party autonomy

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Philippine Institute of Arbitrators

COMPREHENDING PARTY

AUTONOMY IN THE RESOLUTION OF PRIVATE DISPUTES

by

MARIO E. VALDERRAMA AB, LLB, FCIARb, FHKIArb, FPIArbCIArb Approved Tutor

CIAC Accredited Arbitrator

Resident Representative to the Regional Sub-Committee

The Chartered Institute of Arbitrators

East Asia Branch

Contact Details

Tel No 367 4001; Telefax 362 1867

Mobile 0917 4114 594

E-mail <[email protected]>

CONCEPT AND NATURE

R.A. 9285 defined it as “the freedom of the party (should be parties) to make their own arrangements to resolve their disputes” (see Sec. 2).

It is contractual by nature.

INHERENT OR GRANTED RIGHT?

It is an inherent right. Parties entered into contracts even before governments and courts came into being.

Accordingly, the law affirmed, rather than granted, the right or freedom.

BASIS

The basis is the underlying concept behind the freedom to contract: a party who reached the age of majority is an adult, and is presumed to have sufficient discretion to make informed decisions.

He may, therefore, create legal relations by contract.

In the same manner, he also has the freedom to make his own arrangements in resolving his private disputes.

TEST OF VALIDITY OF DISPUTE RESOLUTION CLAUSES Again, contractual.

It is valid if valid as a contract.

Note: Most of the grounds to challenge the jurisdiction of an arbitral tribunal and many of the grounds to challenge an award are grounds to attack a contract or based on contractual precepts. The other grounds are based on the judicial constituent element of an arbitration.

THE PROPER APPROACH: Clearing-Up the Confusion

The proper approach is to apply contractual precepts rather than be “legalistic”.

The wrong approach will result to the wrong conclusions.

THE WRONG APPROACH: EXAMPLE

On the availability of a merits review of arbitral awards (in agreement based arbitration), for example, one will conclude that it is available if he were to look at the law first and the stipulation thereafter.

THE CORRECT APPROACH The correct approach is to look at the contract

first, and thereafter determine if the contract contravened mandatory provisions of law.

In agreement based arbitration, our example, the contract is to abide by the decision of the arbitral tribunal. The conclusion, therefore, is that a merits review is not available.

THE CORRECT APPROACH Principle of Finality of Award is Contractual

“x x x arbitrators are judges chosen by the parties to decide the matters submitted to . them, finally and without appeal x x x” (Burchell v Marsh, 58 U.S.. 344, 15 L.Ed. 96 (1854).

“The essence of the arbitration process is that an arbitral award shall put the dispute to rest x x x. Arbitral finality is a core component of the parties’ agreement to submit to arbitration. Thus, an arbitration decision is final and conclusive because the parties have agreed that it be so x x x.” (Stasz v Schwab).

THE APPLICABLE RULES

The applicable rules are the contractual precepts. Our interest, as a general proposition, should be on:

The age of consent, rule on capacity to act and the circumstances modifying/limiting capacity to act

The principle of the autonomy of contracts The rule that contractual stipulations are the law

between the parties The general limitation on contractual autonomy The other limitations on contractual autonomy

CORRELATIONS

Age of consent: formerly 21, but reduced to 18 by R.A. 6809.

Capacity to act and circumstances limiting capacity to act – see NCC Arts. 37 and 39. Note the rules involving corporations, government entities, the rule on agency. Note also that capacities are governed by the national/domiciliary law of the party involved.

CORRELATIONS

The autonomy of contracts – contracting parties may freely stipulate, and as a general proposition their stipulation is the law between them. (see NCC Arts. 1159 and 1306).

CORRELATIONS

Just like contractual autonomy, party autonomy in the resolution of disputes is also not absolute.

Correlation: The limits of contractual autonomy – The stipulation must not be contrary to law, morals, good customs, public order, and public policy (See NCC Art. 1306).

Limitations on Party Autonomy As a general proposition, the limitation refers to

matters that are not subject to contract, e.g. most criminal (but not civil) liability, matrimonial disputes other than those involving property and custody of children, civil status of persons, the jurisdiction of courts, and future legitime (see R.A. No. 9285 Sec. 6).

In certain instances, it may arise from the public policy to protect classes with “weak” bargaining positions, e.g., the labor contracts exception if covered by our Labor Code (ibid).

Limitations on Party Autonomy Consumer arbitration under the Consumers Act

also limits party autonomy as consumers are classes with “weak” bargaining positions. This public policy may also prevent arbitration of disputes falling under the HLURB and DAR jurisdictions.

The limitation may also arise from public policy declarations, such as in CIAC arbitration.

SIDELIGHT: Public Policy in Creating the CIAC

“There is hereby declared to be the policy of the State to encourage the early and expeditious settlement of disputes in the Philippine Construction Industry” (E.O. 1008, Sec. 2, Declaration of Policy)

CONTRACTUAL PRECEPTS: DYNAMICS Agreements cannot contravene mandatory

provisions of law. The stipulation between the parties is the law

between them as long as the stipulation does not contravene any mandatory provision of law.

Many provisions in contract law are “default” provisions. They apply in the absence or deficiency of agreement.

CONTRACTUAL PRECEPTS: DYNAMICS NOTE: There are two types of mandatory

provisions in contract law.

One type renders the stipulation void but does not become part of the contract between the parties. Example: the not less than 1 yr. limitation re prescriptive period applicable to insurance contracts.

The other type is part of the contract between the parties. Example: the provision granting CIAC exclusive and primary jurisdiction over domestic construction disputes if an arbitration clause were present. (But see China Chiang Jiang).

CONTRACTUAL PRECEPTS: DYNAMICS NOTE: In local text books, distinctions are

drawn between “mandatory” and “directory” provisions.

“Directory” provisions have a broader concept than “default” provisions.

The concept of “default” provisions is included within the concept of “directory” provisions.

CONTRACTUAL PRECEPTS: DYNAMICS

In agreement based arbitrations, UNCITRAL Model Law 1985 Art. 19.2 introduced the concept of arbitrator discretion.

Note that arbitrator discretion is available only if (1) its exercise will not contravene any mandatory provision of law; (2) there is no agreement on the matter; and (3) there is no “default” provision of law.

CONTRACTUAL PRECEPTS: DYNAMICS

UNCITRAL Model Law 1985 Art. 19.2:

Failing such agreement (re agreement of the parties as to the procedure), the arbitral tribunal may, subject to the provisions of this Law, conduct the arbitration in such manner as it considers appropriate. xxx

CONTRACTUAL PRECEPTS: DYNAMICS Order of Preference in Agreement Based

Arbitrations:

Mandatory provisions

Agreement

Default provisions

Arbitrator discretion

SIDELIGHT: HOW INSTITUTIONS PRESERVE PARTY AUTONOMY Mandatory provisions in arbitral

institutions are few and far between. In ICC Rules the provisions concerning the fees and those involving the award, which should be reasoned, are mandatory.

UNCITRAL Rules 1976 has a mandatory provisions clause in its Section I Article 1.2.

SIDELIGHT: HOW INSTITUTIONS PRESERVE PARTY AUTONOMY UNCITRAL Rules 1976 Section I Article

1.2.

These Rules shall govern the arbitration except that where any of these Rules is in conflict with a provision of law applicable to the arbitration from which the parties cannot derogate, that provision shall prevail.

SIDELIGHT: HOW INSTITUTIONS PRESERVE PARTY AUTONOMY Arbitral institutions make use of default

provisions – those with the phrases “unless otherwise agreed upon by the parties”, “subject to the agreement between the parties”, and similar words.

ICC Rules has several default provisions. UNCITRAL Rules 1976 has a general default provisions clause in its Sec. I Art. 1.1. (also called opt-out provision).

SIDELIGHT: HOW INSTITUTIONS PRESERVE PARTY AUTONOMY UNCITRAL Rules 1976 Sec. I Art. 1.1.

Where the parties to a contract have agreed in writing that disputes in relation to that contract shall be referred to arbitration under the UNCITRAL Arbitration Rules, then such disputes shall be settled in accordance with these Rules subject to such modification as the parties may agree in writing.

DYNAMICS: ILLUSTRATION

In their arbitration agreement, the parties agreed that one of them can appoint two out of the three arbitrators. Valid?

Answer: No. This contravenes the principle of equality between the parties, a mandatory rule – see MAL Art. 18, also NCC Art. 2045. (Magellan Capital Management Corporation vs. Zosa, 355 SCRA 157 [2001])


In an arbitration, the parties cannot agree on whether or not the award shall be a reasoned award. May the arbitrator in the exercise of his discretion insist that the award shall be without reason?

Answer: No. The default legal provision is that the award should be with reasons. – see MAL Art. 31.2; also R.A. 9285 Sec. 33.


In an ICC arbitration, the parties agreed that the award shall be without reason. Valid?

Answer: No. Under ICC Rules the rule that the award should be with reasons is mandatory. – see ICC Rule Art. 25.2.

Steps in Exercising Party Autonomy

Choose the mode of dispute resolution

Agree on the rules and procedures that will govern the chosen mode.

FIRST STEP

The first step involves making a choice from among the different modes of dispute resolution.

Note that the choices involve varying degrees of party control, from almost unlimited to almost none.

Note also that, in certain instances, the parties have limited choices or no choice at all.

FIRST STEP: The Dispute Resolution Spectrum Non-Jurisdictional and ADR

Avoidance, violence, chance Negotiation Conciliation and Mediation

Other ADR forms Special Mention: Adjudication

Jurisdictional Arbitration

Statutory Arbitration Litigation

SECOND STEP

The second step is more complicated.

Sample Clause:

“Any dispute arising out of or in relation to this contract shall first be referred to mediation before any of the parties could go to court (or to arbitration, as the case maybe).”

SAMPLE CLAUSE: MEDIATION

The clause left many unanswered questions that may become bones of contention once a dispute arises. It could in fact be used by a recalcitrant to delay the resolution of the dispute.

It is actually worse in Phl because of the definition of court referred mediation in .R.A. 9285 Sec. 3.m.

SAMPLE CLAUSE: ARBITRATION

Is the following clause in an international contract workable?

“Dispute resolution: arbitration in the Philippines.”

SAMPLE CLAUSE: ARBITRATION

The clause also left several unanswered questions.

The difference is that, this time, our arbitration law provided default provisions.

Role of Law Proposing to Promote Party Autonomy The “default” provisions are the rules

that will apply in the absence or in case of deficiency of agreement between the parties. They – the default provisions – “fill-in” the blanks to make the choice of the parties workable.

Role of the Law

Examples of “default” provisions:

English as the default language in international arbitration; English or Filipino in domestic arbitration; in both cases also giving the arbitral tribunal some leeway by providing it with discretion to designate the language of arbitration (R.A. 9285, Sec. 31 and 33).

Role of the Law


Metro Manila as the default place of arbitration but giving the arbitral tribunal some leeway by providing it with discretion to designate the place (R.A. 9285 Secs. 30 and 33).

Role of the Law


The number of arbitrators (3); the manner of appointment (each party appoints one, and the appointed arbitrators to appoint the third); the institution of the appointing authority who will appoint the arbitrator for a recalcitrant or the third or sole arbitrator in default of agreement (Model Law Arts. 10 and 11).

Role of the Law


Awards in international arbitrations are law based (Model Law Art. 33.1); R.A. 876 implies that awards in domestic arbitrations are equity based.

Role of the Law

And thus, the unanswered questions in the sample clause were answered by the default provisions of law.

Role of the Law

Role of a law proposing to promote party autonomy

To allow viable choices

To provide the rules, called “default” rules, that will apply should the agreement be deficient in the important categories of choice so as to make the choice of the parties workable.

REQUIREMENT FOR DEFAULT RULE/PROCEDURE

The default rule or procedure must be viable.


Is the following arbitration clause in a domestic contract pathological?

“Any dispute arising out of or in connection with this contract shall be referred to arbitration.”


R.A. 876 Sec. 21. Fees of arbitration. – The fees of the arbitrators shall be fifty pesos per day unless the parties agree otherwise in writing prior to the arbitration.

COUNTERPART OF PARTY AUTONOMY

“Freedom seldom comes without responsibility.”

PARTY AUTONOMY AND THE PROBLEMS OF THE JUDICIARY Party autonomy has more to do with

rights of choice, less with the problems of the judiciary. It is not intended to solve the problems of the judiciary.

“Private disputes between private parties ought to be resolved through private means.”

PARTY AUTONOMY AND THE PROBLEMS OF THE JUDICIARY The connection is indirect and consequential,

rather than direct.

“To the extent that parties would avail of dispute resolution methods other than litigation in resolving their disputes, to that extent also will courts have time for their more proper function, which is to resolve disputes involving public policy and interest.”

BIBLIOGRAPHY

CIArb Teaching Manual (culled from various sources)

PIArb Teaching Manual (culled from various sources)

R.A. 876; UNCITRAL Model Law 1985; UNCITRAL RULES 1976; ICC Rules; R.A. 9285; New Civil Code; E.O. 1008

WANT TO KNOW MORE?

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Philippine Institute of Arbitrators

c/o Atty. Mario E. Valderrama

Tel. No. (632) 367 4001

Telefax (632) 362 1867

E-mail: [email protected]

party autonomy

Documents

contractualx x x arbitrators

wrong approach

appeal x x x burchell

proper approach

parties agreement

contractual precepts

arbitration decision

arbitral finality