The Fallacy of Consent: Should Arbitration Be a Creature of Contract?

• Publication year: 2021

The Fallacy of Consent: Should Arbitration Be a Creature of Contract?

Fabio Nuñez del Prado

THE FALLACY OF CONSENT: SHOULD ARBITRATION BE A CREATURE OF CONTRACT?

Fabio Nuñez del Prado^*

Abstract

Arbitration is a creature of contract. This paradigm is so basic that it is accepted in all the States of the world. Nevertheless, arbitration is perceived as the most suitable method for the settlement of commercial disputes. Virtually all commercial disputes are resolved through arbitration. The natural order of things has been reversed. In commercial matters, at least, arbitration is the rule, and courts the exception. Why is it, then, that parties must opt in for a solution which appears as the most natural one in the community? I propose to question this default rule and propose an extreme shift: Arbitration should become the default jurisdiction.

Introduction.............................................................................................221

I. The Fallacy of Consent...............................................................222
II. Problems Caused By the Contractual Foundation of Arbitration....................................................................................226

A. A Case to Illustrate................................................................... 226
B. The Countless Problems Created by the Contractual Nature of Arbitration ................................................................................ 228

1. The Risk of Contradictory and Unenforceable Arbitral Awards ................................................................................ 228
2. Arbitrators Cannot See the Forest for the Trees ................ 230

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3. An Inconsistent and Hypocritical Model in Which Consent Is Routinely Sacrificed Prevails: The Elasticity of Consensualism in Arbitration ............................................. 230
4. The Contractual Foundation of Arbitration Is Very Often Strategically Used by Parties to Delay and, in Some Cases, Even Evade the Arbitration ................................................ 234
5. Fictions Need to Be Created to Correct the Deficiencies of the System ........................................................................... 235
6. Many Arbitrable Controversies Are Not Resolved through Arbitration .......................................................................... 236

a. Torts Cases .................................................................. 236
b. Real-Estate Cases ........................................................ 236
c. Complex Contractual Cases Involving More Than One Legal Relationship....................................................... 237

7. The Contractual Foundation of Arbitration Is a Strong Impediment to Initiate Class-Actions ................................. 237

III. Arguments in Favor of Non-Consensual Arbitration..........238

A. Economic Argument: Arbitration Must Be Recognized as the Default Jurisdiction Because under Economic Theory the Default Rules Should Be Designed Based on What the Majority Prefers ...................................................................................... 239
B. Empirical Argument: Evidence That Demonstrates That Consent Is Not Inherent to Arbitration—the Successful Story of Mandatory Arbitration ............................................................. 244
C. Axiological Argument: Arbitration Must Be Recognized as the Default Jurisdiction Because This System Would Be More Compatible with Party Autonomy............................................. 246

1. A Case to Illustrate the Problem ........................................ 246
2. The Recognition of the Contractual Foundation of Arbitration Is a Constructivist Phenomenon ...................... 248

IV. Proposal: Arbitration Should Be the Default Jurisdiction.....................................................................................254

A. What Does It Imply That Arbitration Is the Default Jurisdiction? ............................................................................. 254
B. Consequences of Recognizing Arbitration as the Default Jurisdiction ............................................................................... 255

Conclusion.................................................................................................256

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Introduction

"The task is not so much to see what no one has yet seen; but to think what nobody has yet thought, about that which everybody sees"

—Erwin Schrödinger, Nobel Prize, Physics

Paradigms are one of the worst enemies of knowledge. This is because behind paradigms there are hidden innovations that we do not perceive because of our tendency to respect what has already been established. Undeniably, paradigms can condemn us to intellectual immobility.¹

The basic paradigm of arbitration is that consent is the cornerstone of arbitration. Thus, the default rule has always been that, unless the parties agree otherwise, they should resolve their disputes in courts.² This rule has been a misunderstood paradigm of history. The contractual foundation of arbitration is so internalized in the mind of arbitral actors that it is often thought that arbitration and consent are like shadow and body.³

This Article attempts to knock down the remaining columns on which the contractual foundation of arbitration was built in order to demonstrate that, at least in commercial disputes, the state should no longer be considered the default provider in resolving commercial disputes. Hence, this Article will demonstrate on its face that in commercial disputes, arbitration must be the default jurisdiction. This would imply a shift of the paradigm in which arbitration would be non-consensual.

Consent is an obstacle for the effectiveness of international arbitration. Arbitral tribunals and arbitral institutions are so aware of this reality that they frequently bypass consent without regrets. Additionally, several professors from Yale Law School have argued that default rules should reflect the preferences of the majority. At least in international commerce, virtually all disputes are resolved through arbitration. Hence, the latest surveys conducted by Queen Mary University and White & Case show that an overwhelming majority of the respondent group (ninety-seven percent) prefer arbitration as their method of resolving cross-border disputes.⁴

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If that is so—if it is known that the majority demands arbitration to resolve their disputes and it is known that arbitration has become the natural mechanism to resolve disputes—why isn't arbitration recognized as the default jurisdiction?⁵ It seems that the recognition of arbitration as the default jurisdiction is inevitable.

Moreover, converting to arbitration in the default jurisdiction will generate positive externalities since it would alleviate the burden of the commercial justice system by outsourcing a range of disputes to arbitration. similarly, to the extent that the cost of the proceedings would be internalized by the litigants, it will also be an efficient mechanism to save public funds.

I. The Fallacy of Consent

Is consent inherent to arbitration? Everyone has heard at least once the phrases: "arbitration is a creature of contract," or "like consummate romance, arbitration rests on consent."⁶ These are two of the most ubiquitous phrases in the world of arbitration. For most lawyers, it seems obvious that arbitration must have a contractual nature. so, every time a legal system is designed, the premise is that state justice is the rule; arbitration, the exception.⁷

But when arbitration as the exception is asked why, the answer is not so obvious. Is consent inherent and part of the essence of arbitration? Once I asked

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Professor Emmanuel Gaillard if it was possible to conceive a non-consensual model of arbitration.⁸ He answered that he thinks it would be a different animal.⁹ When asked why, he answered that it was because the New York Convention had prescribed it in that way.¹⁰ This argument is not convincing because it is circular on its face. It would be as fallacious as arguing at a domestic level that things are like they are because the law has determined them in that way.

In this respect, Professor Youssef has stated that:

[T]he admission of the existence of less- or nonconsensual concepts of arbitration is conceptually problematic. Consent in arbitration is close to legal dogma. The rarity of scholarly inquiries to explain the theoretical basis for consent's centralism suggests an evident or self-reliant paradigm of consensual arbitration that would need no further justification or rationale to support it. The seminal rule is simply recited: "The existence of both parties' consent to submit the dispute to arbitration is clearly a necessity." The doctrinal transcendence of consent not only dispenses with the need for rationalization, but also does not authorize the existence or even the inquiry into the existence of alternative concepts of arbitration less attached to consent. Only one concept of arbitration exists, and that concept is consensual.¹¹

Nevertheless, the essence of institutions cannot be found in a normative text, but rather in the nature of things. Something is part of the essence of an institution if, by removing it, the institution ceases to be such. Arbitration

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without consent does not cease to be arbitration; it can perfectly exist being non-consensual. The most paradigmatic example is mandatory arbitration in controversies that involve the Peruvian State. With its implementation, the contractual foundation of arbitration was broken, and arbitrations against the Peruvian State continue to be arbitrations. In Spain, there is also a system of mandatory arbitration and nobody doubts that it is still arbitration.¹²

Additionally, in investor-State arbitration the contractual nature of arbitration is, to say the least, questionable...