IA Fundamentals丨3. Hard Law and Soft Law in IA

Editor's Note: As enterprises are increasingly engaged in international trade and investment, international arbitration is recognized as the preferred option in the face of cross-border disputes. However, international arbitration, which differs from domestic arbitration with complex procedures, often put parties unfamiliar with its rules in an inherent disadvantage. King & Wood Mallesons' international arbitration teams are located in Beijing, Shanghai, Shenzhen, Hong Kong Special Administrative Region of China, Sydney, Melbourne, Perth, London, Madrid, Brussels, Dubai, Tokyo, Sydney, New York and Silicon Valley. KWM International Arbitration Fundamentals is co-hosted by King & Wood Mallesons’ China and Australia international arbitration teams. The purpose of the program is to share knowledge and experience on international arbitration, including international commercial arbitration and investment arbitration, from the perspective of expert lawyers. Hopefully it will benefit parties engaged in international arbitration. Please comment with any suggestions or ideas.

I. Functions of International Arbitration Legal System

As we mentioned in the first article of the "Arbitration Fundamentals" series, historically, the arbitration process relies entirely on the parties' autonomy in order to be applicable at the outset of the agreement. The principle of autonomy is a fundamental feature that distinguishes international arbitration from court litigation.

Most modern states have their own arbitration laws, while also having a relatively high tolerance and support for international arbitration awards. This is because, on the one hand, it is necessary to regulate the arbitration process through domestic laws and regulations, and, on the other hand, the validity of arbitration agreements and the enforceability of arbitration awards needs to be protected to maintain the autonomy and freedom of the contracting parties which are essential to the development of the market economy.

However, domestic arbitration laws are generally only effective within the local sovereign borders. To ensure effectiveness and enforceability of cross-border arbitration on an international scale, an international legal system is also needed to coordinate and navigate the domestic arbitration law systems of various countries, and promote international arbitration agreements and arbitral awards to be recognized and enforced with uniform standards worldwide. All this to ensure the effectiveness of international arbitration as a method of dispute resolution.

This article focuses on international "hard law" and "soft law" in international arbitration, and explains the role of domestic arbitration laws of various countries in the international arbitration legal system.

II. How to Differentiate "Hard law" and "Soft law"

The international laws regulating international arbitration can be divided into "hard law" and "soft law" based on two common standards:

1. Legal binding force

In general, the distinction between "hard law" and "soft law" is the ‘law’s’ legal binding force.

"Hard law" of international arbitration is legally binding, and can be applied before a court when the validity of international arbitration agreements and arbitral awards are in dispute.

Conversely, "soft law" has no legal binding force and only provides a reference for amendment of domestic arbitration laws, development of arbitration procedure rules by arbitration institutions and specific procedural rules, which the arbitral tribunal and parties choose to apply to the selected procedure.

2. Regulators and functions

Apart from the above distinctions, some scholars have proposed to differentiate "hard law" and "soft law" based on regulators and functions.[1]

"Hard law"supervises international arbitration processes from the outside. It focuses on the perspective of judges and legislators and the main function is to provide a framework for the recognition and enforcement of international arbitration agreement and arbitration agreements.

"Soft law" provides guidance to international arbitration processes from the inside. It takes the prospective of the arbitration tribunal and parties with the main function to provide a benchmark for the best practice of international arbitration.

3. What are included?

The two standards are quite consistent in most cases: international treaties and international conventions on international arbitration are "hard laws", because a signatory party is obliged to abide by the rules once they take effect in the country; the exemplary arbitration procedure rules announced by various international organizations and international arbitration institutions as well as international arbitration practice are for reference only and have no legal binding force, and therefore are "soft laws".

The only controversy is on the model arbitration law, mainly referring to the UNCITRAL Model Law on International Commercial Arbitration (Model Law) introduced by the United Nations Commission on International Trade Law (UNCITRAL). According to the standard of legal binding force, the Model Law would be a "soft law" as it is not legally binding unless adopted through local legislative procedures and becomes part of the domestic arbitration law system. However, based on the second standard, the Model Law aims to provide a reference for member states to develop arbitration laws of their own, which makes it a "hard law".

In addition, more and more countries and regions have revised their own arbitration laws based on the Model Law, which means the Model Law has de facto legal effect in practice to a considerable extent.

Therefore, the Model Law stands somewhere between "hard” and "soft" law. In this article, we will consider the Model Law as a "soft law" for convenience.

III. "Hard law" in International Arbitration

As foreshadowed in the preceding sections, "hard law" primarily includes international protocols and conventions with regards to recognition and enforcement of arbitral awards.

（1）Geneva Protocol and Geneva Convention

The "Geneva Protocol", signed in 1923, is the first truly modern international convention on international arbitration. It was initiated by the International Chamber of Commerce ("ICC"), and was drafted by the League of Nations (the predecessor of the United Nations), which focused on two objectives: firstly, to ensure that arbitration agreements could be enforced globally, which can be achieved by requiring domestic courts to refuse to hear disputes that fall within the jurisdiction of valid arbitration agreements; and secondly, to ensure that arbitration awards awarded pursuant to valid arbitration agreements are enforced at the seat of arbitration.

The "Geneva Convention", signed in 1927, was intended to further expand the scope of arbitration awards that were enforceable as stipulated in the Geneva Protocol. The Geneva Protocol only requires contracting parties to enforce awards made within their own borders, while the Geneva Convention requires contracting parties to recognize and enforce awards awarded within the territory of any contracting party. The Geneva Convention also establishes the basic principle that arbitration must not violate the public policies and laws of the country that enforces the award.

The Geneva Protocol and Geneva Convention were signed between the two world wars. There were only more than 30 signatories, mostly of which were traditional European trading countries. Therefore, the agreements' influence failed to reach expectation in terms of timing and scope. However, their spirits of encouraging the recognition and enforcement of international arbitral awards remains.

（2）New York Convention

The "New York Convention" is the abbreviation of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed in 1958. It conforms with the two objectives of the Geneva Protocol, namely ensuring that international arbitration agreements and international arbitration awards are recognized and enforced in the global context. With regards to the enforcement of international arbitration agreements, the New York Convention adopts similar approach as the Geneva Protocol: if one party to an arbitration agreement files a lawsuit over a dispute which falls within the scope of the arbitration agreement, the court of the contracting States should refuse to hear unless the other party to the arbitration agreement agrees with the jurisdiction of that court. Further, the New York Convention simplifies and clarifies the procedural rules and review standards of the recognition and enforcement of international arbitral awards.

In order to attract more countries and regions to join the New York Convention, the convention simply sets out the standards of the judicial review of the recognition and enforcement of foreign arbitral awards. This then leaves the power of the courts at the seat of arbitration to declare the arbitration awards void according to domestic law. The New York Convention has entered into force among 163 countries and regions including the world's major trading countries. The New York Convention’s popularity has ensured international arbitration as the preferred dispute resolution mechanism in international commercial disputes.

（3）Washington Convention

The "Washington Convention", signed in 1966, is the short name of the Convention on the Settlement of National and Other National Investment Disputes, which is an investment arbitration convention led by the World Bank. The Washington Convention aims to build a more equal and effective investment dispute resolution platform, promote the growth of foreign investment in developing countries, and thus achieve the policy goal of reducing poverty. The Washington Convention establishes the International Centre for Settlement of Investment Disputes (ICSID) as a platform for parties to voluntarily resolve international investment disputes through mediation or arbitration, and provides a set of procedural rules accordingly. Currently there are 163 States joining the Washington Convention, and ICSID arbitration has become the mainstream mechanism for resolving international investment disputes.

IV. "Soft Laws" in International Arbitration Laws

(I) UNCITRAL Model Law on International Commercial Arbitration

The Model Law, first issued by UNCITRAL in 1958 and revised in 2006, is designed to further coordinate the legal regulation systems of different countries and regions on international commercial arbitration.

From the perspective of legal enforcement, the UNCITRAL Model Law on International Commercial Arbitration is a "soft law" as it has no legal effect unless it is incorporated into domestic legislation as a local arbitration law. However, the Model Law’s influence has not been weakened due to this requirement. Since its promulgation, more than 100 countries and regions have adopted the Model Law as a legislative model and issued or revised their domestic arbitration laws accordingly. Such countries/regions include Macao SAR and Hong Kong SAR of China, the United States, Canada, the United Kingdom, Australia, New Zealand, Germany, Singapore, Malaysia, Norway, Spain, Sweden, Turkey, Russia and other important trading countries and regions, making the law a de facto "hard law" across the world. It is also for this reason that it has become a bridge between international uniform standards and the practice of various countries.

 (II) Other international standards and best practice standards

There are a number of international guidelines or codes of best practice regarding the conduct of international arbitrations. These sources play an important role in providing reliable procedural solutions and predictability in the conduct of an international arbitration. These guidelines are buttressed by extensive commentary from a wide range of arbitrators, practitioners and academics addressing various procedural aspects of international arbitrations, providing important sources of guidance for both tribunals and parties. These guidelines or codes are not legally binding in themselves, but can be incorporated into the arbitration agreement and thus serve as the basis for the arbitration tribunal to make procedural decisions during the matter. Among them, the important rules are as follows:

1. International Bar Association Rules on the Taking of Evidence in International Arbitration

The International Bar Association Rules on the Taking of Evidence in International Arbitration were introduced in 1999, and revised in 2010 (IBA Rules 2010), which provides a blend of civil law and common law approaches to discovery and evidentiary presentations in arbitration.

The IBA Rules 2010 provide for a more efficient evidence-gathering process which calls for early involvement of the tribunal and specific guidelines regarding electronic documents, witness statements and expert reports. In addition, in order to maintain "fairness and equality," the IBA Rules 2010 also provide considerations on legal privileges and good faith in the discovery and taking of evidence. The IBA Rules 2010 have achieved even greater currency than its earlier versions and is one of the most important "soft laws" in international arbitration. According to a recent survey, the IBA Rules 2010 are used in 60% of international arbitrations.[2]

2. International Bar Association Guidelines on Conflicts of Interest in International Arbitration

The International Bar Association Guidelines on Conflicts of Interest in International Arbitration (IBA Conflicts Guidelines) were published in 2004 and are a detailed set of guidelines and accompanying commentary concerned with the impartiality and independence of arbitrators. The IBA Conflict Guidelines detail circumstances which are customarily considered of concern regarding an arbitrator’s independence or impartiality. The IBA Conflict Guidelines also provide for disclosure of such circumstances by arbitrators and prospective arbitrators to relevant parties.

The IBA Conflict Guidelines have attracted considerable criticism, on the grounds that they are needlessly detailed and encourage challenges to both arbitrators and arbitral awards. The IBA Conflict Guidelines are not automatically binding on either national courts or arbitral institutions. They nonetheless provide an influential perspective on customary attitudes towards an arbitrator’s obligations of independence and impartiality and have strong legal persuasion in practice.

3. International Bar Association Guidelines on Party Representation in International Arbitration

The International Bar Association Guidelines on Party Representation in International Arbitration (IBA Party Representation Guidelines) issued in 2013 aim to provide guidance regarding the conduct of legal counsel and other party representatives in international commercial, investment and other arbitrations. Like other "soft laws" in international arbitration, IBA Party Representation Guidelines are not intended to replace other mandatory laws or arbitration rules that may be relevant or applicable to matters of party representation. Instead, they purport to be binding only when adopted by the parties.

4. International Arbitration Practices Established by Senior Arbitrators and Legal Counsels

As mentioned above, since the detailed procedural rules guiding international arbitration are "soft laws", the arbitral tribunal and the parties, unless otherwise agreed, have certain procedural discretion  on how to advance the arbitral proceedings. Therefore, the procedural practices established by senior arbitrators and legal counsel in international arbitration practice also constitute an important source of "soft laws".

For example, the aforementioned IBA Rules 2010 provide for a procedure called Document Disclosure / Production, that is, each party is obliged to provide all written evidence supporting its claims to the arbitral tribunal and the other party, provided that such evidence is "relevant and material to the outcome of the case". If either party disputes the request for written evidence, the arbitral tribunal will often apply the so-called "Redfern Schedule" to streamline the application for Document Disclosure / Production. The Redfern Schedule provides for the claimant to list its requests for written evidence in forms, and then the respondent will make a reply on whether to provide it or not. Later, the arbitral tribunal will issue a decision on whether to require the disclosure / production of certain document in the form of a procedural order. A Redfern Schedule is the typical form of international arbitration practice, which constitutes an important supplement to the Document Disclosure / Production rules of IBA Rules 2010, and is widely adopted in practice.

V. Significance to Parties Involved in International Arbitration

We have previously discussed the "hard law" and "soft law" in international arbitration law. These two concepts are not in contradiction with each other, and the expression of "hard” and “soft” is only a result of comparison. Together, they represent a "spectrum" of legal effect with different degree of enforceability.

On one hand, parties involved in international arbitration should understand the flexibility and diversity of "hard law", and avoid any one-sided or rigid interpretations. On the other hand, it is important to understand the great impact of "soft law" on the outcome of arbitration and pay attention to its role. Ignoring customary arbitral procedural rules may attract unfavorable presumptions against a party's claims.

"Hard law" only provides a principle-oriented framework for the recognition and enforcement of international arbitration agreements and arbitral awards. Most arbitral awards are recognized and enforced (or refused to be recognized and enforced) in accordance with the domestic arbitration law of the enforcement country or region. Although the domestic arbitration laws and rules are predominantly modelled on the Model Law, other countries and regions (even if they are both state signatories of the same valid international convention), may have different understandings on the rules of the convention when converting such rules into their domestic legislation. Different jurisdictions have different understandings on various matters. These can be as detailed as different specific "written" requirements for the arbitration agreements, or as broad as different interpretations of “public policies and interests”.

"Soft law", while not legally enforceable in the absolute sense, can be binding on parties once it is adopted in arbitral proceedings by the arbitral tribunal. Parties from China should pay special attention to the ‘soft laws’ regarding application of procedural rules regarding the attendance of witnesses and document disclosure / production. Traditionally, arbitration practice in China emphasises written evidence over the testimony of witnesses, and "the burden of proof shall be borne by claimant" is a widely acknowledged principle. As a result, Chinese parties, and even some Chinese legal counsels who lack experience in international arbitration, often find it difficult to comprehend (and so undervalue) the rules of evidence in international arbitration, which are derived from common law traditions. Therefore, many Chinese parties have obtained unfavorable results in international arbitration simply by undervaluing "soft law". In fact, these "soft law" rules of evidence are fair to all parties, as long as all parties are familiar with the procedures. Furthermore, the arbitral tribunal can use such rules to make more accurate finding of facts, thus giving justifiable awards.

It is particularly important for parties to seek the support of professional lawyers who are familiar with international arbitral proceedings and rules as early as possible in a dispute. Further, experienced lawyers can better protect interests of parties from an even earlier stage by providing tailored advice during the negotiation of transaction contracts and arbitration agreements. Stay tuned for our further insights on the key points to arbitration agreements.

Footnotes：

[1] Park, William W., "Arbitration in Autumn", 2 Journal of International Dispute Settlement, 3 (2001).

[2] Queen Mary, University of London, 2012 International Arbitration Survey: Current and Preferred Practices in the Arbitral Process, 2 (2012) (IBA Rules used as guidelines in 53% of cases and as binding rules in 7% of cases).

References：

[1] Gary B. Born, International Commercial Arbitration, Second Edition, Kluwer Law International, 2014.

[2] Nigel Blackaby and Constantine Partasides QC with Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration, Sixth Edition, Oxford University Press, 2015.

往期链接：

Authors

Shining Guo

过仕宁

Partner

Dispute Resolution

[e-mail]

Ms. Shining Guo specializes in dispute resolution, especially in cross-border commercial dispute resolution.Ms. Guo is proficient at assisting Chinese and foreign clients with complex commercial disputes, and she has handled many influential arbitration cases before major international arbitral institutions, which includes the HKIAC, ICC, SIAC, FOSFA, CIETAC, as well as ad hoc arbitrations in Hong Kong and London, in respect of joint venture shareholders’ disputes, financial derivative disputes, product liability disputes, sale of goods disputes, bill of lading, charterparty and shipbuilding contract disputes. She also represents clients in recognition and enforcement of foreign arbitral awards in China. Additionally, Ms. Guo has participated in several litigation cases before the UK and the US courts.

关凯丽

Edwina Kwan

Partner

Sydney Office

[e-mail]

Edwina is a Partner in our Sydney dispute resolution practice, specialising in China related cross-border disputes. She represents clients in all forms of dispute resolution including international arbitrations, mediations, intellectual property disputes and commercial litigation. Edwina has extensive expertise covering commercial strategy & negotiations and risk mitigation and advises clients on trade, shareholder, joint venture and IP disputes in the retail, e‑commerce, private equity, telecommunications, construction, energy & resources and international trade sectors.Edwina has been recognised by Who’s Who Legal: Arbitration as a Future Leader in 2019, 2018 and 2017.

Domenico Cucinotta

Senior Associate

Sydney Office

Benedict Porter

Solicitor

Sydney Office

Mengtao Mao 

毛孟涛

Associate 

Dispute Resolution

Thanks to Jin Xiaojia for her contribution to this article.