International Arbitration – Pros and Cons

Arbitration is a dispute resolution process in which the disputing parties present their case to an arbitrator or tribunal (three or more arbitrators) who will issue a binding decision, based on an examination of the evidence presented by the parties.  Arbitration has become a popular method of resolving business disputes, both domestically and internationally.  As the international marketplace continues to expand, businesses are emerging, and business transactions are taking place in new world regions. These regions may be unprepared for such transactions as a result of a young (and hence unpredictable) judicial system, political or economic pressures or an inefficiency that would make court-based adjudication impractical.  Arbitration is also beneficial for multi-national operations due to their exposure to varying legal regimes, institutions, and customs.  As a result, more and more international contracts are mandating that arbitration be used to resolve any disputes that may arise in the future.  In this article we will take a closer look at international arbitration, the arbitration process and present major advantages and disadvantages of arbitration.

THE PROCESS:

Arbitration can be administered through an established arbitration institute or ad hoc.

There are a number of internationally recognized arbitration institutions that provide parties with administrative assistance, physical facilities, an established format of rules for conducting the arbitration and support services.  The institution will provide the parties with a list of arbitrators tailored to the issue being disputed, often based on parameters set by the parties, including language, governing law and cost.  Each of these institutions have their own set of procedures thereby avoiding conflicting procedures between various countries. Some of the more recognized international institutions include the International Chamber of Commerce based in Paris, the London Court of International Arbitration, the American Arbitration Association, the International Center for Dispute Resolution in New York, the Stockholm Chamber of Commerce, the Singapore International Arbitration Center and the Hong Kong International Arbitration Center. 

Under a non-administered ad hoc arbitration the parties are responsible for establishing the rules, procedures, applicable law and administrative support governing the arbitration.  Typically, the arbitration clause of the business contract will be the controlling provision.  Where the parties have not included an arbitration clause in their business contract, but wish to resolve their dispute through arbitration, they will be required to agree to the terms after the dispute arises.  Parties that choose to proceed ad hoc must be very careful when drafting the arbitration clause so as to prevent inconsistencies that may invalidate the clause in a given jurisdiction.  The lack of clarity or omission in an arbitration clause could result in litigation, delay and additional expenses.  The basic provisions that should be included by the parties in the arbitration clause: (1) the number of arbitrators; (2) the method of selecting the arbitrators; (3) the place or situs of the arbitration; (4) the language of the arbitration; (5) a governing law provision; (6) a notice provision and (7) authorization for a court to enter judgment on the award.  Depending on the nature of the business to be conducted, the parties may also consider addressing the following issues in the arbitration clause: (1) confidentiality; (2) discovery; (3) multi-party arbitration; (4) consolidation; (5) currency of the award; (6) split clauses requiring litigation of some issues and arbitration of others; (7) scope of award; and (8) authorization to adapt the contract or to fill gaps in it.  

 BENEFITS OVER COURT-BASED ADJUDICATION

1.  Enforceability of Arbitration Awards

The ability to enforce an arbitration award is perhaps the greatest advantage over traditional litigation.  In contrast to arbitration, there are no international treaties that require domestic courts to recognize and enforce foreign court judgments.  The New York Arbitration Convention, however, provides for recognition and enforcement of arbitration agreements and the resulting awards in over 130 Contracting States.  When entering into an international business contract, parties should consider whether the country where they expect to enforce an award (usually the country where the weaker party is located) is a signatory to the New York Convention or another treaty that obligates it to enforce arbitral awards.

 2.  An Impartial and Knowledgeable Decision Maker

Whether conducted ad hoc or through an institution, the parties will select the arbitrator(s) from a list of independent and impartial professionals.  The custom in international arbitrations is to have a tribunal of three arbitrators for matters involving significant monetary amounts; otherwise one arbitrator will oversee the dispute.  Having the ability to select the arbitrator(s) provides parties with a sense of control and a level of trust that their dispute will be resolved fairly.  In a court-based adjudication, the court will randomly assign a judge to handle your dispute with limited regard to the matter or issues being disputed.  Since many arbitrations, especially in the international setting, will deal with complex technical issues, arbitration allows the parties to construct a panel of arbitrators that are knowledgeable experts in the field of the subject-matter being disputed.

 3.  Confidentiality

In general, the arbitration process is a private matter that allows participants to avoid disclosure of personal information, trade secrets, financial reports and other nonpublic information.  Unlike court proceedings, arbitration is not part of any public record.  Some arbitration institutions impose a confidentiality requirement on the parties and on the arbitrator but there is no universal confidentiality requirement.  Parties that are concerned with confidentiality will want to include special provisions in their contract to ensure that both parties keep the arbitration process private.

4.  Brevity

In traditional litigation, procedural requirements, motion practice, adjournments and the availability of the right to appeal can result in disputes playing out for years without resolution.  While the length of any arbitration will depend on the complexity of the conflict, generally, arbitration will provide parties with a much quicker resolution of their dispute.  Unless the agreement provides otherwise, arbitration awards are final and cannot be appealed or overturned in the absence of a showing of extraordinary circumstances (for example, fraud, bias or other inappropriate actions on the part of the arbitrator).  Thus, once a decision is rendered, the matter is resolved.

 5.  Limited Expenses

Arbitration is perceived to be less expensive than traditional litigation.  This is because of the limited discovery, lack of appeal and ease of enforcing arbitration decisions.  However, the costs will vary significantly depending on the complexity of the arbitration and how the parties plan to conduct the arbitration (see the disadvantages below).  Depending on the chosen location and language for the arbitration, there will be additional costs for transportation (parties, witnesses and documents), translators and the translation of documents.  Parties will also have to pay the fees and expenses of the arbitrator.  If an arbitration institution is used, there will be additional fees.  Similar to litigation, an award may dictate that the prevailing party may be reimbursed for these fees by the losing party.

DISADVANTAGES OVER COURT-BASED ADJUDICATION

The disadvantages of arbitration stem from the same characteristics as the advantages listed above.

1. Finality of Awards 

Arbitration takes decision-making power away from the parties.  As noted, once a decision is rendered it is not appealable as of right and the parties are generally bound to the award of the arbitrator.  Without the right to appeal, there is always the risk of being subject to the whims and prejudices of a single arbitrator.

2. Potentially High Fees

The more professional and knowledgeable an arbitrator is, the higher her fees are likely to be.  If the fees are not limited in advance, the costs of arbitration can exceed the costs of a court-based adjudication.  It is therefore recommended to agree to a fee structure at the outset of the arbitration process.  Also court fees are typically lower than the registration fee of arbitration organizations.

3. Dispute over Arbitrator Selection

Unless agreed upon in advance, the process for selecting an arbitration institution, the specific arbitrator and the number of arbitrators could significantly delay the arbitration process.  As in most cases, it is worthwhile considering these matters and making these decisions before a dispute arises.

4. International Challenges

An international arbitration may present the practical challenges associated with international business dealings, and while such challenges may be present in court-based adjudication, they are worth briefly noting. For example, an international arbitration may require learning the substantive law of a foreign jurisdiction, or new rules of procedure which may appear “backward” compared to any previous experience. In addition, challenges such as linguistic differences and the need for use of a translator (or even multiple translators) may further complicate and draw-out the arbitration proceeding. 

CONCLUSION

In the business world, where maintaining relationships is important and time is money, a quick resolution is often preferable.  As this article has highlighted, there are many advantages in providing for arbitration of disputes when conducting business with foreign partners.  If you are considering entering into a foreign business venture or would like to draft an arbitration provision for a current business venture, we recommend contacting an attorney who can help structure an agreement that is best suited to you as well as ensure that your interests are fully protected.

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