International Arbitration in a Globalized World

Vol. 20 No. 2

By

Almost three decades ago, the US Supreme Court acknowledged in Mitsubishi Motors v. Soler Chrysler-Plymouth that “[a]s international trade has expanded in recent decades, so too has the use of international arbitration to resolve disputes arising in the course of that trade.”[1] Global economic integration has been fueled by technological innovation and development ever since, as information technology and affordable transportation have continued to erase the relevance of national borders for investments and other kinds of commercial activities.[2] This has increased the importance of transnational[3] dispute resolution, including under agreed arbitral regimes in bilateral investment treaties, free trade agreements, or investment agreements with host states. Not surprisingly, international law has gained an increasingly important role.

The lack of a delocalized international court system with the power to resolve private cross-border disputes of all kinds has led to a fragmentation of dispute settlement fora,[4] and arbitration seems to have become the preferred method for the resolution of such disputes. The prevalence of arbitration clauses in transnational commercial contracts at least indicates the perceived value of international arbitration vis-à-vis national court litigation.[5]

The reasons for preferring international arbitration over litigation in a given contractual setting depend on the circumstances and strategic considerations of the parties involved. Generally speaking, the benefits of arbitration are often considered to be “lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.”[6] A study on the use of nonjudicial dispute resolution undertaken by the American Arbitration Association involving interviews with 254 corporate general counsel, associate general counsel, or people in similar positions of seniority in more than 250 legal departments revealed that the chief reasons for choosing arbitration were that it “saves time” (73%), “saves money” (71%), “has limited discovery” (66%), and “provides a more satisfactory process” (66%).[7]

One of the most appealing features of international arbitration is the cross-border enforceability of awards. Due to the widespread acceptance of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”),[8] arbitral awards, unlike court judgments, can be effectively enforced in almost every corner of the world. Parties trying to enforce a court judgment often must rely on “comity” instead of more predictable and reliable legal rules. For resolving a dispute that spans both borders and legal systems, international arbitration seems to be the best way for all parties to get an unbiased hearing and enforceable decision.

The Landscape of International Arbitration

Domestic and international arbitration are structurally different and should not be conflated. International arbitration proceedings are governed by a plethora of different legal rules and systems, whereas a domestic arbitration is embedded in a single national legal order. The most important difference is the New York Convention, which applies only to “arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.”[9] 

The choice between institutional versus ad hoc arbitration can have a significant impact on a case, and thus should not be taken lightly. Institutional arbitration might be preferable for parties who are looking for established rules and procedures; ad hoc arbitration will provide parties with more procedural flexibility. This flexibility, however, carries many risks for inexperienced users, such as substantial delays and expenses in mishandled proceedings. The “success” of an ad hoc arbitration proceeding may depend to a greater extent on the parties’ procedural cooperation. Some of the most frequently used arbitral institutions for international commercial arbitration are the Court of Arbitration of the International Chamber of Commerce (ICC) in Paris, the London Court of International Arbitration (LCIA), the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), and the International Centre for Dispute Resolution (ICDR) established by the American Arbitration Association. In the context of investor-state arbitration, the International Centre for the Settlement of Investment Disputes (ICSID) plays a key role (See the article by Jack Coe in this issue, page 9). In ad hoc arbitration, procedural efficiency considerations might lead the parties to agree, at least, on the use of preexisting arbitration rules. The most important and frequently used arbitration rules in ad hoc proceedings are the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules.

The arbitration rules should not be confused with the lex arbitri, or even the law governing the substance of the dispute. The difference is best explained as follows: The arbitration rules are the set of procedural rules agreed by the parties, whereas the lex arbitri is the national legislation governing the arbitration at its seat. Because the seat of arbitration thus provides mandatory rules applicable to the proceeding, its location should be chosen after careful consideration of those arbitration rules.

Pre-Hearing Considerations

Appointment of Arbitrators

Selecting the arbitrators is one of the most important strategic decisions a party can make in an international arbitration. Arbitrators generally should be impartial, independent, and sufficiently qualified from a substantive perspective but also capable of conducting the proceeding efficiently and fairly. The most effective way for counsel to identify such arbitrators is to communicate with prospective candidates, as noted in the recently issued International Bar Association’s Guidelines on Party Representation in International Arbitration, “to determine his or her expertise, experience, ability, availability, willingness and the existence of potential conflicts of interest,”[10] which is widely done and generally considered appropriate. When an arbitral tribunal is composed of three arbitrators, counsel might be interested in communicating “with a prospective or appointed Party-Nominated Arbitrator for the purpose of the selection of the Presiding Arbitrator,” as the IBA Guidelines suggest.[11] Such ex parte communications are generally permissible, but to avoid disputes, parties may want to discuss and agree to the process in advance.[12] The parties, the IBA Guidelines recommend, can also agree to permit ex parte communications with a possible presiding arbitrator to assess the same expertise, ability, and other qualities listed above for arbitrators.[13] But before taking any such steps, counsel should review the applicable arbitration rules for any special or diverging provisions. The ICDR International Arbitration Rules, for example, contain the following special rule on the subject:No party or anyone acting on its behalf shall have any ex parte communication relating to the case with any arbitrator, or with any candidate for appointment as party-appointed arbitrator except to advise the candidate of the general nature of the controversy and of the anticipated proceedings and to discuss the candidate’s qualifications, availability or independence in relation to the parties, or to discuss the suitability of candidates for selection as a third arbitrator where the parties or party designated arbitrators are to participate in that selection. No party or anyone acting on its behalf shall have any ex parte communication relating to the case with any candidate for presiding arbitrator.[14]

Discovery

Facts win cases. This probably holds true in international arbitration as much as in any other contentious proceeding. The crucial importance of evidence-gathering should thus need no further explanation. Close familiarity with the applicable rules relating to the gathering of evidence is also important for a very practical reason: As many readers know, up to 80 percent of the costs in US litigation can be incurred in the context of discovery.[15] Greater access to potential evidence comes only at a higher cost.

Subject to any specifically applicable arbitration rules, the extent and form of discovery in international arbitration proceedings may depend on the legal background of the arbitrators and counsel in a particular case.[16] Civil law jurisdictions generally mandate very limited, if any, document production. Common law jurisdictions permit broad discovery – and in the United States, very broad discovery. Without overgeneralizing, it seems fair to say that as legal cultures have merged in international arbitration practices, the trend, sometimes labeled the “Americanization” of international arbitration, has been toward broader document disclosure. Other American discovery tools, however, such as depositions and interrogatories, are not commonly used in international arbitration.

The IBA Rules on the Taking of Evidence in International Arbitration (“IBA Evidence Rules”) have attempted to strike a balance in this regard.[17] According to Article 3, for example, a request to produce documents must describe “each requested Document sufficient to identify it” or describe “in sufficient detail […] a narrow and specific requested category of Documents that are reasonably believed to exist” and state the relevance and materiality of each document requested. Further, Article 3 “imposes” that the requesting party must be reasonably certain that such documents exist and are in the possession of the other party. Although the IBA Evidence Rules are not binding as such, they are often incorporated by reference into the procedural rules governing the arbitration by the parties’ agreement or by order of the tribunal. Even where the IBA Evidence Rules are not formally incorporated into the procedural rules, arbitrators often refer to them as reflecting best practices.[18]

Contrary to a widely held misconception that international arbitration takes place in a legal vacuum, parties and advocates involved in international arbitration should be aware of the potentially drastic consequences that may flow from a failure to abide by document disclosure rules or orders in such proceedings. The IBA Evidence Rules reflect such a consequence: The tribunal has authority to draw adverse inferences if a party fails to produce documents without a satisfactory explanation.[19] How that plays out in practice may be seen in the following excerpt from the arbitral award in Fraport v. Philippines:

There is a further troubling factor. Despite requests for document production, the obvious relevance of these secret documents to the Respondent’s jurisdictional objection, and a stern warning by the President of the Tribunal early in the arbitration that adverse consequences could be drawn from the failure to produce such documents, it was only in the course of the hearing that the existence of many of these documents became known. It was only at the insistence of the President of the Tribunal at that moment that they were finally produced.[20]

The majority of the tribunal proceeded to decide the related issue against the party that failed to produce.[21]

Written Submissions

International arbitration procedures are initiated by the claimant’s request for arbitration or notice of arbitration, which usually identifies the legal basis for the claim and provides a brief overview of the factual background and the parties. Depending on the particular case strategy and considering that the request is the first submission the arbitrators receive, a claimant may choose to provide more information in the request or notice than the bare essentials. Additionally, when an arbitral institution, rather than the parties, selects the arbitrators,[22] the institution will rely on the request or notice to identify the characteristics it will seek in the arbitrator candidates. Lastly, the request or notice will inform the procedural schedule, which the arbitrators generally set in the first so-called Procedural Order, following the constitution of the tribunal and a first meeting of the tribunal with the parties.

At least one round of written submissions, known as a memorial and counter-memorial, usually follows. In many international arbitrations, memorials are submitted sequentially, often in two rounds (including memorial, counter-memorial, reply, and rejoinder). The memorial must contain the entire direct case, all documents, witness statements, and legal arguments. Depending on the applicable arbitration rules, in very rare instances the parties also may agree to dispense with submitting memorials, but this is much less frequent than, for example, in US domestic commercial arbitration.

The customary practice in international arbitration, unlike domestic litigation, is for the parties to submit written fact witness statements and expert reports as well as all documentary evidence and copies of legal authorities together with the written submissions. Arbitral tribunals increasingly require that memorials be submitted electronically – and that the memorials include hyperlinks to cited documentary evidence and legal authorities.

There is generally no rule of precedent or stare decisis concerning legal authorities in international arbitration. Nonetheless, the rationale used by other tribunals in other cases may be persuasive. Depending on the applicable law, scholarly commentary, or even general legal customs and principles may be authoritative. Thus, for example, in international law, “international custom,” “general principles of law recognized by civilized nations,” and even “teachings of the most highly qualified publicists of the various nations” are considered sources of international law.[23] In addition to international law, one or more national legal systems also may be applicable. Accordingly, proof of that national law must be provided by expert opinion and/or co-counsel from the relevant jurisdiction.

Hearing

A hearing usually follows the last round of written submissions. In some cases where witness testimony is not relevant, the parties may agree to have a “documents-only” arbitration and dispense with a hearing.[24] Since extensive written material has already been submitted, oral argument should serve mainly to highlight the key points.

In practice, the hearing usually focuses on the examination of witnesses and experts. The written statements and reports submitted in advance of the hearing are usually taken as the witnesses’ and experts’ direct testimony, so that oral direct testimony at the hearing can be reduced to affirming and, if necessary, updating that written testimony.[25] A major challenge for US litigators is the lack of prior deposition testimony; effective cross-examination requires greater preparation.[26]

In international arbitration it is accepted practice for counsel to interview fact and expert witnesses. Article 4(3) of the IBA Evidence Rules spells this out as follows: “It shall not be improper for a Party, its officers, employees, legal advisors or other representatives to interview its witnesses or potential witnesses and to discuss their prospective testimony with them.” Telltale signs that counsel drafted a witness statement or coached a witness, however, likely will diminish that witness’s credibility in the eyes of the arbitrators.

International arbitration can involve foreign language testimony. Experience shows that sequential translation takes more time than simultaneous translation but gives the witness an opportunity to reflect before answering questions. Use of translation, however, inevitably requires allocating more time.

It is fundamentally important for counsel to keep in mind that the arbitrators usually will have read the written submissions, including the written testimony, and that they will see the hearing as their opportunity to ask questions of the witnesses, experts, and counsel.

Concluding Remarks

International arbitration plays an increasingly significant role in the resolution of cross-border disputes. Such disputes naturally involve parties, counsel, and arbitrators from different jurisdictions and may be governed by one or more foreign legal systems as well as international law. Counsel experienced only in US court litigation need to consider these circumstances carefully and make early strategic decisions to address the nuances. However, US litigation experience certainly is an advantage in dealing with document exchange and other factual matters.

Carolyn B. Lamm is a partner at White & Case LLP, specializing in international dispute resolution through international arbitration, litigation, and international trade proceedings. She has served as lead counsel in high-stakes, cutting-edge cases, primarily representing foreign corporations and foreign sovereigns. She can be reached at clamm@whitecase.com. Eckhard R. Hellbeck is counsel at White & Case LLP, practicing international dispute resolution with a focus on complex arbitration and litigation involving sovereign state parties. He also advises on matters of German, European Union, and public international law. He can be reached at ehellbeck@whitecase.com. Nikolaos Tsolakidis specializes in international and domestic arbitration. He has experience in international commercial and investment arbitration and public international law. He can be reached at nikolaos.tsolakidis@whitecase.com.

The views expressed in this article are those of the authors alone and are not to be attributed to White & Case LLP or its clients.


[1] Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 638 (1985).

[2] For example, in 2012, the global foreign direct investment flow amounted to $1.35 trillion. UNCTAD World Investment Report 2013 at ix, available at http://unctad.org/en/PublicationsLibrary/wir2013_en.pdf.

[3] The term “transnational law” was coined by Philipp Jessup in the 1950s, when he defined it as “all law which regulates actions or events that transcend national frontiers. Both public and private international law are included, as are other rules which do not wholly fit into such standard categories.” Philip C. Jessup, Transnational Law 2 (1956).

[4] The International Court of Justice (ICJ) is a misnomer in that regard because it is competent to hear only state-to-state disputes concerning (a) the interpretation of a treaty; (b) any question of international law; (c) the existence of any fact which, if established, would constitute a breach of an international obligation; (d) the nature or extent of the reparation to be made for the breach of an international obligation. Statute of the International Court of Justice, arts. 34(1), 36(2), June 26, 1945, 59 Stat. 1055, T.S. No. 993, 3 Bevans 1179. Consents to arbitration in more than 3,000 investment treaties, free trade agreements, and other instruments provide variously for arbitration before the ICSID, ICC, LCIA, ICDR, or national arbitral fora (Stockholm, Geneva, Vienna, Singapore, and others). Consents in contracts are equally varied.

[5] Carolyn B. Lamm & Eckhard R. Hellbeck, When to Arbitrate Rather Than Litigate, in International Litigation Strategies and Practice 191, 192 (B. Legum & E. Berghoff eds., 2nd ed. 2013).

[6] Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 688 (2010).

[7] American Arbitration Association, Dispute-Wise Business Management: Improving Economic and Non-Economic Outcomes in Managing Business Conflicts 25 (2006), available at http://www.adr.org/aaa/ShowPDF?doc=ADRSTG_004326.

[8] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38. As of October 8, 2013, 149 States were parties to the New York Convention. UNCITRAL, Status of the Convention on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html.

[9] New York Convention, art. 1(1).

[10] IBA Guidelines on Party Representation in International Arbitration, art. 8(a) (2013), available at http://www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx.

[11] Id. art. 8(b).

[12] See White & Case LLP/Queen Mary University of London, 2012 International Arbitration Survey: Current and Preferred Practices in the Arbitral Process 2, available at http://www.whitecase.com/files/Uploads/Documents/Arbitration/Queen-Mary-University-London-International-Arbitration-Survey-2012.pdf, [hereinafter White & Case/Queen Mary Survey].

[13] IBA Guidelines on Party Representation in International Arbitration, art. 8(c) (2013), available at http://www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx.

[14] ICDR International Arbitration Rules, art. 7(2), available at http://www.adr.org/aaa/ShowProperty?nodeId=/UCM/ADRSTG_002037&revision=latestreleased.

[15] See ABA Section of Litigation Member Survey on Civil Practice: Detailed Report 2 (Dec. 11, 2009), available at http://www.americanbar.org/content/dam/aba/migrated/litigation/survey/docs/report_aba_report.authcheckdam.pdf, (“When asked about the average cost of discovery as a percentage of litigation cost in cases that are not tried, the median response was 70%”).

[16] See White & Case/Queen Mary Survey at 3 (“The survey confirms the widely held view that requests for document production are more frequent in the common law world: 74% of common lawyers, compared to only 21% of civil lawyers, said that 75-100% of their arbitrations involved such requests.”).

[17] IBA Rules on the Taking of Evidence in International Arbitration (2010), available at http://www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx.

[18] See White & Case/Queen Mary Survey at 2 (“The IBA Rules on the Taking of Evidence in International Arbitration … are used in 60% of arbitrations: in 53% as guidelines and in 7% as binding rules. Under most arbitration rules, the tribunal has the power to fill gaps in the procedural framework.”). See, e.g., ICC Arbitration Rules, art. 19; LCIA Arbitration Rules, art. 14.2; ICDR International Arbitration Rules, art. 16(1).

[19] IBA Evidence Rules, art. 9(5).

[20] Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Phil., ICSID Case No. ARB/03/25, Award, ¶ 400 (Aug. 16, 2007), annulled on unrelated grounds, Decision on Annulment (Dec. 23, 2010).

[21] See id.

[22] See, e.g., LCIA Arbitration Rules, art. 5.5.

[23] Statute of the International Court of Justice, art. 38(1), June 26, 1945, 59 Stat. 1055, T.S. No. 993, 3 Bevans 1179.

[24] See, e.g., LCIA Arbitration Rules, art. 19.1.

[25] See White & Case/Queen Mary Survey at 3.

[26] See Carolyn B. Lamm, Francis A. Vasquez, Jr., & Matthew N. Drossos, Ten Guidelines for the Cross-Examination of Financial and Technical Experts, in Take the Witness: Cross-Examination in International Arbitration 193, 195 (Lawrence W. Newman & Ben H. Sheppard eds., 2010) (discussing in greater detail the preparation required for cross-examination in international arbitration).

 

 

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