Arbitration: Definition, Types, and Examples

Arbitration: Definition, Types, and Examples – Every day in any part of the world as long as there are humans there will always be problems because it is impossible to completely rid humans of problems and vice versa. Differences of opinion or business competition are the things that most often trigger problems, therefore the presence of law becomes a mediator or solution to various problems that arise in human life. In a business, for example, problems occur because there are parties who feel aggrieved by other parties which makes the problem bigger and becomes a dispute that must be resolved through legal channels. In dealing with this problem.

There are various ways​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ for example through mediation, negotiation, court and arbitration. Especially for the name of the last case mentioned above, the arbitration court has been an alternative dispute resolution institution since ancient times. In general, arbitration is the settlement of civil disputes out of court. Law number 30 of 1999 concerning Arbitration and Alternative Dispute Resolution, it is explained that this institution is a way of resolving disputes outside the general court,

But for those of you who don’t understand or know about the settlement of legal cases through arbitration, don’t worry, because in this discussion we will try to discuss the definition of arbitration along with its types and examples.

Furthermore, we will review the discussion below!

Definition of Arbitration

Etymologically, Arbitration originates from France and refers to an arbitrator’s decision made by an arbitrator in an arbitration or arbitral tribunal. In modern French, the word “arbitration” usually means a judge. The word “arbitration” referred to in this article was first used by “Mathieu de la Porte” in 1704 in his book “La science des négociants et tenurs de livres” to calculate exchange rate differences. identify the location, the most profitable way to issue and carry out currency exchange transactions. (U)ne combinaison que l’on fait de plusieurs Changes, pour connoître Quelle Place est plus avantageuse pour tirer et remettre”

“Arbitration” (English arbitration), which in the world of economics and finance is the practice of seeking profit. price difference between two financial markets. This arbitrage is a combination of adjustments between two financial market transactions, where profits are obtained from the difference between the market price of one transaction and another. .

In the field of law, civil disputes are settled outside the general court based on a written arbitration agreement made between the disputing parties and carried out by an independent arbiter/judge assembly.

In the scientific world, the term “arbitrage” is defined as a transaction where there is no negative cash flow under any circumstances and positive cash flow under at least one condition, or simply, “risk-free profit” (free profit). .

The person conducting the arbitration is called an “arbitrator” or, abroad, an arbitrator. This term is mainly used in the business of financial instruments such as bonds, stocks, derivatives, goods and currency. Arbitration is the solution or end of a dispute by a judge or judges based on an agreement submitted and complied with by the parties. by decision of an arbitrator of their choice. Arbitration comes from the Latin word arbitrate, which means the right to decide something at his own discretion.

Basically an arbitral court is a special type of court, where an important fact that distinguishes it from an ordinary court is the use of a permanent or permanent court in a judicial agreement, whereas in an arbitral court a special arbitration court is formed for that purpose. activity is used. The arbitrator acts as a judge of the arbitral tribunal in the arbitration process as a permanent judge, although only in the case concerned.

Conventional arbitration is voluntary submission of disputes to an impartial third party, namely an individual or ad hoc arbitration.

Arbitration Procedure

An agreement is required between the two disputing parties to resolve the dispute through arbitration (can be concluded before or after the dispute arises). Therefore, both parties must enter into a written agreement before the arbitration.

Indonesia has several special institutions that facilitate arbitration, namely the Indonesian National Arbitration Board (BANI), the Indonesian Capital Market Arbitration Court (BAPMI) and the Bali International Arbitration and Mediation Center (BIAMC).

Although both are arbitral bodies, they basically have their own procedures or rules governing the proceedings of the parties to the dispute. However, each institution does not turn a blind eye that if the parties to the dispute have agreed on another procedure, this can also be used.

The procedure for arbitration is as follows:

  • Registration

Initially, a candidate may submit an application for registration of arbitration from the party initiating the arbitration to the arbitration secretariat chosen by the parties.

  • Arbitration proceedings

The applicant must provide the following information when submitting the application:

  •  The names and addresses of the parties
  •  Arbitration agreement of the disputing parties
  •  The circumstances and legal basis of the arbitral proceedings
  •  Case details
  •  Claims or lawsuits
  •  mark
  • Document
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The applicant must attach certified copies of the dispute in question, as well as certified copies of the arbitration agreement and other relevant documents. If there are documents on the back, the applicant must confirm the following documents.

  • Arbitrator appointment

The applicant must appoint an arbitrator as a neutral third party no later than 30 days after the registration of the application. If the applicant is unable to appoint an arbitrator, an unconditional appointment shall be made to the arbitrator selected.

The chairman of the arbitration court has the right to ask for an extension of the time limit for appointing an arbitrator up to a maximum of 1

(days) with a valid reason.

  • Arbitration Fees

The registration fee for arbitration is usually IDR 2 million upon submission. At the same time, administration fees vary according to requirements.

Arbitration Conditions

Arbitration is possible if one of the following three conditions is met:

  • The same asset does not trade at the same price in all markets.
  • Two assets with the same cash flow are not trading at the same price.
  • Assets whose futures contract values ​​are known and are not currently trading at the futures contract price less the discounted risk-free interest (or the commodity has significant carrying costs).
  • Arbitrage is not a simple procedure in which a product is bought in one market and then sold in another at a higher price. Arbitrage transactions must be continuous to avoid market risk or the risk of price changes in one market before two transactions are settled. In practice, this is usually only possible for electronically tradable financial and security products.

Types of Arbitration

  • Merger Arbitrage

Merger arbitrage is usually carried out by buying the target company’s shares in addition to short buying by selling the acquirer’s shares.

In general, the market price of the target company is lower than the price offered by the acquiring company. The price range between these two prices depends on the element of “probability” and the exact timing of the acquisition, as well as the prevailing interest rates.

Merger arbitrage risk is zero price range when the acquisition process is complete. The risk is when the contract fails and the price range becomes very wide.

  • Regional bond arbitration / Municipal Bond Arbitrage

Municipal bond arbitrage or municipal bond arbitrage is a global investment management strategy that employs one or two techniques.

Generally, managers seek relative value opportunities by selling and buying regional maturity neutral bonds. The relative value of a trade can occur between different issuers, different bonds issued by the same institution or capital structure trading the same asset.

  • Convertible bonds

Convertible bonds are bonds that the investor can return to the issuer for a predetermined amount in exchange for shares in the company.

These convertible bonds are like private bonds with an option to buy shares.

The price of these convertible bonds is very sensitive to three main factors, namely:

  • Flower

When interest rates rise, the price of convertible bonds falls, but the call option portion of convertible bonds rises and the total price tends to fall.

  • Stock price

When the price of the stock traded for these bonds rises, the price of the bond tends to rise.

  • Loan difference credit

If the issuer’s creditworthiness deteriorates (i.e. the credit rating decreases) and credit spreads widen, the price of the bond generally decreases, but in most cases the call option portion of the convertible bond increases.

  • Depository Receipts

Depository Receipts are securities offered to overseas shareholders, for example a Japanese company that wants to make money, can issue depository receipts on the New York Stock Exchange because the stock exchange’s working capital is limited. local exchange These securities are known as ADR (American Depositary Receipt) or GDR (Global Depositary Receipt) depending on where they are issued. Here, there is a difference between the quoted value and the actual value, and the ADR is trading below its actual value, so ADR buyers can expect to profit if the value changes to its true value. However, there is a risk that the value of the stock will decrease, so sorting can reduce that risk.

  • Regulatory arbitration

Regulatory arbitration is an arbitration procedure in which an institution capitalizes on the difference between the actual risk or financial risk and the existing regulatory position. For example, a bank operating under Basel I regulations, whereby a bank must have 8% remaining capital to cover credit risk, but the actual risk of default is very small, making it useful for securing debt so that low-risk loans are eliminated. from the loan portfolio. On the other hand, if the risk turns out to be greater than the risk regulated by current regulations, it is better to have debt in the bank’s portfolio.

Examples of Arbitration Cases

Many cases are resolved through arbitration. There are several land disputes related to the property. The following is an example of an arbitration process that has existed.

  • The Government of Indonesia and Hesham Al Waraq
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In 2011, former vice president of Bank Century Hesham, commissioner, sued the government to take over the bank’s shares. He is seeking compensation of US$19.8 million. Instead of compensation, ICSID actually rejected Hesham’s takeover demands. Thus, Indonesia’s victory in the two Bank Century cases prevented the government from paying around US$100 million or the equivalent of 1.3 trillion rupiah.

  • Indonesian dispute with two foreign companies.

Indonesia is in dispute with two foreign companies, Planet Mining and Churchill Mining. In this case, the arbitration was carried out with the assistance of the International Center for Arbitration of Investment Disputes (ICSID) and Investor State Dispute Settlement (ISDS).

The lawsuit stems from the fact that the East Kutai government revoked the operating permits of two companies in 2010. A British company, Churchill Mining Plc, once obtained a mining permit covering an area of ​​350 km2 in Busang, Telen, Muara Wahau and Muara. Ancalong, bought a 75% stake in PT Ridlatama Group. Planet Mining Australia is a Churchill subsidiary.

Previously, Churchill filed a lawsuit at the Samarinda State Administrative Court. But the end result is the same, revoking the royal license is fine. The appeal process continued all the way to the Supreme Court and the outcome remained the same until Churchill referred the matter to international arbitration. Based on the ICSID decision, Indonesia has the right to increase the claim value to US$1.31 billion or around 17 trillion rupiah.

However, during the trial, it was found that Planet and Churchill Mining forged the license documents, so their investment activities were deemed illegal. In the end, Indonesia won the argument. Meanwhile, Planet and Churchill Mining paid compensation of USD 8.7 million.

  • Arbitration involving the New York Stock Exchange and the Chicago Mercantile Exchange.

If the stock prices on the NYSE and the related delivery contracts on the CME do not balance, you can buy at a slightly lower price and sell at a higher price. Because these price differences are small (and short-lived), using a computer can be useful for analyzing prices in different markets and automatically placing trades when prices are far from the equilibrium price. Other refereeing actions can make it very risky. Whoever has the fastest computer and the smartest mathematician wins by a constant small margin, which is a loss for the individual investor.

Risks in the Arbitration Process

In the modern information security market, the risk of arbitrary events is low. It is generally impossible to close two or three transactions at once, therefore it is possible that when one transaction is closed, there is a rapid increase in the market price, which makes it impossible for subsequent transactions to be executed at the same time.

There is also a risk for the counterparty that the counterparty will not fulfill the contract, this risk is very important, because to profit from even a very small price difference, you have to trade very large amounts. This risk increases when there is leverage or the money used is borrowed money.

Another risk arises when the goods bought and sold are not the same, and arbitration procedures are carried out on the assumption that the prices of the goods are related or predictable.

Market competition can also pose risks in connection with arbitrary transactions. For example, if someone wants to take advantage of the difference in the price of IBM stock trading on the NYSE and the London Stock Exchange, he might buy a large number of IBM shares on the NYSE and find that he cannot sell it. NYSE. LSE market. This exposes the referee.

In the 1980s, arbitrage risk became more common. In this form of speculation, a person trades in a security that is significantly lower or higher than its true value, seeing that a pricing error corrects the trade.

Conclusion

This is a brief discussion of the definition of arbitration theory. The discussion this time does not only discuss the definition of arbitration but also discusses the procedure for conducting arbitration, looking at the conditions for the possibility of arbitration occurring, the types of arbitration, as well as real examples of cases resolved by arbitration. Understanding the meaning of arbitration itself allows us to know various legal settlements that can be carried out in business and other cases.

This is a review of the meaning of arbitration. For Sinaumed’s who want to learn all about the meaning of arbitration and knowledge related to other laws, you can visit sinaumedia.com to get related books.

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Author: Pandu Akram

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