and follow the standard court procedure. Arbitration, on the other hand, is a private process that offers more flexibility and also enables the parties to select arbitrators possessing the desired knowledge and experience. 

Arbitrators' Role and How They're Selected

The role of an arbitrator is to make a binding decision on the dispute and ensure that the arbitration proceedings are conducted in a just, fair, and effective manner. In practice, disputes are decided by a sole arbitrator or a panel of three arbitrators. Depending on the terms of the arbitration agreement, arbitrators may be selected either by the parties themselves or by an arbitral institution.

In most cases, the number of arbitrators and the procedure for selection are mentioned in the arbitration agreement itself. In the case of a sole arbitrator, the parties try to reach a consensus regarding who should be appointed. In the case of three arbitrators, each party typically selects one arbitrator, and the two party-appointed arbitrators choose the chairman of the Arbitral Tribunal.

The role of an arbitrator is to make a binding decision on the dispute and ensure that the arbitration proceedings are conducted in a just, fair, and effective manner.

Arbitration Agreement

Arbitration proceedings cannot take place without an arbitration agreement (or an arbitration clause in the agreement). For arbitration proceedings to take place, parties are required to specifically choose arbitration in the underlying agreement as the method of dispute resolution. 

The arbitration agreement or clause should be drafted to clearly reflect the parties’ intention to settle disputes through arbitration. 

The arbitration agreement/clause should include essential elements such as:

• Number of arbitrators and the procedure for their appointment, 
• Language in which proceedings will be conducted, 
• Applicable arbitration rules (such as ICC, LCIA), 
• Seat of arbitration, 
• Geographical location where the proceedings will be conducted.

The arbitration agreement or clause should be drafted as such that it clearly reflects the parties' intention to settle disputes through arbitration. 

Arbitration Proceedings: Basic Steps Involved in the Arbitration Process

Arbitration proceedings typically involve the following steps (may vary from case to case):

Step 1. Request for Arbitration

Arbitration proceedings commence when the Claimant sends a notice of arbitration to the Respondent or submits a request for arbitration to the arbitration institution (depending on whether the arbitration is ad hoc or institutional). 

The Notice/Request includes details of the dispute giving rise to the claim and the relief sought. In the case of three arbitrators, the Claimant may also nominate its arbitrator in the Notice/Request.

Step 2. Answer

After the Notice/Request is served, the Respondent provides a Reply/Answer, which includes the Respondent’s position and counterclaims (if any). In case of three arbitrators, the Respondent may nominate its arbitrator in the Reply/Answer.

Step 3. Constitution of Tribunal

In the case of three arbitrators, the two party-appointed arbitrators select the chairman of the Arbitral Tribunal. In the case of a sole arbitrator, the parties try to reach a consensus regarding who should be appointed.

Step 4. Preliminary Hearing

Once the Arbitral Tribunal is constituted, a hearing is convened with the Parties to discuss the procedural issues. After consulting the parties, the Tribunal draws up a provisional timetable for the proceedings.

Step 5. Exchange of Pleadings and Fact Witness Statements

The parties exchange pleadings, which include a Statement of Claim, Statement of Defence, Statement of Reply (i.e., Claimant’s Reply and Defence to Counterclaim), and Statement of Rejoinder (i.e., Respondent’s Reply to the Claimant’s Defence to Counterclaim).

Step 6. Discovery stage

In the document discovery phase, the parties may request each other to produce the documents which they think will be relevant to support their respective cases.

Step 7. Exchange of Fact Witness Statements 

Submission of written witness statements is also a common practice in arbitration.

Step 8. Exchange of Expert Reports

Arbitration enables the parties to appoint independent technical experts with specialist knowledge to conduct in-depth dispute analysis. These experts prepare written submissions known as Expert Reports.

Step 9. Exchange of opening submissions

Parties may exchange written opening submissions before the hearing, which include a summary of their position, including facts, issues, evidence, and arguments.

Step 10. Hearing

In most cases, an oral hearing takes place, during which the parties present their respective cases. The hearing may also involve witness examination and expert examination. It may take place in person or virtually and usually lasts 4-5 days.

Step 11. Award

The Tribunal usually issues the Arbitration Award (i.e., the final decision on the disputes) within 2-3 months of the hearing’s conclusion. 

Types of Arbitration

Ad Hoc Arbitration Vs. Institutional Arbitration

Arbitration can either be ad hoc or institutional, depending on the needs of the parties, as each comes with its own set of strengths and weaknesses. Ad hoc arbitration is not administered by any arbitration institution, and the parties have to choose how the proceedings will be conducted. 

On the other hand, institutional arbitration is administered by an arbitration institution (such as ICC or LCIA), and the institution oversees the whole proceedings as per pre-established rules and procedures.

Ad hoc arbitration is more flexible, as the parties have more control over the process, and less expensive because the institution does not charge an administration fee. 

Institutional arbitration offers the benefits of a streamlined procedure and administrative assistance. It is more suitable for large, complex disputes, whereas ad hoc arbitration is more suitable for smaller claims. 

International Arbitration and Domestic Arbitration

International arbitration typically involves parties from different jurisdictions or where the subject matter of dispute relates to more than one country. In contrast, domestic arbitration deals with disputes within a country’s borders. 

Benefits of Arbitration

1. Speed and Flexibility

Arbitration is a preferred alternative to traditional court proceedings for several reasons. First, arbitration proceedings are private and confidential. Second, arbitration involves a thorough analysis of complex disputes. 

Unlike litigation, arbitration enables the parties to select arbitrators with extensive knowledge and experience in the relevant industry. Parties can also appoint technical experts with specialist knowledge to carry out in-depth analyses of technical issues. 

2. Confidentiality

Confidentiality is an important feature of arbitration and is one of the main reasons why parties choose it. Arbitration is considered a private dispute resolution process, and the parties, arbitrators, and the arbitration institution are required to maintain confidentiality with regard to the proceedings, evidence, and award (unless the parties agree otherwise). 

3. Finality of Arbitration Decisions (limited scope for appeal)

Arbitration awards are generally final and binding, which is considered one of the main advantages of arbitration. However, arbitration awards may be challenged on limited grounds, such as the invalidity of the arbitration agreement, lack of jurisdiction, and procedural irregularities. 

Challenges in Arbitration: Cost Factor

Arbitration costs include various components such as arbitrators’ fees and expenses, the administrative fee of the arbitration institution, travel and accommodation costs, hearing costs, documentation costs, and the fees and expenses of the legal representatives, experts, and witnesses. 

Arbitration costs can vary depending on several factors, such as the complexity of the dispute, the amount involved, the fee of the Arbitration Institution (if applicable), etc. In the case of high-stakes complex disputes, arbitration costs can be significantly high. 

Arbitration in Different Industries

Some industries, such as the energy and construction, financial services, and technology sectors, are more inclined towards arbitration as a method of dispute resolution. Disputes related to these sectors are often complicated and peculiar, requiring arbitrators and experts with specialist knowledge and experience. 

Understanding Arbitration in the UAE Context

The UAE Arbitration Law, i.e. Federal Law No. 6 of 2018, was issued in May 2018 and was recently amended by Federal Law No. 15 of 2023. Important provisions of the Law are discussed below:

• The UAE Arbitration Law applies to any arbitration carried out in the UAE (unless both parties agree to apply another arbitration law). The Law also applies to any International Commercial Arbitration carried out outside the UAE if the parties agree that it should apply.
• Article 7 of the Law states that an arbitration agreement must be in writing, except in certain specified cases, such as when the agreement is contained in an exchange of communications, e.g., email correspondence.
• Article 10 states that the arbitrator is not required to be of a particular gender or nationality, but the arbitrator should not have any direct relationship with any of the parties that would prejudice his impartiality, integrity or independence.
• Article 19 states that the Tribunal has the power to rule on its own jurisdiction and may do so either as a preliminary question or in a final arbitral award on the dispute’s merits.
• Article 21 grants the Tribunal the power to issue interim measures upon request by a party or on their own initiative whenever they deem it necessary. Interim measures can include an order to preserve evidence that may be material to the resolution of the dispute, taking necessary measures to preserve the goods that constitute a part of the dispute’s subject matter, preserving assets and property of which a subsequent award may be enforced, or maintaining the status quo.