A Brief Introduction to the World of International Commercial Arbitration - ABA YLD 101 Practice Series

By Baiju S. Vasani and Catina Haynes

Why Do Parties Use It?
Set the scene: two companies from two different countries and two different legal backgrounds negotiate a contract to build a chemical processing plant. Neither company wants to litigate a potential dispute in a foreign court or have the contract interpreted by a judge or jury that is unfamiliar with the chemical processing industry. Further, neither party wants to risk obtaining a favorable judgment that is unenforceable in a foreign court where the opposing party's assets are located, or to have a third party competitor or members of the public able to follow each step of their litigation dispute in court. For many parties in similar situations, unfamiliar with the language, rules and customs of foreign courts and often unsure of the basic independence of those courts from outside pressure and influence, the solution to these problems is international arbitration.

What Is It?
International arbitration is a non-judicial, binding form of dispute resolution. It provides a forum that gives parties the autonomy to resolve their disputes based on the guidelines of their choice. This flexibility is coupled with the ability to have a neutral third party or parties, known as an arbitrator(s), decide the outcome of their dispute and render an award that is enforceable in multiple international venues. For these reasons, among others, international arbitration is appealing to many parties dealing in international commerce. Within the realm of international arbitration, parties from different cultures, who speak different languages and come from various legal systems - such as a common law versus a civil law system - can find a common platform from which to communicate.

The Procedural Rules
Arbitral tribunals are usually either ad hoc or institutional. In other words, parties may decide to utilize fully the ability to dictate every aspect of an arbitral proceeding for themselves, or they may submit their dispute to one of the many arbitral institutions that offer a framework of rules to govern an arbitral proceeding. In an ad hoc arbitration, the parties decide for themselves how arbitrators are to be selected, what procedural rules are to govern the arbitration process, what the applicable substantive law will be, and how administrative support arrangements are to be made. Some parties choose ad hoc arbitration because they want rules specially tailored to their business relationship, they assume it will be less expensive than being required to pay administrative fees, or they are simply unable to agree on which arbitration institution should handle the dispute. Generally, ad hoc arbitrations afford parties the greatest autonomy on how their dispute will be resolved, and work out cheaper than institutional arbitration if the parties are able to limit the case they put forward and work well with each other within very narrow dispute resolution confines. If not, costs increase simply because the parties end up in dispute over how the arbitration will be conducted, in addition to the substance of the dispute itself.

An arbitration institution, on the other hand, has pre-set procedural rules which the parties can typically modify subject to some exceptions. Institutional arbitrations are popular with parties that do not wish to negotiate every aspect of an arbitration on a case-by-case basis. For example, negotiations over clauses involving ad hoc arbitration can become lengthy as the parties dispute different aspects of the case, such as the permissible length of written submissions, whether oral argument will be permitted, whether cross-examination is allowed in questioning witnesses, and the number of witnesses each side will be allowed to present. Further, an institution's pre-set infrastructure provides the parties with benefits such as access to lists of approved and qualified arbitrators, the ability to work with a trained staff that is experienced in efficient administration of the dispute resolution process, and the availability of independent procedural rules that provide a more predictable structure for the arbitration. Although parties can usually modify an institution's procedural rules, it may not be advisable to do so because national courts generally give greater weight to arbitral awards that are the product of an institutional arbitration conducted according to standard rules than to awards resulting from ad hoc arbitration proceedings. On the whole, and subject to certain exceptions, institutional arbitration is to be preferred.

Regardless of whether an arbitration is ad hoc or institutional, however, the tribunal must have the participating parties' written consent to decide the dispute in question. Because a tribunal's authority comes from the parties' consent, international arbitration avoids some issues common to litigation such as whether the decision-making body has personal jurisdiction over a party. The most common way that parties give consent is by including an arbitration clause in their contractual agreement. Less often, parties agree to submit to arbitration after a dispute has arisen. In either case, the agreement to submit disputes to arbitration may be drafted to indicate what procedural rules will govern a future dispute including the number of arbitrators, how arbitrators are to be appointed, the location of the arbitration, and the language in which the proceedings will be conducted.

A major provision that contracting parties usually include in an arbitration clause is the number of arbitrators that will be required to sit on a tribunal panel. Although parties have the freedom to select a single arbitrator or any number of arbitrators, typically, the parties select as sole arbitrator for smaller disputes, and a panel of three arbitrators to decide larger disputes. Parties have the flexibility to select arbitrators from a number of different legal as well as non-legal backgrounds. For example, in a dispute involving highly technical topics, the parties may appoint an arbitrator with a technical background in the field relevant to the controversy, such as an engineer or a chemist in our chemical processing example above. Additionally, if the dispute involves a number of different languages, the parties may require that a potential arbitrator be fluent in the languages relevant to the dispute, thus allowing the parties to plead in the language of their choice, and reducing translation expenses during the course of the arbitration.

Enforcement Of Arbitral Awards
Arbitrators have no independent power of enforcement, and if national courts were able to construe arbitral awards based on their own discretion, there would be a risk of inconsistent enforcement. To promote uniform enforcement of arbitral awards, awards are typically enforced through treaties and conventions. The Convention on the Recognition and Execution of Foreign Arbitral Awards of 1958, also known as the New York Convention, is the major means for parties to seek consistent judicial enforcement of arbitral awards. Well over 130 countries have agreed to abide by the New York Convention, including the United States. The presence of such international conventions and treaties promotes parties' confidence in the enforcement of arbitral awards - it is widely regarded as easier to enforce an international arbitral award than a foreign court award - and thus increases their willingness to consent to arbitration as a means of resolving their disputes.

Types Of International Institutions
Because the New York Convention requires that certain procedures be followed during an arbitration proceeding for an award to be enforceable, disputing parties may prefer to arbitrate in an institution rather than to arbitrate on an ad hoc basis. Some institutional arbitration organizations generally handle all types of disputes while others specialize in particular areas of law.

The American Arbitration Association's International Centre for Dispute Resolution ("ICDR"), the International Chamber of Commerce's Court of Arbitration ("ICC"), and the London Court of International Arbitration ("LCIA") are amongst the most well-known and well-established arbitration institutions that tailor to international business disputes. Other rising commercial dispute institutions include the Arbitration Institute of the Stockholm Chamber of Commerce ("SCC"), the China International Economic and Trade Arbitration Commission ("CIETAC") and the Cairo Regional Centre for International Commercial Arbitration ("CRCICA"). In addition, the Permanent Court of Arbitration in the Hague facilitates the administration of arbitrations involving various combinations of private parties, states, and intergovernmental organizations, while major specialty organizations include the International Centre for the Settlement of Investment Disputes ("ICSID"), and the World Intellectual Property Organization Arbitration and Mediation Center ("WIPO").

Advantages And Disadvantages Of International Arbitration
Whether ad hoc or institutional, there are a number of advantages and disadvantages to the use of international arbitration as a mechanism for efficient and final dispute resolution. One advantage of international arbitration is that an arbitral award is usually easier to enforce internationally than a court judgment. Typically, a national court will decline to enforce a foreign court's judgment unless it meets very narrowly tailored requirements. To remedy this problem, many countries have entered into treaties and conventions wherein they agree to honor other signatory countries' arbitral awards, such as the New York Convention as highlighted above. Another advantage to international arbitration is that parties are able to keep the facts surrounding their dispute (including the fact of their dispute) and the terms of the arbitral award confidential. There are some potential negative consequences to this confidentiality. Because arbitral awards are usually kept private, there is a lack of precedent for subsequent parties and arbitrators to consider when they are involved in similar disputes.

Of usually greatest concern to companies, pursuing international arbitration may be significantly less expensive than litigating a dispute in a judicial system. For example, in a highly technical engineering matter, it may save time to have an engineer analyze and decide the dispute rather than to have a judge who does not have a technical background take the time to understand and decide the dispute. Usually, arbitrating a dispute is also faster than litigating a dispute because parties are not facing a crowded court docket and there is less chance for appeal of an arbitral award. The less time it takes to resolve a dispute, the less expensive it will usually be for the disputing parties. In addition, because the parties in an arbitration may select the language of their choice to be used in a proceeding instead of being forced to use the language of a court venue, parties can save costs on translating documents. Finally, there is usually a limited role for discovery, which tends to eat up so much time and expense in litigation. However, the costs for conducting an arbitration can, at times, also exceed the costs of a litigation. There is limited, if any, ability for a party to submit a "motion to dismiss" or "motion for summary judgment." As a result, as long as the arbitral tribunal has jurisdiction to hear a dispute (a question which the tribunal will decide for itself), a case will usually proceed to the merits phase almost regardless of the strength of the claims. Further, as the number of experts in an arbitration rises, so do the costs of the arbitration. Parties that decide to submit their arbitration to an institution must also pay the institution's fees, often in advance, and there could be increased travel costs when the parties are required travel to a distant location to conduct the arbitration. Travel costs can be reduced, however, using mediums such as video conferencing and electronic mail that help to decrease the need for face-to-face meetings.

Another advantage to arbitration is that parties have the flexibility to use it as an optional, mandatory, or cumulative dispute resolution process. Parties are increasingly using international arbitration as part of a multi-step dispute resolution process. In such agreements, parties must pursue non-binding dispute resolution processes (often called "ADR," a term with which international arbitration is sometimes mistakenly confused) such as negotiation, conciliation or mediation as a pre-condition to arbitration. Further, some parties prefer the informal advocacy style of arbitration to litigation. Unlike litigation, in international arbitration parties are not forced to abide by formal rules of evidence or to address a tribunal with formal language. This lack of formality often facilitates a more efficient, productive business-like proceeding when parties have different legal training and there is a potential that one party will be disadvantaged based on their legal background. On the other hand, some parties may prefer the formalized rules and procedures available in a litigation setting. An arbitration a party may be prohibited from seeking remedies such as equitable relief or punitive damages, and have limited right to appeal the tribunal's final decision. In addition, arbitration is litigation's poorer cousin when it comes to a dispute involving multiple parties. Unlike arbitral tribunals who can only resolve a dispute to which a party has consented, national courts usually have rules that allow - and often compel - joinder of parties and the consolidation of similar disputes. Therefore, national courts may remain better equipped to handle multi-party disputes in complex commercial matters where the court has personal jurisdiction over each party.

Conclusion
International arbitration allows parties of different nations to transact business in confidence that they will be able to obtain a satisfactory result in the event that a dispute arises. It gives parties a better perception of fairness regarding the proceedings than litigation. In a dispute involving parties of different nationalities, each side usually feels that it would face bias or prejudice in the opposing party's national court. By taking the dispute to an "a-national" plane, international arbitration allows parties the autonomy to resolve their dispute in a neutral, customized manner with the rules, guidelines, and arbitrators of their choice. Such autonomy helps to foster confidence in the fairness of an arbitration proceeding. When parties are satisfied in the fairness of a dispute resolution procedure, they are more likely to comply voluntarily with the results of the process. Even when parties do not voluntarily comply with an arbitral award, there are conventions and treaties in place which give parties confidence that their private agreement will be recognized and enforced in public venues. When parties seek to resolve a dispute that spans multiple nations in an effective, efficient, and confidential manner, international arbitration is the venue that most likely fills the void traditional litigation can leave behind.

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About the Author

Baiju S. Vasani is an associate in the International Arbitration and ADR Group of Fulbright & Jaworski L.L.P. in Houston, Texas. He is admitted both as an Attorney in the United States (Texas) and as a Solicitor in England, holding full law degrees (a Juris Doctor and Bachelor of Laws respectively) from both countries. He has appeared before various international tribunals under the auspices of, among others, the International Chamber of Commerce (ICC), the International Centre for the Settlement of Investment Disputes (ICSID), the London Court of International Arbitration (LCIA), and the London Maritime Arbitrators Association (LMAA), as well as before ad hoc arbitration tribunals.

Catina Haynes joined the International Arbitration and ADR Group of Fulbright & Jaworski L.L.P.'s Houston office as an associate in 2006.

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