I. When to Opt for International Arbitration
One selects arbitration as the dispute resolution device in a contract for several reasons: (1) to reduce legal costs, (2) for the convenience of the parties in scheduling and presentation, (3) to keep the proceedings and the result confidential, and (4) to avoid trial of claims which could potentially produce large damage awards when decided by other than “commercial” people or in a particular jurisdiction. Add to that list two very significant reasons for selecting arbitration in an international contract: (1) decision enforcement and (2) a neutral forum.
Decision Enforcement. Each country has its own laws and applies those laws within its own borders. That may be an accepted fundamental precept of international law, but, practically speaking, that happens because the country has the force and the control to accomplish that result within its own borders. The extent to which a country’s laws will be recognized outside its borders by other countries is limited. There is no international legal or enforcement body to require a country to recognize the decisions of another country. One country recognizes the decisions of another purely by “comity” or “as a favor” to the other country. In many commercial countries, having a foreign country judgment has virtually no effect. You must try your lawsuit all over again. In others, having a judgment limits the defenses which can be raised, but one still essentially must try one’s case twice. Even the United States, thought to be a commercially and legally advanced country, has no federal statutory law on recognition or enforcement of foreign country judgments. There is state statutory law. (c) 2008 Chris Helmer, Esq.
The last hundred years of civilization’s development have seen a growing number of “conventions” adopted by countries, that is, essentially multi-country treaties drafted by United Nations committees or nongovernmental groups which are the product of international consensus and ratified by a number of countries with few or no “declarations or reservations.” The United States is a party to thousands of conventions and multilateral or bilateral treaties. Because they can be fairly uniformly applied internationally and applied frequently enough for people to begin to understand and use them in a consistent manner, conventions are much more useful as an international legal tool than simply treaties.
One of the most well known and widely used conventions is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention because it was negotiated and concluded in New York. Countries which have adopted this convention have essentially contracted with the other countries adopting the convention that they will recognize the other countries’ arbitral awards and enforce them according to certain internationally accepted rules. Other than the Brussels Convention, in effect only among European countries, there is no similarly generally adopted convention on the recognition and enforcement of judgments. Thus, if a party wishes to have a decision which it can enforce in countries other than the country in which it was decided, that decision should be an arbitral award which meets the terms of the New York Convention, not a judgment. Not only is one assured by including an arbitration clause that the decision will be enforceable, but it will be enforceable according to a known and predictable standard and within a reasonable time.
The New York Convention was signed in 1958. Prior to that time, the 1927 Geneva Convention on the Execution of Foreign Arbitral Awards, a less effective and less comprehensive convention, governed amongst a number of ratifying countries. Some countries still have only the Geneva Convention, and some have both. The 1975 Panama Inter-American Convention on International Commercial Arbitration operates to recognize and enforce foreign arbitrations (including U.S. awards) in South and Latin American countries which have not adopted the New York Convention. The New York Convention, however, is by far the convention which has made international arbitration the basis for transnational dispute resolution. A copy of the New York Convention, together with a list of the countries which have ratified it to date, can be found at either:
Neutral Forum. How would you like to try a claim for damages brought by a Mexican buyer of your $5 MM piece of equipment in a Mexican court? Or a claim by your Chinese distributor for wrongful termination of your distribution contract in a Chinese court? If you feel “hometowned” in Salem, imagine the trepidation with which you would approach resolution of these disputes. And imagine how a party from a country significantly less developed than the United States would feel about having its complaints decided by a United States court.
Use of an arbitration clause in a contract between parties from two different countries permits them to decide in advance that a third “neutral” country will be the exclusive forum for dispute resolution. While use of a third “neutral” country is not required, and the home jurisdiction of either party may in fact be used, a third country is often not inconvenient, and its stipulation makes both parties to the contract feel comfortable going forward to do business together.
II. Issues to Expect in the International Arbitration Forum
National Law Framework. Arbitration must occur in a place, and that place will have its own law about arbitration which will of necessity affect the process. If the parties have not chosen the governing law to be applied to the dispute in arbitration (which they should do), the national law of the place where the arbitration will take place will provide the conflicts rules for choosing that governing law. Even if the parties have chosen a governing law, the national law of the arbitration place will still be the law which a party must resort to if it must compel arbitration or if the arbitration organization’s rules must be enforced to, for example, compel removal of an arbitrator or attendance of witnesses. If the arbitration award will be confirmed and “turned into a judgment” in the jurisdiction where the arbitration occurred (which would be done if, for example, the losing party had assets in that jurisdiction), the national law of the place of arbitration will have an effect on the extent to which the award may be challenged.
Choice of Law. A clause designating a particular arbitral tribunal is not a choice of the law of the country in which the tribunal is located or with which it is associated. If the contract which is the subject of the dispute does not make a choice of law, the arbitrators are by general rule required to apply the choice of law principles of the jurisdiction in which they are sitting in order to determine which law to apply. Rather than engaging in complicated and expensive choice of law analysis, it is not unlikely that a sophisticated arbitral tribunal will simply apply commonly accepted general legal principles, international uniform rules such as the 1994 UNIDROIT Principles, or the legal principles which they are accustomed to working with, even if the tribunal does not admit to doing that. But one should never take a chance on what law will be applied, because the results can be so different, and the legal wrangling over choice of law can be so expensive. Include a clause designating which law will be applied with a clause choosing arbitration and making an arbitral tribunal designation.
Mandatory Law. No matter whether the law which will govern the arbitration is one chosen by the parties or one adopted by the arbitrators, you will also need to deal with whether there are some countries’ laws which require application. If a country in which the arbitration award will be presented for enforcement feels strongly about issues in the arbitration from a “public policy” standpoint, unless its laws are followed, it has the right under the New York Convention to refuse to recognize and enforce the award. This “public policy” enforcement exception is not lightly invoked by the courts. Nonetheless, these laws which countries think of as mandatory will be honored over any choice of governing law made by the parties, so parties must evaluate where their award might be enforced and what mandatory law might apply there in order to consider the extent to which that law should be argued to the arbitrators.
Discovery. Those involved in litigation in the United States are accustomed to having good access to the opposing party’s documents and to taking pretty much every deposition they want to take. If a third party must be subpoenaed out-of-state for deposition, that is not difficult to do. Most international arbitrators, however, do not believe in discovery. Each side will be required to furnish to the opposing party the documents which it plans to rely on at the hearing, but the parties are not required to disclose documents which might be adverse to them. Arbitrators can usually be persuaded to order a perpetuation deposition on the basis that it is actually a portion of the arbitration itself, but, unless opposing counsel is as eager as you are for discovery depositions (so that the two of you agree to proceed with them), those depositions will not happen because most international arbitrators will not order them. Also, courts in places other than where the arbitration is being administered often do not enforce arbitrators’ subpoenas for discovery.
General Commercial Principles. Be aware that “general commercial principles” and an overall sense of fairness will usually be the guide for an arbitral tribunal rather than procedural technicalities or particular laws. More and more, arbitral tribunals are looking to harmonized laws such as those represented by the international conventions or to internationally “understood” uniform laws such as Incoterms, UNIDROIT, or lex mercatoria, on which to rest their decisions. The international arbitral body sees itself not as a law maker but as a dispute resolver, and its primary goal is to resolve the dispute before it in a way which seems just to it and in keeping with what is in the best interests of the flow of commerce. While the tribunal may well analyze the facts in excrutiating detail, what will in the end be more likely to make a difference in its decision is not a legal intricacy but a factual detail that tips the “scales” in favor of one side.
Breadth of Arbitrability–Issues and Parties. Of course, the arbitral body will only arbitrate those issues which you agree to submit to it, either in your contract pre-dispute or by agreement of the parties post-dispute. A common area of dispute resolution “vulnerability” is the statutory right. If a party has a statutory claim independent of the contract which is related to the subject of the contract (i.e. an antitrust claim or an unfair trade practices claim), perhaps one which grants extra-contractual relief such as punitive damages or civil penalties, is that claim covered by the arbitration? Decisions are everywhere on this issue, and the deciding points seem to be (i) the intention of the parties and (ii) the position of the country providing the statutory claim as to whether or not it may be resolved by arbitration. Although it is not necessarily determinative, you are more likely to be able to include all claims and issues in an arbitration if your arbitration clause specifically mentions statutory claims. If the contract is one in which specific statutory claims might be expected should a dispute arise, obviously, those kinds of statutory claims should be specifically mentioned as covered by the arbitration clause. Avoid couching the disputes to be arbitrated as those involving simply “interpretation of the contract” or “breaches of the contract.” Always say at least “all disputes arising from or in connection with” the contract.
International arbitrations are even more resolution-oriented than domestic arbitrations, and the arbitral tribunal or an internationally sophisticated court (such as those in large “international” cities) from whom a decision is sought will be inclined to include in the arbitration those who were not specifically parties to the contract providing for arbitration if to do so would further complete resolution of the dispute and avoid litigation. A “non-party” to a contract can always be found to be a party under standard agency concepts. In addition, the International Chamber of Commerce (the most internationally experienced arbitral body and the most respected) holds that the arbitral contract binds all companies who are part of what it finds to be an “economic unit,” that is, related companies who were all involved in a particular contract in some way, even if only one of them actually signed the contract. There is also authority holding that contract guarantors are bound by an arbitration clause in the contract they guaranteed.
Selection of Arbitrators and Their Role. The more well established arbitral bodies have honed lists of arbitrators with considerable information available on the legal, client, and personal background of the listed arbitrators. Appointment to the better international arbitral bodies’ lists of arbitrators is a prestigious honor bestowed only upon senior lawyers with considerable international experience and impeccable reputations. European bodies in particular respect academic credentials and require not only post-law school education but teaching experience. While the three-person arbitral panel with each party designating an “advocate” arbitrator was once common, that practice has waned internationally. It is important to know whether the particular arbitral body you choose continues to adhere to that practice in any respect. Most of the better international bodies do not. This means that you cannot expect the arbitrator you select to argue your case and attempt to influence the third or “neutral” arbitrator in your favor, nor may you have ex parte contacts with that arbitrator. You should, however, certainly select as your arbitrator an experienced commercial person who you have some reason to think would be sympathetic to your client’s case. One should always check with international lawyers in the country of arbitration to obtain more information on the prospective panel choices than what is offered by the arbitration body itself. Administrators at the better international arbitral bodies will often be personally acquainted with their institution’s arbitrators and provide additional information on them when asked.
Selection of Lawyer for the Arbitration. The international arbitral bodies are accustomed to working with lawyers from a variety of countries. They do not expect to necessarily see lawyers from their own country before them, and they pride themselves on being “international.” While it is not necessary to use for the arbitration a lawyer from the country in which the arbitration will be held, it is important to use a lawyer with international arbitration experience. The best lawyer in an international arbitration is one who is familiar with your industry, familiar with international arbitration procedures and the relevant substantive law, accustomed to dealing with people from foreign countries, comfortable in a different time zone with different food and different cultural practices, and perceptive to and respectful of cultural differences. The zealous United States advocate attuned to the nuances of evidentiary objections, the effectiveness of hard-charging cross-examination, and the value of precedent will not be as respected in an international setting as he or she might be in a United States court. A flexible lawyer who can weave the facts as a good story and make the decision maker like your company and want to rule for it is always the best lawyer to have in the courtroom, but this is even more true in the international arbitration setting. It does, however, make sense to establish a relationship with a lawyer in the arbitral body’s country early in the proceeding to be able to obtain advice on the choice of arbitrator, obtain advice on the local law (to the extent it might influence the arbitrators’ approach), or to appear for the client in court if it becomes necessary to seek court intervention for some reason.
III. Sample Form of International Arbitration Clause
Your international arbitration clause can, of course, be as simple or as complicated as you want, provided that it meets certain basic requirements for an internationally recognized arbitral referral. It should do the following: (1) cover a broad range of disputes in wording recognized by a majority of the international arbitration institutions, (2) name the institution under whose auspices the arbitration will be conducted, (3) name the procedural rules which will apply to the arbitration (which will usually be the rules of the institution named to handle the arbitration, but some institutions, like the American Arbitration Association, have several sets of rules), and (4) state that arbitration is the exclusive means for dispute resolution and that the award will be final and binding. In addition, it is advisable to: (5) name the place where the arbitration hearing will be conducted, (6) name the language in which the arbitration will be conducted, and (7) provide for arbitration before a single arbitrator at some lower level of dispute. These last three terms may make a big difference to your client in the expense of any actual arbitration, and most opposing contractual parties are not that concerned about these terms at the time the contract containing the arbitration clause is negotiated. Cautious drafters also include language preserving the parties’ rights to pursue liens or to act on or judicially obtain security, but most institutions’ arbitration rules and countries’ arbitration laws preserve those rights without specific mention in the arbitration agreement.
A copy of a standard international arbitration clause (which also includes a “governing law” term) is provided at the end of this article. Many of the arbitral institutions will also provide suggested clauses for use when they are designated as the arbitral body, but I have never found those clauses to cover all the issues I like to cover nor to be as precise as I think the clause should be.
IV. Recognized International Arbitration Tribunals
There is no specific requirement that international arbitration be conducted through a particular institution. Parties to a dispute may agree pre-dispute in their contract or after the dispute has arisen to submit the dispute to a selected individual or individuals for resolution, and there is no legal requirement in the New York Convention that that resolution be administered by an organization such as those to be discussed. It is the rare composite of disputing parties, however, who will be able to set aside their disagreements long enough to agree on arbitrators, a procedure for the arbitration, and handling of any unanticipated disputes that may arise during the arbitration. While non-administered arbitration is obviously cheaper (because there are no administration fees), that kind of arbitration risks delay, stalemates, and non-enforcement of the award if it fails to comply in some respect with the New York Convention, because the arbitration or the award failed to comply with a country’s perhaps not-too-well-articulated arbitration law.
In addition, the arbitration clause in a contract providing for non-administered arbitration must be very specific about the nature of and procedure for the arbitration, all of which is usually handled by an institution’s arbitration rules. Some of this may, of course, be provided for in a form of agreement executed at the time the arbitration is commenced, but that usually means delay and unnecessary legal expenses before the arbitration will get underway.
Almost every country has an arbitration organization which has been established by its government or an independent entity. Some of those organizations are internationally recognized and trusted. Others are fledgling. Each organization has its own procedural rules and its own fee structure. While the United Nations organized a group which produced the United Nations Commission for International Trade Law (“UNCITRAL”) Model Arbitration Law (a model to be enacted in countries to recognize validity of the arbitration process and provide for the effect of references to arbitration) and Rules for Arbitration, the United Nations itself does not have a commercial arbitral body for private parties. Each international commercial arbitration body is organized pursuant to the laws of a particular country and associated with that country.
International Chamber of Commerce. If any arbitral organization comes close to being truly “international,” that is, one which transcends country boundaries, it is the International Chamber of Commerce International Court of Arbitration, commonly known as the ICC, which was organized under French law in 1923 and is based in Paris. The ICC is the most well known and well respected international arbitration body in existence. It was impetus from the ICC that prompted the drafting and ratification of the New York Convention. The ICC is the oldest body devoted primarily to international arbitration, has handled the most arbitrations, and was in the past thought to be the most expensive. Fortunately, that “expensive” reputation is changing, because having an excellent arbitral body like the ICC available for less than multi-million dollar arbitrations is a very good thing for commercial dispute resolution.
ICC arbitral tribunals are formed from a panel of potential arbitrators from the 57 countries in which the Chamber is active. Arbitrators are appointed to the panel by the Court, which is composed of ten members and a technical advisor chosen from an appointed group of advisors. Each member of the Court and the chosen technical advisor are from different countries. While the arbitral tribunals decide the arbitrations before them, the Court performs an important supervisory function which other international arbitration associations have no Court or other entity to perform: it “approves” every decision made by the arbitral tribunals before those decisions may become effective. As a part of that approval process, the Court may make modifications to the form of the award and may “suggest” changes to the substance of an award. The purpose of the Court approval process is to ensure that no ICC decision is invalidated by a judicial tribunal.
While the ICC and its Court are based in Paris, ICC arbitrations are held all over the world before experienced arbitrators from all over the world. While we might prefer to hold that international arbitration in Paris for selfish reasons, it is unfortunately not necessary. The ICC also has a New York office, and that office has a well-deserved reputation for providing lawyers and their clients with helpful guidance throughout the arbitration process.
American Arbitration Association. The AAA was founded in 1926, but it did not enact International Arbitration Rules until 1991 (which it modeled after the UNCITRAL rules), and it did not handle any significant number of cross-border arbitrations until after those rules were adopted. The AAA International Rules were improved by amendment in 1997 to provide for their applicability in any qualifying “international” dispute submitted to AAA arbitration, whether or not specified, to provide that punitive damages were waived by the agreement to arbitrate (unless the parties’ agreement or mandatory law specifically permitted them), and to make other changes in arbitration procedures for international disputes. The AAA has negotiated cooperative agreements with the arbitral institutions of 50 other nations to provide for conducting AAA arbitrations in those jurisdictions.
While the AAA has made a strong effort to become recognized in the international arbitration field, its International Dispute Resolution Centre in New York has not achieved the reputation of the AAA domestic arbitration offices. Arbitrators and participating lawyers have reported that the AAA administrators do not provide any meaningful help in international arbitrations and are in fact sometimes a hindrance. In addition, most foreign entities who contract with a U.S. party do not want to use an “American” institution as their arbitral body. They prefer the better known ICC, a recognized neutral.
London Court of International Arbitration. While France prides itself on having the most sophisticated international commercial arbitral body in its ICC, London is thought of as the more practically “commercial” location, and the LCIA was a respected international commercial arbitral body with its own rules and procedures long before UNCITRAL began its effort to draft model and uniform laws. Another long-standing, busy organization is the London Maritime Arbitrators’ Association, which competes with the New York Society of Maritime Arbitrators as the arbitration body recognized as most competent to decide maritime disputes involving charter parties, cargo damage claims, and the like. Maritime disputes are almost always international, and many of the significant international legal concepts which have garnered notice in today’s recent global economy are rooted in old maritime traditions.
Other Recognized Bodies. The national arbitration associations of Sweden (through the Stockholm Chamber of Commerce), Hong Kong, and Switzerland are respected for their neutrality and handle a significant number of international arbitrations. The China International Economic Trade Arbitration Commission (“CIETAC”) has grown in respect as China’s international trade has grown, and many foreign companies trading with China have recently been willing to include arbitration clauses in their contracts designating CIETAC as the arbitral body. The General Agreement on Trade and Tariffs (“GATT”) and its World Trade Organization (“WTO”), as well as the North American Free Trade Act (“NAFTA”) provide for arbitration of trade disputes through organizations operating under their auspices if the parties do not otherwise have a contract which specifies arbitration and the applicable body and procedures to be used. The Inter-American Commercial Arbitration Commission was created pursuant to the Inter-American Arbitral Convention but has not been frequently used. The World Intellectual Property Organization (“WIPO”) in Geneva, Switzerland has a specialized arbitral body for intellectual property disputes.
Arbitration/Governing Law Provision For International Contracts
#. Arbitration/Governing Law. All claims arising under or relating to this agreement or to the relationship of the parties evidenced by this agreement, including any claims created by statutory law, shall be decided by arbitration and be governed by the law of the state of Oregon, without reference to its conflicts of law principles. The arbitration shall be final and binding and shall be held in Portland, Oregon in the English language before a tribunal appointed by the International Chamber of Commerce (“ICC”). The arbitration shall be conducted according to ICC rules, provided, however, that, (i) if the arbitration involves claims totaling less than $50,000, it shall be before a single arbitrator and (ii) where a party to the arbitration is from a country other than the United States, the ICC International Arbitration Rules shall apply. This arbitration provision shall provide the exclusive means for dispute resolution, provided, however, that neither party shall be prohibited from proceeding in a court to obtain specific performance of this agreement or provisional relief auxiliary to arbitration. The arbitration award rendered pursuant to this provision shall be enforceable by any court having jurisdiction. [May add “confidentiality” term here to preserve confidentiality of information exchanged in the arbitration and that the proceedings are to be treated as confidential.] [Note that reference to Oregon law will by law include reference to the Convention on the International Sale of Goods, in a contract to which that is otherwise applicable, unless that Convention is expressly stated to be inapplicable.]