Arbitration and Basic Rights: Movement from Contractual Theory to Jurisdictional Theory

A number of countries have experienced significant developments in their general opinion on the nature of arbitration. There are three to four basic theories which have been established in the course of time, namely (i) the contractual theory, (ii) the jurisdictional theory, (iii) the hybrid (mixed) theory, and (iv) the theory which characterizes the essence of arbitration as a method of dispute resolution sui generis. The description of arbitration from the perspective of public authorities enables us to answer a number of questions concerning the jurisdiction and authority of arbitrators to hear and resolve cases. Individual countries as well as the entire international community have come to realize that litigation (court proceedings) is often unable to provide effective legal protection. This can be illustrated in the example of Germany. The case law of many countries offers certain guidelines for the definition of the nature of arbitration. Modern trends in the adjudicatory nature of arbitration are evidenced by developments in many developed countries. For instance, in Belgium on 8 August 2005 a report was published stating that a Belgian arbitral tribunal is entitled to examine the compliance of a law with the Belgian Constitution. The nature of arbitration in relation to litigation in courts has also been extensively analyzed in many court judgments in Germany. A landmark decision was adopted by the Italian Constitutional Court, Case No. 376 of 28 November 2001. The European Court of Human Rights (ECtHR) is regularly confronted with and renders decisions on arbitration. The ECtHR commonly deals with issues such as whether and to what extent Article 6(1) of the ECHR. The right to enter into an arbitration agreement and thereby waive the right to judicial trial is primarily based on the freedom to express one’s will. We must strictly distinguish between the right to judicial protection and the right to legal protection. As concerns the requirements of a fair trial in arbitration, it is appropriate to refer to the voluminous and historically conditioned case law of certain selected countries. Special attention should be paid to Austria. The author actually considers Austrian law as one of the most friendly system in respect to Arbitration. The nature of arbitration as a method of protecting rights and legitimate interests is subject to varying interpretation, depending on the concept of arbitration within the framework of the constitutional system of each individual state. The opinions on this issue in the Czech Republic have also undergone certain developments, while moving from a pure contractual theory to jurisdictional theory pursuant to the decision of the Czech Constitutional Court o March 8th, 2011. The contractual theory is based on the presumption that the jurisdiction of arbitrators to hear and resolve a dispute rests solely on the contract between the parties. The author does not agree with the contractual theory. If we accepted the status of arbitrator as a quasi representative of a party, he or she would in no case be an impartial person. The jurisdictional theory is, conversely, based on the presumption that arbitration means adversary proceedings and arbitrators exercise their decision-making power, i.e. resolve the dispute, by finding the law on the basis of its jurisdiction delegated by the state, not the agreement of the parties. This doctrine originated before the Second World War, and its principal idea is that the state has the power to supervise and regulate, at its discretion, any and all arbitrations conducted within its jurisdiction, e.g. that the primary authority rests with the state whose legal rules (legislative power) enable the existence of arbitration within its jurisdiction as an alternative to litigation. The decisive procedural effects are therefore always derived from the law of the state in whose jurisdiction the arbitration takes place. Although this doctrine recognizes that the mechanism of arbitration and the possibility of using it for a particular dispute originates in an agreement of the parties, the decisive factor is the legal system of the given country in whose territory the arbitration takes place. This legal system allows the proceedings to take place, the arbitrators to be appointed, the arbitration agreement to have effects, the arbitral award to be enforceable, etc. The effects of arbitration, primarily the enforceability of the arbitral award, are therefore connected with a particular legal system, because they are not established only by the agreement of the parties. This doctrine stipulates that arbitration is an adversary proceeding and that arbitrators exercise their duties based on the power delegated by the state, not by a “mere” agreement of the parties. As concerns the nature of the duties performed by arbitrators in arbitration and the nature of the arbitral award as an authoritative decision, the jurisdictional theory is more acceptable, because the legal force and effect of the decision is not exclusively established by the agreement of the parties. The agreement of the parties itself can only suspend the constitutional right to assert one’s rights before an impartial and independent court, although only if the state allows such possibility. This suspension therefore constitutes a legal delegation of the state’s power, and the form of exercising that power to a private-law entity is contingent on the existence of a valid arbitration agreement. Jurisdictional power is one of the fundamental powers of the state and attributes of state power. The state therefore reserves in this case, as well as in other cases, the possibility to verify whether the conditions for this delegation were fulfilled, i.e. whether the parties entered into a valid arbitration agreement. In the case of arbitration, the state’s supervisory power primarily consists in the termination of the proceedings following a jurisdictional objection where the court is ex officio obliged to examine the existence and validity of the arbitration agreement (including the arbitrability of the dispute, which is a condition for the valid conclusion of the arbitration agreement); in other words, the court may not terminate the proceedings if, for instance, both (or all) parties declared the arbitration agreement valid but the court assessed the agreement as invalid. The court therefore examines whether the conditions for the delegation of this important power of the state and the form of exercising that power were fulfilled, both in the case of an jurisdictional objection and in the case of a motion to annul the arbitral award. The state waives its power if the dispute is arbitrable and if the parties entered into a valid arbitration agreement; in such case, the state also delegates its power to a private-law entity, because the parties have the possibility to influence the choice of the person(s) who will resolve the dispute. Consequently, it is a different type of exercise of civil judicial power. This means that arbitration does not breach the right to legal protection, because the arbitrators are appointed subject to the conditions stipulated by law and can be considered “lawful judges”. A “pure” contractual theory can succeed only if one can rely on the fact that the parties will indeed fulfill the terms of their agreements and that the principle of pacta sunt servanda will not only be considered a fundamental legal axiom but will also be honored in practice without any authoritative intervention. This is a very desirable objective, but bordering on a chimera in practice.