Chapter 1 focus on the basic requirements of arbitration. Arbitration is a private system of dispute resolution that allows parties to resolve their disputes outside of the judicial system. This chapter discusses the advantages and disadvantages of arbitration. International commercial arbitration has become the standard for resolving disputes in international business transactions due to its benefits. The defining characteristics of arbitration include the requirement of consent of the parties, the use of arbitrators, and the issuance of a final and binding award. Arbitration awards are generally enforceable, and the losing party may challenge them only on narrow grounds. Enforcement of awards is facilitated by the New York Convention, which ensures recognition and enforcement in numerous countries. The regulatory framework of arbitration includes the arbitration agreement, chosen arbitration rules, national laws, international arbitration practices, and relevant international treaties.

From an economic point of view, the substantive law is a mechanism to generate incentives towards efficient behaviour, i.e. behaviour that maximizes the social surplus. The same applies to the legal rules that the parties agree in the contracts they make. The behavioural response that legal rules aim for depends on accurate enforcement. Litigation, arbitration and other mechanisms of dispute settlement must be viewed and evaluated as tools for the accurate enforcement of legal rules. This contribution analyzes arbitration as an efficient enforcement mechanism that may be used by the parties to maximize the surplus they jointly reap from their transactions. The paper addresses the decision to be made by the parties in choosing arbitration over litigation and other tools of ADR, but also the choice between institutional and ad hoc arbitration. As it turns out, the parameters that influence these choices differ, depending on the domestic or international nature of the given transaction. However, the economics of arbitration are not only about the choices to be made by the parties. Thus, the paper also looks at the incentives faced by the arbitrators.

Some industries have avoided using standard or generic arbitration clauses by developing industry-specific clauses. This chapter focuses on the energy sector and its view of arbitration as reflected in its widely used arbitration clause. Given the specificity and uniqueness of the industry, energy disputes are mostly settled through alternative dispute resolution methods. From a legal standpoint, the regulations and practices related to the energy sector are complex and chaotic due to the technical nature of the energy industry. In such a context, energy dispute resolution cases are unusually complex. Large energy transactions, projects or contracts almost always have an international dimension, and the preferred means of dispute resolution is international arbitration.