A PRIMER on International Arbitration for Board MEMBERS
& Local COunsel
Arbitration is not a new
concept, in fact it has been used for centuries, with Plato writing about
arbitration amongst the ancient Greeks. As international trade and commerce
have grown over the past decades, the frequency of international arbitration
proceedings has significantly increased since globalization of
cross-border investments and trade has led to increased and ever more complex
relationships between businesses, investors, and States. Hence,
over the last 50 years or so, the international community has increasingly
embraced arbitration, with many recognizing its importance as the primary means
of resolving complex transnational disputes. For example, nearly half of the requests
for arbitration filed with the International Chamber of Commerce (ICC)
International Court of Arbitration since its creation in 1923 were filed in the
1980s with a steady increase in each decade thereafter with records in 2016 and
2017 and beyond.
According
to the ICC alone, worldwide, 2,282 parties were involved in ICC Arbitration
cases from 135 countries in 2018. Newly registered cases in 2018 represented an
aggregate value of US$ 36 billion, with an average amount of US$ 45 million in
dispute. The aggregate value of all pending disputes before the Court at the
end of the year was US$ 203 billion, with an average value of $131 million and
a median value of US$ 10 million. With the exception of 2016, which
included 135 related small-claim cases arising from a single collective dispute,
these statistics represent a new record for ICC Arbitration cases. In addition,
for the top 11 international arbitration institutions this number increases to 6,288
in 2018, according to Global Arbitration News. This growth promises to continue
through the 2020s, since international arbitration offers many distinct
advantages to parties involved in international transactions. Of course, arbitration is not right for
every party in every situation and an informed and considered decision need to be
made depending upon a party’s particular circumstances and objectives.
Principally,
arbitration offers an international neutral forum for the resolution of a
dispute so that neither party to an international transaction need be subject
to the national courts of the other party.
Neither side wants to be at a procedural or substantive disadvantage by
having to resolve a dispute in the home court of the other party. Because international arbitration is now so
routinely conducted, each party can feel comfortable proceeding in a forum with
familiar procedures.
International
arbitration, as domestic arbitration, is conducted on a confidential
basis. Trade secrets, business
information, and even the fact that the arbitration is taking place at all may
thus, in many instances, be kept private.
This confidentiality can be particularly useful if the parties wish to
continue their business relationship during or after the resolution of the
particular dispute. The ability to
preserve a good business relationship exists to an even greater extent in
international arbitration because many of these arbitrations, particularly
those involving parties from civil law jurisdictions, are conducted principally
through the submission of written evidence rather than oral testimony. As a result, the proceedings are likely to be
less confrontational since business executives will be subject to less of the
intensive and difficult cross-examination that occurs in litigation, or even in
domestic arbitration.
Moreover,
international arbitration awards are easier to enforce than foreign court
judgments. The New York Convention and the Panama Convention each provide straightforward procedures to
enforce international arbitration agreements and foreign arbitral awards; they
also limit the ability of the party resisting enforcement to challenge the
award. By contrast, the United States
This
summary describes the nature of the legal regime that governs international arbitration,
the institutions that are frequently used in international arbitration, the
manner in which international arbitrations are conducted, and the enforcement
of international arbitration awards. Although
many aspects regarding arbitral law, procedures, and strategy applies to
international arbitration as much as to domestic arbitration, this summary focuses
on those areas in which international arbitration varies from domestic
arbitration and on the different resources that are available to the parties in
an international arbitration.
I.
The Law Governing International Arbitration
Each
international arbitration is governed by two legal regimes. The governing procedural law regulates the
manner in which the arbitration is conducted, while the relevant substantive
law provides the arbitrators with the legal principles by which they must
resolve the dispute.
The
substantive law is often chosen by the parties and expressly stated in the
contract, but, if it is not, the arbitrators apply choice-of-law rules to
select the proper substantive law. The
applicable substantive law may have no connection at all to the forum in which
the arbitration is conducted.
In
contrast, although the procedure governing the arbitration may be agreed upon
by the parties or determined by the arbitrators, mandatory procedural
requirements may be imposed by the procedural law of the country in which the
arbitration is held. Thus, before selecting
a site for an international arbitration, a party should consider the national
arbitration law of that country and the effect it may have on the
proceeding. Some countries’ laws are not
as favorable to arbitration as others; some may provide for greater judicial
interference or limit the flexibility of the parties in determining the manner
in which the proceeding will be conducted.
Other countries may require that counsel or arbitrators be nationals of
the forum country. In general, the best
countries in which to conduct an international arbitration are those that: (1) severely limit the role of the courts,
and (2) provide the parties with the greatest autonomy in fixing the manner in
which the arbitration is conducted.
A. Federal and State Laws
In the United States, the United
States Arbitration Act (Pub.L. 68–401, 43 Stat. 883, enacted February 12, 1925)
(FAA) governs international arbitrations.
Under the FAA, there is maximum party autonomy, as well as limited
judicial interference. In addition,
virtually all of the states have their own statues, most of which are based on
the Uniform Arbitration Act (UAA). A
number of states have also recently adopted statues specifically governing
international arbitration, some of them modeled on the United Nations
Commission on International Trade Law (UNCITRAL) model law, described
below. These new state statutes are
intended to foster the state’s use as a forum for international
arbitration. The application of these
statutes is unclear, however, since state arbitration laws are pre-empted to
the extent that they conflict with the FAA.
Also, it is not always possible to determine whether a particular
provision of the state arbitration law does conflict with the FAA.
B. Other Countries’
Laws
As
the use of international arbitration grew in the 1980s, various countries
enacted modern arbitration statues or amended their arbitration codes to provide
a more attractive forum for conducting international arbitrations. These countries include Austria , Belgium ,
France , Mexico , The Netherlands, Spain , and Switzerland England Belgium
C. The UNCITRAL Model
Law
In
general, the UNCITRAL Model Law has been adopted by countries that did not have
either “an up-to-date body of arbitration law” or “sufficient volume of
arbitrations over a sufficient period to have permitted the growth of an expertise
in putting their laws in practice.” It
has been adopted - at least to a significant degree - by Australia, Bulgaria,
Canada (including several of its provinces), Cyprus, Hong Kong, and Nigeria and
most recently by Republic
of Korea (2016), Qatar (2017), Mongolia (2017), and Fiji (2017).
The
Model Law provides detailed procedures that apply in the event that the parties
do not specify what procedures are to be followed. Its subject matter includes the scope of
permissible judicial intervention and arbitrations; stays of legal proceedings
and interim measures of protection by a court; the number of manner of
appointment of arbitrators and grounds and procedures for challenges; the
competence of arbitrators to rule on their own jurisdiction and to order
interim measures of protection; the conduct of arbitral proceedings; the nature
of decision making by the arbitrators, including determination of the
applicable law and the form and content of the award; recourse against the
arbitral award; and recognition of arbitral awards, including enforcement
procedures and grounds for refusal to recognize and enforce arbitral awards.
II.
Forums for Conducting International Arbitrations
A
principal consideration in international arbitration is whether the proceeding
should take place under the auspices of an international arbitral institution
or whether it should be conducted on an ad
hoc basis. This section discusses
some of the various arbitration institutions and sets of ad hoc rules that are available.
A.
Arbitration Institutions
There
are many international arbitration institutions, of which the leading ones are
the AAA, the ICC International Court of Arbitration, and the London Court of
International Arbitration (LCIA). These
arbitral bodies offer institutional advantages that can facilitate the progress
of an arbitration. In addition to
providing facilities and staff, the institutions offer comprehensive rules that
provide a framework for the parties, but also grant autonomy to parties to adapt
the rules as needed. Some of the
institutions also provide guidance and assistance to arbitrators to ensure that
their final award will be enforceable.
Many arbitral institutions, however, charge substantial administrative
fees, usually based upon the amount in controversy.
1.
The American Arbitration Association. The AAA is known primarily for domestic arbitration
but is has handled an increasingly large number of international arbitrations
as well. The American
Arbitration
Association-International
Centre for Dispute Resolution®
(AAA-ICDR®) announced that the ICDR provided alternative dispute resolution services for 993 international
cases, totaling $8.2 billion in claims, filed in 2018. The ICDR’s
year-over-year caseload has remained relatively stable, with approximately
1,000 cases filed annually. The international cases filed in 2018 involved parties
from 99 countries, and a variety of industries. Approximately 30 percent of the
international cases filed with the ICDR in 2018 (294 in total) were
multi-party in nature. The largest categories
of international cases filed
in 2018 related to disputes among commercial
franchises (272 cases),construction companies
(113),technology (58 cases), insurance (43), energy (40), and
pharmaceutical/biotechnology (23) industries. To further promote its role in
the international arbitration process, the AAA has promulgated International Arbitration
Rules, effective March 1, 1991 (AAA Int’l Rules). The rules are also designed to be used by
other arbitral institutions as administering bodies. According to the AAA,
[t]he overall approach
taken is close consultation by the association with the parties in the early
stages to organize the proceedings, broad arbitrator authority in the conduct
of the arbitration sufficient administrative authority to resolve procedural
impasses and institutional diligence to streamline and expedite the arbitration
process.
The rules seek to combine the benefits of the ad hoc approach taken by the UNCITRAL
Arbitration Rules, to which these new rules bear some similarity, with the
efficiency that can be gained through the use of an arbitral institution to
administer the arbitration.
2. The ICC
International Court of Arbitration. The ICC is
the most commonly used institution in the international arbitration field. Its rules provide for somewhat greater
involvement by the institution in the arbitration proceeding than do the rules
of most other institutions. For example,
if there is a question of the prima facie
validity of the arbitration clause, the ICC will issue a preliminary ruling on
that question. As long as there appears
to be an arbitration clause, the ICC will refer the matter to the arbitrators,
but, if there does not appear to be a clause governing the dispute, it will
refuse to do so. The ICC also reviews
the Terms of Reference, discussed below, which are framed by the parties and
the arbitrators in the early stage of the proceedings, and it reviews the final
award to make sure it is enforceable.
3. The London
The LCIA provides services
for arbitration, mediation, adjudication and ADR. It is important to note that
the institution does not itself resolve disputes. Rather, it provides the
necessary support for parties and for the arbitral tribunal throughout the
proceedings.
Parties may also resort to
the LCIA in ad hoc proceedings. In this case, the institution will act as an
appointing authority, and it will assist the parties in the appointment of
arbitrators, mediators and experts.
4. Regional Arbitration
Centers. The Stockholm Chamber of Commerce and the
Federal Economic Chamber of Commerce in Vienna Peoples Republic
of China Vancouver , Hong Kong, Sydney ,
Melbourne , San Francisco
and Los Angeles Milan , Quebec ,
Cairo
5. The International Center Washington , DC
B. Ad Hoc Rules.
An ad hoc arbitration may in some circumstances be preferable to an
arbitration conducted pursuant to the rules of one of the organizations
described above. In an ad hoc
arbitration, parties and arbitrators either develop their own rules in
the arbitration agreement or at the time of the arbitration, or they use standard rules that have been promulgated to
assist parties in ad hoc arbitrations. The most commonly used standard rules are the
UNCITRAl Arbitration Rules. In addition,
the Center for Public Resources has recently issued an excellent set of Rules
for Non-Administered Arbitration of Business Disputes (CPR Rules). A number of arbitration institutions, such as
the AAA, also offer a hybrid of the institutional and ad hoc approaches by providing a set of procedures for using the
UNCITRAL Rules and simultaneously using the institution to act as an appointing
authority or provide other necessary functions.
IV. Enforcement of Foreign Arbitral Awards
Unlike
judgments entered in American courts, awards issued by arbitration panels
cannot be enforced by the entity that renders them. Arbitrators have no legal authority
themselves to require any particular actions by the losing party. Although historically most participants in
international commercial arbitration - both private parties and states - comply
with arbitral awards, some losing parties do not. In these circumstances, the successful party
must seek means external to arbitration to secure enforcement of the award.
A. The New
York
The
United Nations Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (New York, 10 June 1958) (“New York Convention”) provides the
legal basis for the enforcement of most international commercial arbitration
awards. The Convention provides for
mutual recognition and enforcement of arbitral awards by the contracting
states. By limiting defenses to
confirmation of an award, it seeks to eliminate wasteful, duplicative litigation
following an arbitration. The Convention
has been ratified or acceded to by over eighty countries. The United States
The
New York
The
Convention provides that any member state may, at the time of its signing,
ratification of, or accession to the Convention, declare that it will apply the
Convention only to the recognition and enforcement of awards made in the
territory of another Contracting State, or to differences arising out of legal
relationships “considered as commercial under the national law of the State making
such declaration.” The United States United States court would enforce an arbitral
award rendered in Switzerland ,
a signatory of the New York Convention, but not one rendered in Brazil
In
establishing a prima facie case for
enforcement under the Convention, the proponent of an award is required only to
supply the original, or a certified copy, of the award and the arbitral
agreement. The burden of proving the
invalidity of the award rests upon the defendant. He may raise one of five grounds for the
refusal of enforcement. These grounds
are detailed in Article V of the Convention:
(1) absence of valid arbitration agreement; (2) lack of a fair
opportunity to be heard; (3) the award exceeds the submission to arbitration;
(4) improper composition of the arbitral tribunal or improper arbitral
procedure; or (5) the award has not yet become binding or has been stayed.
American
courts have generally been quite reluctant to overturn an award on the basis of
any of the Article V defenses. As the
Supreme Court has noted:
The
goal of the Convention, and the principal purpose underlying American adoption
and implementation of it, was to encourage the recognition and enforcement of
commercial arbitration agreements in international contracts and to unify the
standards by which agreements to arbitrate are observed and arbitral awards are
enforced in the signatory countries.
Thus, courts have been careful to take into
account the strong public policy favoring arbitration and to adopt standards
and define defenses in a manner that can be uniformly applied on an
international scale. They have therefore
construed narrowly any defenses to the enforcement or recognition of an award.
Courts
may refuse to enforce an award if the subject matter of the arbitration is not
capable of settlement by arbitration under the law of the country in which
enforcement is sought, or if it would be contrary to the public policy of that
country. In general, however, “[e]enforcement
of foreign arbitral awards may be denied on this basis only where enforcement
would violate the foreign state’s most basic notions of morality and justice.”
B.
The Panama
The
1975 Inter-American Convention on International Commercial Arbitration, also
known as the “Panama Convention“, is a significant multilateral agreement of
which not all in the arbitration community are aware.
The
Convention was open to signature by all 35 Members of the Organization of
American States (OAS) and entered into force on 16 June 1976.
The
Panama convention may also be used as a legal basis for enforcing an arbitral
award rendered within the Western Hemisphere.
The Convention has been ratified by Argentina, Brazil, Chile, Colombia,
Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Panama,
Paraguay, Peru, the United States, Uruguay, and Venezuela. Some Latin American countries, however, have not ratified either the Panama Convention
or the New York Convention.
The
Panama Convention is essentially a regional carbon copy of the New York
Convention. The principal difference
between the two conventions is that the Panama Convention does not distinguish
between foreign and domestic awards, and it is applicable to any arbitral
decision with respect to a commercial transaction. In addition, the Panama Convention provides
that, if the parties do not select procedural rules for the arbitration, the
Rules of the Inter-American Commercial Arbitration Commission shall automatically
apply. Most importantly, Article 5 of
the Panama Convention allocates the burden of proof in the same manner and
provides for the same defenses as Article V of the New York Convention. The two Conventions, however, contain
different procedures for the enforcement of the award.
The
United States implementing
legislation provides that, if both the New
York
C.
State Law
Arbitral
awards may also be enforced in state courts.
Generally, states that have substantial contacts with international
transactions and sophisticated commercial activities tend to be more hospitable
to the enforcement of arbitration awards than states that do not have such
connections. Thus, it is important for a
party to review state law since it may play a significant role with respect to
the arbitration clause of the agreement.
© 2017-2020 Juliette Passer, Esq.
