Keeping Courts’ Hands Off Arbitration: Bahrain’s Innovation

When a Canadian business is asked to agree to a seat (or place) for an international arbitration, it should be concerned about the possibility of interference by a local court in that jurisdiction.  This is particularly so when the seat is an unfamiliar jurisdiction.

No matter how modern the jurisdiction’s arbitration rules; how competent the arbitral institution; how attractive the hearing and other facilities; or how safe, convenient or welcoming the place (international connections; visa availability; lack of impediments for visiting counsel, arbitrators, parties and witnesses) ─ the risk of local court interference can undermine it all.

The seat of an arbitration is its legal location, not necessarily where hearings will be held.  Its courts have the ability to lend support to the arbitration or to interfere with it.

The prospect of a local court interfering with the arbitration by entertaining – often slowly – and even worse, granting relief such as an anti-arbitration injunction or an order narrowing the scope or subject matter of the arbitration, or setting aside the arbitration award on some basis that does not accord with international standards, justifiably makes foreign parties and their counsel nervous about that place.

Whether local courts will interfere more than is acceptable in accordance with international standards is an important issue to resolve before accepting an unknown place as the seat of an arbitration.  This should be a fundamental consideration when assessing newer international arbitration options such as India, Singapore and the UAE (Dubai), to name just a few, as well as when assessing more established options such as Geneva, Hong Kong, London, New York, Paris and Stockholm.

It is also a consideration when the international business and legal communities look at Canada as a potential place for an arbitration – Toronto, Montréal, Vancouver, Ottawa or Calgary – although happily from a Canadian perspective, the assessment of Canadian places of arbitration is generally favourable (although aberrant court decisions – even if corrected by appellate courts – do disproportionate damage to Canada’s reputation on the world stage).

There is one new arbitral centre in which the prospect of local court interference may have been banished.  That arbitral centre is the Bahrain Chamber for Dispute Resolution (BCDR).

Earlier this year, the BCDR was launched as a joint venture between the Government of the Kingdom of Bahrain and the American Arbitration Association.  It has the strong support of the local Government and boasts world-class hearing facilities in Manama, Bahrain.

What may separate the BCDR from the rest of the pack is the creation of what is informally termed an arbitration “free zone” under Bahrain’s new arbitration legislation.  The BCDR has stated publicly:

. . .  [W]here international disputes are heard at the BCDR, where the parties involved agree to be bound by the outcome, the award will be guaranteed and not subject to challenge in Bahrain.  This resolves an issue that has been a significant problem in many parts of the world, despite existing international conventions. Bahrain’s arbitration “free zone” will, therefore, offer jurisdictional and legal certainty in the recognition of arbitration awards, an essential component of modern day commercial transactions.

Legislative Decree No. (30) for the year 2009 with respect to the Bahrain Chamber for Economic, Financial and Investment Dispute Resolution provides (in Article 11) that parties to a dispute “may agree upon the applicable law relevant to the subject matter of the dispute . . .” and (in Article 25) that “if the parties have agreed in writing to choose a foreign law concerning the dispute, and they shall not be entitled to challenge the award before Bahrain’s Courts, and that the challenge against the award shall be before the competent authority in another state.”

While local courts in any jurisdiction should not be interfering with international arbitrations beyond accepted international standards, in Bahrain the parties can point to a specific statutory prohibition on court interference.  The BCDR believes that this should provide foreign parties with greater confidence that Bahrain’s courts will not interfere.

This innovation in arbitration is but one of the BCDR’s innovations.  The Legislative Decree also introduces “statutory arbitration”.  Commercial and financial cases over 500,000 BHD ($1.3 M US) involving an international party or a party licensed by the Central Bank of Bahrain, which would previously have come before Bahrain’s domestic courts, will be subject to statutory arbitration in the BCDR.

The BCDR is fortunate to have the Bahraini minister of justice as the motivating force, exercising leadership from the beginning.  Most countries can only dream of the kind of support that Shaikh Khalid bin Ali Al Khalifa is providing to the Centre.

More and more countries are coming to realize that having a strong international arbitration regime is an important contributor to being an international financial centre.  Bahrain has joined the handful of countries in the world that have their governments proactively supporting international arbitration as a means of helping to further economic activity, growth, trade and development, and attract foreign capital and international business.

Innovation in arbitration – spurred by the global free market for arbitration business – is becoming more common.  The Delaware’s Court of Chancery’s commercial arbitration initiative is another innovation (“Delware court enters the arbitration business” “The Lawyers Weekly, April 2, 2010, page 13).  Other important innovations in arbitration are taking place – they will be the subject of our upcoming ADR Focus Section articles.

Andrew McDougall ([email protected]) is Special Counsel to Perley-Robertson, Hill & McDougall LLP in Ottawa (www.perlaw.ca).

This article was originally published in the The Lawyers Weekly, Vol. 29, No. 49.