INTERNATIONAL ARBITRATION

Description of Arbitration:

With the rapid growth and expansion of the world financial and business communities, it is increasingly important for businesses to have an established method of resolving business disputes quickly, efficiently and constructively.

When disputes arise in the course of business, parties often prefer to settle them privately and informally, in a businesslike fashion that will enable them to maintain their business relationship.

Arbitration is designed for just such occasions, in that it can be designed for quick, practical and efficient resolution.

Arbitration is a voluntary process of dispute resolution where a neutral third party renders a final and binding decision after each side has an opportunity to present its view. This method is especially useful in international business transactions where parties are often unfamiliar with foreign legal systems.

Unlike a judicial process, arbitration is conducted outside the court system by impartial arbitrators who are selected by the parties based on criteria that best fits the nature of the contract. Arbitration is usually conducted by either one arbitrator or a panel of three arbitrators with the structure, format, site and scope of arbitration all decided by the parties and memorialized in the arbitration clause of their contract. The parties usually negotiate the arbitration clause at the same time they develop the initial contract. A properly structured provision will help establish a framework for expeditious resolution of contract disputes.

Arbitration allows the parties greater flexibility than a court proceeding. Parties can decide to have abbreviated time periods in which to respond to claims, where the arbitration will be conducted, how formal the process will be, or whether to involve lawyers in the arbitration.

Advantages of Arbitration over Litigation:

1. Impartiality of Decision Maker - Where a party is concerned that a court in another country may not be neutral, arbitration allows parties chose the arbitrators who will decide the matter;
2. Enforceability of Arbitral Awards - Arbitration awards are final and can be challenged only under very limited circumstances;
3. Confidentiality - Where arbitration proceedings and awards are normally private, court proceedings and judgments are frequently public;
4. Expertise - Parties may choose arbitrators with technical backgrounds who will understand the specific issues in the case;
5. Limited Discovery - Because the parties may choose to limit discovery in their arbitration, arbitration can be less burdensome;
6. Expense - Arbitration is usually less expensive than litigation;
7. Brevity - Arbitration usually produces a resolution more quickly than litigation; and,
8. Relationships - Arbitration may be viewed as less adversarial, thereby preserving long-term business relationships.

Kinds of Disputes Subject to Arbitration:

Generally speaking, there is a two-step process to determine if a controversy is arbitrable: first, parties should specify in an arbitration agreement or in an arbitration clause of a contract whether disputes will be subject to arbitration; second, the parties should consider that the law of the country in which the arbitration takes place may prohibit arbitration for certain types of disputes. Arbitration for commercial matters, however, is normally encouraged.

The types of disputes that are considered arbitrable varies among countries. In the United States, courts have strongly favored arbitration in the resolution of international business disputes. They have held that almost all civil disputes can be arbitrated and have denied arbitration only where Congress has expressly stated that the provisions of a specific law can be enforced only in the courts.

The Agreement to Arbitrate

Arbitration agreements are formed at one of two points in time: during the negotiation of a contract, or after a legal dispute arises. Because the contract negotiation process offers greater opportunity to develop an arbitration format without the acrimony that can develop after a controversy arises, inclusion of an arbitration agreement as a clause in a contract is preferable and can streamline the dispute resolution process. The arbitration agreement is generally incorporated into the contract governing the transaction.

Comparing Ad Hoc to Institutional Arbitration

Arbitration can be conducted either ad hoc or through an established arbitration institution, with advantages and disadvantages to each.

1. Institutional Arbitration

Parties may choose to take advantage of the established mechanisms/procedures offered by one of the many arbitration institutions. These institutions have formal procedures and rules designed to assist parties. The institution chosen may administer the arbitration according to its own rules or, in most cases, according to other rules if requested.

a. Advantages of Institutional Arbitration:
(1) Availability of pre-established rules and procedures;
(2) Administrative assistance from institutions with a secretariat or a court of arbitration;
(3) Lists of experienced arbitrators, often listed by fields of expertise;
(4) Appointment of arbitrators by the institution if the parties request it;
(5) Physical facilities and support services for arbitrations;
(6) Assistance in encouraging reluctant parties to proceed with arbitration; and,
(7) An established format that has proven workable in prior disputes.
b. Disadvantages of Institutional Arbitration:
(1) Institutions charge administrative fees for services and use of facilities. Expenses may be high in disputes over large amounts, especially where fees are related to the amount in dispute. For small amounts in dispute, institutional fees may be greater than amount in controversy;
(2) The institution's bureaucracy may lead to delays and added costs; and,
(3) Parties may be required to submit responses in abbreviated time periods.
c. Issues to Consider in Selecting an Arbitration Institution:
(1) History of the institution's administration of international arbitrations.
(2) Experience:
  • How many international disputes has the organization handled and from where did the disputing parties come?
  • Has the institution handled disputes similar to the subject of the contract?
(3) Selection of Arbitrators:
  • Are the parties involved in the selection of arbitrators?
  • Will the institution automatically select arbitrators from neutral countries, or will they do so only on request?
  • Does the institution maintain a roster of arbitrators?- Can parties select arbitrators outside the roster of the institution?
  • Does the institution have arbitrators with experience in the subject matter of the contract?
(4) Procedures:
  • Does the institution permit flexibility in the conduct of the arbitration?
  • Can parties opt out of certain rules or procedures?
  • What are the rules regarding time limits in the arbitration?
  • Are time limits enforced?
  • Does the institution limit the procedural rules selected by the parties?
  • Are the institution's rules clear and neutral for all parties?
(5) Cost:
  • What administrative fees are charged by the institution?
  • Are these fees fixed or based on the amount in dispute?
  • Are the arbitrator's fees based on time spent or amount in dispute?
(6) Services:
  • Does the institution's staff have experience with international disputes? How large is the staff?
  • Does the institution have any affiliations within the region that may facilitate administration of the arbitration?
2. Ad Hoc Arbitration

Ad hoc arbitration refers to a process by which the parties select the arbitration format and structure without using an arbitration institution. The ad hoc approach allows for greater specificity in the design of a mechanism for the particular contract. Parties may select ad hoc arbitration to reduce costs, to accelerate the process and/or to structure proceedings to suit their particular needs.

When choosing ad hoc arbitration, parties must specify in the arbitration clause all aspects of the arbitration, including applicable law, rules under which the arbitration will be carried out, the number of arbitrators, the method for selecting the arbitrator(s), the language in which the arbitration will be conducted and the place of arbitration. Parties may either develop their own rules or select established arbitration rules to govern the arbitration. Parties may use the rules of an arbitration institution without submitting the dispute to that institution.

DRAFTING THE ARBITRATION CLAUSE

The optimal way for parties to ensure a successful arbitration is to draft an appropriate arbitration clause that specifically meets their needs. Although a model clause may be used in standardized contracts, in complex international transactions the parties should tailor the arbitral provision to the needs of the specific contract.

Elements of the Arbitration Agreement

The following elements should be considered for inclusion in any arbitration agreement:

1. Scope of Arbitration - The parties should explicitly state the matters that they want the arbitration agreement to cover. However, they should be aware that local law may restrict issues that may be subject to arbitration.
2. Choice of Arbitrator(s)
a. The clause must specify the selection process, otherwise statutes and rules may fill any gaps;
b. If institutional rules are used that provide for selection of arbitrators, no further reference to selection may be necessary;
c. A panel of three arbitrators is standard for international commercial arbitrations, with the parties each appointing one, and the parties or arbitrators selecting a third. In some circumstances an appointing authority will designate any missing members (e.g. where one of the parties refuses to select an arbitrator as a dilatory tactic);
d. A sole arbitrator may be preferable for disputes involving smaller amounts; and,
e. If an arbitrator must have a special skill, it should be specified in the arbitration agreement.
3. Choice of Law
a. The parties should designate the substantive law that will be applied in the arbitration;
b. The parties may select a procedural law. If they do not, the procedural law of the place where the arbitration occurs will apply; and,
c. Absent an express choice of applicable law, the law of the place of the arbitration will be applied.
4. Choice of Location
a. A forum country should be selected that is a signatory to an international arbitration convention (i.e., the New York or Panama Conventions);
b. The location determines the extent of potential assistance, or even interference, by national courts during an arbitral proceeding and it may affect enforcement of the award;
c. Practical features such as facilities, communications and transportation systems, freedom of movement of persons, documents and currency, and support services should be considered; and,
d. The choice of location in the arbitration agreement should include the name of both the city and country.
5. Choice of Language - Parties may designate one language as the official language of the proceedings and allow simultaneous interpretation into another language.
6. Choice of Rules - Parties should specify the rules of procedure that will govern the arbitration process.
If selecting institutional rules to govern the arbitration, parties should consider whether those rules provide for:
a. The selection of a site where it is not specified in the arbitration clause;
b. Assessment of costs, including allocation between parties;
c. Selection of arbitrators;
d. Powers given to the arbitrator;
e. The language in which the proceeding will be conducted;
f. The substantive law to be applied;
g. The use of experts;
h. The time allowed to arbitrators to make awards;
i. The power of any administering authority over the awards;
j. The availability of provisional relief; and,
k. Flexibility to allow parties to opt out of certain provisions.
If the parties do not use institutional rules, the following items should be included in their own ad hoc rules:
a. Procedure to initiate arbitration proceedings;
b. Means for dealing with the refusal of a party to proceed with arbitration;c. Scope and limitation of discovery;
d. Outline of hearing procedures, including notice and form of the award (whether it must be written out with reasons for the decision); and,
e. Procedures for enforcement of the award.
7. Interim Relief - Some arbitration rules specifically address matters of interim relief, i.e., whether the parties may apply to a court for a preliminary injunction, an order of attachment or other order preserving the status quo until the arbitrator(s) decide the case. The rules of most arbitration institutions provide that resorting to a court in such circumstances is not incompatible with, or a waiver of, the right to arbitrate under their rules. Moreover, most rules allow the arbitrators to order such relief.
8. Costs - The arbitration agreement should provide for the allocation of costs.
9. Award of Tribunal - The agreement should specify that a majority of the arbitrators must agree on an award and that it must be based on applicable law. The agreement should also specify the currency for payment of the award. If the award is to be recognized and enforced internationally, it may need to state reasons and legal basis, including reference to the process by which the legal basis was selected. Some awards contain no reasoning or written report.

Court Enforcement of Arbitral Awards

The effectiveness of arbitration in providing final and binding resolution of international commercial disputes depends upon the ability to obtain court recognition and enforcement if a party refuses to satisfy an award. 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 losing party is located) has a domestic legal framework in place for the enforcement of arbitral awards and whether that country is a signatory to a treaty that obligates it to enforce arbitral awards.

Conventions for Enforcement of Arbitral Awards

1. United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), June 10, 1958 (entered into force in the United States in 1970) [For full text of Convention, see International Legal Materials at 7 I.L.M. 1046.] The New York Convention is the most widely-recognized convention for enforcement of arbitration awards. There are currently 120 parties to the New York Convention.

The Convention provides that each country must "recognize [arbitral] awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied on." This means the party only needs to supply the local court with an authenticated original or duly certified copy of the award and the original or a certified copy of the arbitration agreement in order to apply for enforcement.

The New York Convention obligates each country that is a party to enforce arbitral awards subject to a limited number of defenses (which are discussed in Section C below).

When the United States ratified the Convention, it incorporated two reservations, that U.S. Courts will only enforce arbitral awards where (1) the subject matter of the award is considered to be commercial in nature; and, (2) the award was rendered in a country that is also a party to the New York Convention.

2. Inter-American Convention on International Commercial Arbitration ("Panama Convention"), Jan. 30, 1975 (entered into force in the United States in 1990).

The Panama Convention is an agreement among certain members of the Organization of American States providing for the reciprocal recognition and enforcement of international commercial arbitration agreements and awards.

There are 17 state parties to the Panama Convention.

Grounds for Refusal to Enforce Arbitral Awards

Generally, a court must comply with a request to enforce an arbitration award. The grounds upon which a court can refuse to enforce an award are very narrowly defined. Generally, there are seven grounds for refusal to enforce, which fall into two categories:

1. Problems with the conduct of the arbitration itself. The party against whom enforcement is sought must furnish proof that the award is flawed due to:
a. Incapacity of a party;
b. Failure to give proper notice to a party, or the inability of a party to present his/her case;
c. The award fell outside the scope of the arbitration agreement;
d. The selection of the arbitrators violated the agreement; or, if the agreement did not address selection, the selection process violated the law; or
e. The award was set aside or annulled.
2. State sovereignty issues
a. The law of the country in which enforcement is sought prohibits arbitration on the subject matter of the issue in dispute; or
b. The recognition or enforcement of the award would be contrary to the public policy of that country.

INTERNATIONAL ARBITRATION RULES

Unless parties select an arbitration institution that requires use of its own rules, parties may use any of the following rules:

A. Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL)
In 1976, the United Nations Commission on International Trade Law (UNCITRAL) promulgated rules for use in ad hoc international arbitrations. The rules are widely accepted. Some arbitration institutions have adopted the UNCITRAL Rules as their institutional rules and other institutions will administer arbitrations under the UNCITRAL Rules, if requested.
B. American Arbitration Association International Arbitration Rules
The American Arbitration Association (AAA) is an arbitration institution that has developed International Arbitration Rules, Commercial Arbitration Rules, Securities Arbitration Rules, Patent Arbitration Rules, and rules designed for specific sectors including construction, employment, labor, patents and textiles.
C. International Chamber of Commerce Rules of Conciliation and Arbitration International Chamber of Commerce
The International Chamber of Commerce International Court of Arbitration's rules are widely recognized and can also be selected by parties for use in ad hoc arbitrations or in arbitrations conducted by other institutions.

DISPUTES BETWEEN FOREIGN INVESTORS AND HOST GOVERNMENTS

Specific Issues to Consider in Investment Contracts

Because of the uncertainty of adequate relief in the courts of another country, an agreement to arbitrate in a forum where enforcement of the award is assured may be essential. When a State is a party to a contract, the contract should include a commitment by the State to resolve disputes through arbitration and to "internationalize" the agreement. Internationalization implies that the rights and duties of parties cannot be legally affected by unilateral action of the host state. The arbitration clause should be sufficiently broad and clear in order to include issues of nationalization, expropriation and unilateral abrogation of "stabilization clauses" (e.g., tax rates, customs exemptions, currency convertibility, remittances and repatriation of capital).

The State should also agree that the arbitration clause is an explicit waiver of sovereign immunity against enforcement and execution of the award or any judgment thereon, and that the award or judgment, if unsatisfied, is enforceable against the State in the courts of any nation in accordance with its laws.

The ICSID Convention

In 1965, ICSID was established under the auspices of the World Bank via the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention), March 18, 1965 (entered into force in the United States October 14, 1966). The ICSID system includes rules for both conciliation and arbitration as well as its own enforcement mechanism.

ICSID jurisdiction is conditioned upon written consent, which cannot be withdrawn once granted. Consent by the State is usually given in either an investment or arbitration agreement or in an ICSID clause in a contract, but it could also be provided in the State's investment code or in a bilateral investment treaty (over 150 treaties refer to ICSID arbitration).

ICSID may take jurisdiction of any legal dispute arising from an investment between a contracting State and a national of another contracting State. Both the investor's country of nationality and the host country must be ICSID members in order to use ICSID. If only one of those countries is an ICSID member, ICSID's Additional Facility may be available.

The ICSID Additional Facility was established in 1978 to administer proceedings for settlement of certain legal disputes between States and nationals of other States that fall outside the scope of the ICSID Convention such as in: (a) investment disputes where one party is not a contracting member or national thereof; and, (b) disputes not directly arising out of an investment, provided at one of the parties is either a party to the Convention or a national of a country that is party to the Convention. Existing laws that provide for the enforcement of awards rendered pursuant to the ICSID Convention cannot be relied on to enforce awards rendered by the Additional Facility. The Additional Facility rules require that the arbitration be held only in countries that are party to the New York Convention.

The ICSID Convention attempts to depoliticize investment disputes between States and foreign investors by providing for a comprehensive system of international arbitration to govern such disputes. Under the Convention, an investor's government need not intervene in the dispute because the host State would participate in an arbitration proceeding on equal procedural footing with the investor.

The ICSID Convention includes its own enforcement mechanism. An administrative "appeal" may be made to the ICSID Secretary-General for the annulment of an award on any of five grounds:

(1) the arbitration panel was not properly constituted;
(2) the arbitration panel manifestly exceeded its powers;
(3) there was corruption on the part of a member of the arbitration panel;
(4) there was a serious departure from a fundamental rule of procedure; and,
(5) the award failed to state the reasons on which it was based. Awards cannot be challenged outside of the mechanisms provided for under the Convention.

ICSID clauses sometimes require exhaustion of local remedies but more typically require an investor to choose either local remedies or ICSID.

Of the approximately 123 countries that have signed the ICSID Convention, approximately 110 have ratified it. Ratification of the Convention obligates Parties's courts to enforce an ICSID award as a final judgment of one of its courts.