Commercial Arbitration: Advantages, limitations and recent developments in Nigeria

The Trusted Advisors Legal Digest:

COMMERCIAL ARBITRATION

Commercial arbitration is a type of alternative dispute resolution (ADR) mechanism that is used by parties to settle disagreements in business relationships as opposed to going to the courts. For a dispute to be settled by arbitration, the parties typically agree through an arbitration agreement that they are willing to take certain disagreements that arises from their legal relationship to arbitration; this can be done by adding a clause in the agreement or a separate agreement. One or more arbitrators are appointed by the parties to the dispute to analyse the circumstances with the aim of resolving the dispute.

The principal legislation regarding arbitration in Nigeria is the Arbitration and Mediation Act 2023 which repealed the Arbitration and Conciliation Act, Cap. A18, LFN 2004.

ADVANTAGES OF COMMERCIAL ARBITRATION

Commercial arbitration being an alternative method through which parties can resolve disputes without recourse to the courts has several advantages. They are:

1. Specialization: Arbitration presents a unique characteristic of specialization. The arbitrators are personally selected by the parties, and this allows parties to select experts in the field the dispute pertains to thus allowing there to be a better understanding and resolution of the dispute.
2. Confidential and Private: Major corporations and well-known individuals find arbitration attractive because of its confidentiality. Parties to the proceedings can keep the procedures and the terms of the arbitration proceedings confidential; this enables parties conceal delicate and sensitive information from the public.
3. Party autonomy and flexibility: Arbitration procedures are flexible because they let the parties customise the process to meet their needs. Parties to an arbitration are free to decide how best to resolve the issue in a way that suits them. Parties may choose the arbitrators who will decide on their case and the number of arbitrators they wish for.
4. Timesaving: Another advantage of arbitration is the speed at which it takes for proceedings to end. Through arbitration, parties can avoid the complexities of the court system as prolonged disputes can be harmful in this fast-paced business age. Arbitration provides a faster route to conflict resolution because of its concentrated procedures and the usual lack of drawn-out appeals.
5. Simplified rules of evidence and procedure: In arbitration, the often-convoluted rules of evidence and procedure rules does not apply, which makes them less formal. Arbitral proceedings are not regulated by the Evidence Act however, the fundamental rules and principles of evidence apply to arbitral proceedings for a tribunal to do justice and be fair in making an award. The arbitral proceedings do not operate in a vacuum as they can be guided by arbitration rules such as the Arbitration rules provided under the First Schedule of the Arbitration and Mediation Act 2023.

LIMITATIONS OF COMMERCIAL ARBITRATION

As a result of the efficiency, simplicity, flexibility and party autonomy of Commercial Arbitration in resolving disputes, it is a favored method of resolving dispute among business entities and personalities. However, despite its benefits, there are numerous limitations to arbitration, they are:

1. It can be costly: When deciding whether to arbitrate a dispute, one factor to consider is the issue of cost. Since there are several factors that parties must take into account which includes the arbitration process itself, the parties’ representations, the arbitrators, their motivation to settle the dispute, and the particulars of the case at hand; arbitration can be an “expensive” method of resolving disputes.
2. No formal precedent: Arbitrators typically have less experience than Judges and they are not bound by the same standards regarding the admissibility of evidence. In litigation, courts are required to follow earlier judicial decisions when the same point arises by the principle of Stare decisis. This binding nature is not present in arbitral awards, which means that arbitrators are not required to follow previous decisions made in the same matter and that the award solely applies to the parties involved. This makes arbitration decision unpredictable.
3. It is not transparent to the public: Arbitration hearings are generally held in private which may be a positive to many. However, it is possible that this lack of transparency makes the process more likely to be biased, which may be problematic because arbitration decisions are not always reviewed by the courts. Since the public does not have access to the same information that would be available in a court case. It is more difficult for third parties to evaluate the fairness of the decision or to learn from the outcome. In addition, the lack of openness adds to its unpredictable nature.
4. Arbitration decisions require court for enforcement: An arbitral award is a decision of the arbitral tribunal on the substance of the dispute. A valid award must be in writing and must be signed by the arbitrators. However, arbitrators lack the authority to enforce their awards as a party who wants to enforce an arbitral award must make an application in writing to the court. An award may by leave of the court be enforced in the same manner as a judgement or order to the same effect.

RECENTS DEVELOPMENTS IN ARBITRATION IN NIGERIA

There have been developments in the arbitration space and some of which are underway in Nigeria with the enactment of the Arbitration and Mediation Act, 2023 (“Act” or “AMA”). This new act is set up to be aligned with international practices and allows for the fair and efficient settlement of commercial disputes through Arbitration in Nigeria. Some of these innovations are:

1. Electronic communication of Arbitration agreements: An arbitration agreement can either be a written clause in a contract or a separate agreement. Section 2(4) of the Act broadens the requirement of what constitutes a valid written agreement with the addition of agreements made by electronic communication. The act defines electronic communication to include any information generated, sent, received, or stored by electronic, magnetic, optical, or similar means, such as electronic data interchange (EDI), electronic mail, telegram, telex, or telecopy.
2. Consolidation of arbitrations: Consolidation is a legal process that combines two or more claims into a single action involving all parties involved and any connected conflicts. Now, Parties to a case may agree that the arbitral processes would be combined with other arbitral proceedings, even if they involve different parties.
3. Joinder of parties: The Act gives the arbitral tribunal the authority to allow additional parties to be joined to an arbitral proceeding if it appears that the additional party is bound by the arbitration agreement that started the arbitral process. This reverses a previous limitation of arbitration, as parties could not be added to an arbitration proceeding as a third party who is not a party to the arbitration agreement.
4. The limitation period for enforcement of awards: One of the limitations of arbitration was the issue of when the statute of limitations applied to the enforcement of arbitral awards. Enforcement actions commences after arbitration proceedings and as a result, the action might fall under the limitation period depending on how long the arbitration lasted. For instance, Lagos stipulates that an arbitral award cannot be enforced six years after the cause of action first arose and has been a drawback to arbitration as an alternate remedy to litigation; However, the Act makes it quite clear that the amount of time that passes between the beginning of the arbitration process and the date of the award is not taken into account when determining the statute of limitations for enforcing an arbitral award.
5. Interim measures can now be granted by an arbitral tribunal: Where parties agree to it, an arbitral tribunal can grant interim measures. An interim measure is a temporary measure whether in the form of an award or in another form which at any time before the award which decides the dispute is issued. The reliefs can be issued to maintain or restore the status quo pending determination of the dispute, take action to prevent harm to the arbitral process itself, preserve evidence that may be relevant to the subject matter of the arbitration proceeding itself or provide a means of preserving assets out of which a subsequent award may be satisfied.
6. Emergency arbitrators: Any party that requires an emergency relief before the constitution of the arbitral tribunal can submit an application for the appointment of emergency arbitrators to any arbitral proceedings. The application must provide the statement of the relief sought, the circumstances of the application and the reasons the applicant is entitled to the reliefs amongst others. The emergency arbitrator will be appointed within two business days after date of application by the arbitral institution or the Court. The emergency arbitrator is expected to remain impartial and independent to the parties in the dispute.
7. Grounds for setting aside an Arbitral Award: parties may apply to set aside an arbitral award and a party shall not make an application on the ground of an error on the face of the award or any other ground except those stated in Section 55(3) of the arbitration and mediation act 2023.Such grounds include reason such as a party is under legal incapacity, the arbitration agreement is not valid under the law which parties have subjected themselves to, the party who made the application was not given proper notice of the appointment of arbitrators or the proceedings, amongst others. This has taken away the ground of “misconduct by an arbitrator” which was a ground wherein parties to a proceeding could rely upon to set aside an award.

Article written by Toluwani Kalaro. Toluwalase Kalaro is an associate in the conflict management and dispute management practice group of Trusted Advisors.

The Trusted Advisors is a leading Nigerian full-service law firm providing cutting-edge and timely legal solutions and services to its clients.

Disclaimer: This article provides general information and does not constitute legal advice. For specific legal advice, readers are advised to contact us on [email protected]