chevron-down Created with Sketch Beta.
May 10, 2012 Articles

Young Lawyers: Is the Arbitration Domestic or International in Scope?

By P. Jean Baker

Five years ago, the global marketplace was not accessible to medium- and small-sized businesses. Today, with the arrival of the Internet and growing acceptance of e-commerce, global markets are open to almost everyone. Attorneys need to recognize and understand how international arbitration can come into play in what may seem the most basic of domestic business disputes.

Consider the Following Hypothetical
Two small businesses, Business A and Business B, both headquartered in the state of Bliss, execute a contract via the Internet for Business B to deliver at a fixed price by a specified date ceramic pottery to be obtained from Mexico for resale by Business A to third-party retail outlets in the United States. The arbitration clause in the contract specifies that all disputes must be submitted to the American Arbitration Association (AAA) for binding arbitration in the state of Bliss. The clause does not reference use of a specific set of the AAA's rules. Instead of shipping the pottery to Business A, Business B enters into an agreement with a Mexican company to ship the pottery directly to the U.S. retail outlets. Business A wants you to immediately file a demand for arbitration with the AAA, alleging breach of contract and tortuous interference. Business A is seeking punitive damages.

Domestic or International in Scope
Because the arbitration clause does not specify a set of alternative dispute resolution (ADR) provider rules, the first issue you need to address with your client is whether the dispute is domestic or international in scope.

A generally accepted way to ascertain whether a dispute is international in scope is to apply the definition established under the United Nations Commission on International Trade (UNCITRAL) Model Law Article 1(3).

Using this approach, the AAA defines arbitration as being international in scope if:

(a) The parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different countries; or

(b) One of the following places is situated outside the country in which the parties have their place of business: (i) the place of arbitration if determined in, or pursuant to, the arbitration agreement; (ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject matter of the dispute is most closely connected; or

(c) The parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.

(d) If a party has more than one place of business, the place of business is that which has the closest relationship to the arbitration agreement; if a party does not have a place of business, reference is made to his or her habitual residence.

Because a substantial part of the obligations of the business-to-business e-commerce relationship described in the above hypothetical was to be performed outside of the United States and the majority of the tortuous interference occurred in Mexico, the AAA would classify the resultant dispute as being "international" in scope. Because a specific set of AAA rules was not designated in the arbitration agreement, AAA will administer this hypothetical case according to their International Dispute Resolution Procedures unless the parties agree otherwise.

Arbitration of International Commercial Disputes
Administration of arbitration pursuant to the AAA's International Dispute Resolution Procedures differs markedly from the way in which a case would be administered pursuant to the AAA's Commercial Arbitration Rules and Mediation Procedures. For example, parties involved in an international arbitration expressly waive and forego any right to punitive, exemplary, or similar damages unless a statute requires that compensatory damages be increased in a specified manner. An international arbitrator may not resolve disputes according to customary rules of equity and international commerce. Substantive law(s) or rules of law designated by the parties, or absent party designation determined by the international arbitrator to be appropriate, shall apply. An international arbitral tribunal may appoint one or more independent experts. Reasonable costs for legal representation of a successful party and the costs of experts appointed by an arbitral tribunal may be apportioned in the award.

Reviewing Arbitration Agreements to Prevent Unwelcome Surprises
In the above hypothetical, Business A will be unable to seek punitive damages absent agreement of Business B. Chances of obtaining such agreement post-dispute are probably zero. Nor is it likely that Business B will voluntarily agree to have the case administered according to the AAA's Commercial Arbitration Rules. Needless to say, our hypothetical plaintiff is going to be very upset with the attorney who drafted the arbitration clause and failed to reference a specific set of AAA rules.

To prevent this type of unwelcome surprise, attorneys should periodically review their clients' arbitration clauses—especially if a client engages in global e-commerce. Failure to include a reference to an ADR provider or to a set of ADR provider rules can result in application of the UNCITRAL Arbitration Rules if a dispute is deemed to be international and the U.S. state or foreign nation with jurisdiction has adopted the model law. The UNCITRAL procedures provide for ad hoc arbitration administered by the arbitrator. Issues can arise when seeking enforcement of an arbitral award and a foreign court learns that a neutral third-party administrator, such as the AAA, did not oversee the proceeding.

Keywords: litigation, alternative dispute resolution, American Arbitration Association, UNCITRAL, International Dispute Resolution Procedures, Commercial Arbitration Rules and Mediation Procedures