2004, Volume 07, Issue 3

Litigate or Arbitrate?

A quandary, both domestically and internationally, for parties engaged in commercial disputes.

Charles J. Hunt, Jr, JD

Commerce is inevitably associated with the potential for conflict, and the growth of globalization in business means that the potential for conflict has grown exponentially as well. A recent study by PricewaterhouseCoopers found a 25 percent increase in international arbitration cases over the past five years.[1]

Even when people share the same language, culture, and legal system, there can be differences of opinion about what was promised, what is required to meet the obligations of a contract, or about what should be done when unanticipated obstacles arise. When distance and different cultural expectations and languages are added to the mix, it should not be surprising that conflicts often arise despite high hopes and best efforts to develop positive working relationships.

What then is to be done when a dispute occurs between two or more parties involved in international trade? Disputes ultimately need resolution, and in business this means litigation, arbitration or some other alternative dispute resolution process.

Photo: David Di  Biase

Even when both parties are from the same country, there may be concerns about having to litigate a dispute. In the United States these concerns would certainly include cost, time, a drawn-out appeal process, and perhaps punitive damages. However, there are usually few concerns about the enforceability of judgments within all of the states since all are subject to the Constitution of the United States.[2] Furthermore, within the U.S. there has been almost uniform adoption of the Uniform Commercial Code Sales of Goods provisions.[3] The uniformity of the Code provisions tends to lessen possibilities for disputes at the inception of a contractual relationship, and it creates uniform handling of disputes that fall under its terms.

However, going to court in a foreign country may be quite a different matter. No single source of “global” commercial law exists, either regulatory or judicial. Thus disputes are usually subject to national legal systems that have individually adopted substantive rules, which makes consistent outcomes difficult to achieve.[4] Not only are the laws likely to differ from those in the home country of litigants, but the enforceability of judgments may also be questionable, especially if the judgment includes actions that must occur outside of that court’s jurisdiction. There may also be concerns as to whether the court will be biased in favor of the local party.

Arbitration as an Alternative

If litigation is not a desirable option, that leaves arbitration or some other form of alternative dispute resolution as the most likely means of settling differences. Mediation might sometimes be a good option, but arbitration is more widely accepted in the international arena as the alternative to litigation. Given these options, it is not surprising that international business contracts often contain a clause calling for arbitration should a conflict arise.

In international agreements, arbitration comes about in two ways. Either the parties have arranged in their contract that they will arbitrate any dispute that arises, or after a dispute does arise, the parties agree to submit the dispute to arbitration. In either case they can create an arbitration agreement that suits their needs as opposed to using a static judicial system in one or more venues to which the parties’ contract might subject them. Most developed countries have arbitration laws that permit arbitration of commercial disputes.[5]

One significant benefit of arbitration in international disputes is that it offers reasonable predictability of award enforcement in member countries. The New York Convention,[6] convened in 1958 by the United Nations, created an agreement between member states that provides for the enforcement of foreign awards in each member state.[7] Over 140 nations are signatories to the Convention.[8]

Elements of an Arbitration Agreement

At a minimum, a good arbitration agreement will provide for the following:[9]

• The law governing the contract. This is probably the most important clause in an international contract. It is usually separate from the arbitration language. The parties may choose the law of any country they desire, including the law of a third country that is not the home of either party.
• The arbitration laws of the country chosen as the seat (or place) of arbitration will govern the arbitration proceedings. Since the laws of particular countries are considered favorable for commercial arbitration, many contracts specify those countries.
• The language of the arbitration proceedings. English is frequently chosen. Given the extent to which English is used in today’s international market place, as well as the number of parties who choose England as the place for dispute resolution, this language choice is understandable.
• The number of arbitrators. Small cases would normally specify one arbitrator; large or complex cases, three.
• The method of appointment of arbitrators. This is the opportunity for the parties to agree on the method before there is a dispute, thus precluding that issue becoming one more dispute.

Potential Benefits of Arbitration vs. Litigation

• Arbitration provides a neutral venue for dispute resolution so that neither party has to litigate in the national courts of the other.
• Although not always the case, the cost of arbitration is often less than that of litigating the issue.
• Arbitration is frequently less time-consuming than litigation, in part because one does not usually have to wait for a backlog of cases to clear before the arbitration can begin.
• The proceedings are not open to the public. Minimum publicity is assured through private hearings.
• Since arbitration is a private matter between the parties, if they are dissatisfied with a particular arbitrator or arbitration proceeding, they can choose to cancel that proceeding and begin again. This option is not often realistic because of cost and time, but it is an option.

Other Considerations

• It is important to assure, to the degree possible, that the arbitrators are aware of the “world of international trade relations” and have the ability to appreciate the background of cultures involved in addition to the legal issues. [10]
• Different arbitral institutions, and different arbitrators, may hold to different rules of evidence and discovery, as well as to different approaches to oral testimony and cross examination. If preferences are not spelled out in the arbitration agreement initially, the arbitration may be quite different than expected.[11]
• In the selection of an arbitral tribunal, it is important to be sure that it is composed of arbitrators who “shall be and remain at all times impartial and independent of the parties; and none shall act in the arbitration as advocates for any party.”[12] This criterion requires that the parties do some background work regarding the tribunal and the chosen arbitrators.
• Arbitral tribunals and law firms that specialize in international arbitration have different types of fee schedules.[13] One needs to investigate the type of fee structure when making a choice of a tribunal or arbitrator.
• An arbitral tribunal usually does not have authority over third parties who may have relevant information. If a third party has relevant information and does not cooperate, then assistance from a state court could be sought, but this may put the issue back into a court system.
• Arbitration awards cannot be appealed to a higher court. While this axiom makes the process more efficient, such finality may be considered a negative by some.

Major Arbitral Institutions

Parties frequently choose an institution to facilitate the arbitration process, although sometimes they may choose a simple ad hoc process of their own. Many institutions engage in this process, and more are attempting to establish themselves as venues of choice for different regions of the world.[14]

Nevertheless, the three dominant tribunals at this time are the London Court of International Arbitration (LCIA), the American Arbitration Association (AAA), and the International Chamber of Commerce (ICC).[15] “The ICC, LCIA and AAA rules are all regarded as modern and user-friendly.”[16]

London Court of International Arbitration (LCIA)

The LCIA is the longest established major international institution for commercial dispute resolution, and it is also a not-for-profit organization. It is considered to be one of the most modern and forward looking arbitral institutions, and its services are available worldwide. The LCIA is viewed as impartial and thus a fair place for parties to have their disputes heard.[17] The administrative costs and fees for the Tribunal LCIA are reasonable and probably less than the cost of litigation.

LCIA rules are considered state-of-the-art and offer the best features of the civil and common law systems.[18] The fact that there are definitive rules is itself an advantage, since the rules eliminate any argument between the parties as to the procedure to be followed.

London is one of the world’s foremost arbitration venues, and its location within Europe provides a readily accessible pool of expertise.

Although the power to appoint the arbitrators rests solely within the power of the LCIA,[19] and the Chair will be appointed by the LCIA,[20] the parties may nominate the other members of the tribunal. All appointed arbitrators must agree to abide by the LCIA rules and must disclose any circumstances that might give rise to any justified doubts as to their impartiality or independence.[21]

The rules provide for the appointment of expert witnesses by the tribunal. Since these expert witnesses must be impartial and independent of the parties, this requirement tends to reduce the “battle of the experts” that frequently takes place in the litigation process.[22]

LCIA Article 25 creates the authority for the tribunal to consider seeking interim or conservatory measures, should it become necessary. Unlike the situation under most domestic law, the LCIA Tribunal could award legal fees and costs.[23]

American Arbitration Association (AAA)

The American Arbitration Association is also a non-profit organization. It is dedicated to providing various alternative dispute resolution (ADR) services, and in addition, it arranges extensive education and training opportunities for arbitrators, mediators, and members of the business and legal communities.[24]

The Association has 37 offices in the United States and Europe and currently has cooperative agreements with arbitral institutions in 39 other nations. These agreements provide that the Association and other institutions cooperate in selecting arbitral locales when a contract is silent on the topic and in selecting arbitrators, as well as administering the arbitration.[25]

The International Centre for Dispute Resolution (ICDR) is the international dispute resolution arm of the AAA, and as such, it has established rules for arbitrations and mediations. However, international parties may proceed under UNCITRAL Rules (United Nations Commission on International Trade Law), or specialized industry rules if they prefer. Cases can be filed in any of their worldwide offices, but they are administered from the Centre in New York, where all staff attorneys are multilingual.

ICDR’s rules provide for the maximum in autonomy for the parties involved. They can customize their arbitration as they deem appropriate, even including the ability to designate a specific arbitrator, or instead choose the nationality of the arbitrator. They can even exclude particular nationalities from the list of potential arbitrators.[26]

Some obvious differences exist between the AAA rules and the LCIA rules. The ability to actually select the arbitrators is perhaps the most distinctive difference.

International Chamber of Commerce (ICC)

The International Chamber of Commerce, through its International Court of Arbitration established in 1923, is another long-time leading organization in the field of international commercial dispute resolution. The International Secretariat, which is based in Paris, supervises and administers all cases, up to and including the ability to remove arbitrators if the Secretariat, according to its discretion, feels that arbitrators are not doing the job properly. The ICC has administered over 12,000 international arbitration cases involving parties and arbitrators from more than 170 countries and territories.[27]

The ICC operates globally. The Court has national committees in over 80 countries that assist in finding arbitrators. In the year 2003, ICC arbitration took place in 47 countries and involved arbitrators of 69 different nationalities.

Summary

In concluding this rather brief look at international commercial arbitration, there are key points that must be remembered when considering arbitration in an international business dispute.

First, once the parties submit to arbitration, they have waived any right to litigate. Second, there is no right of appeal. This creates finality on the basic legal issues involved. Furthermore, the award is enforceable under the New York Convention if all parties are from countries that have subscribed to the Convention.

The rules of most international dispute resolution organizations regarding written evidence, declarations, oral testimony and general rules of evidence are usually much more liberal than those of courts. Such rules allow the parties to present all the evidence they believe bears on the disputed issues with fewer constraints. However, these rules may also lead to abuses that the rules of evidence were created to prevent. Therefore, parties must be careful.

An important benefit of arbitration is that it may allow the parties to maintain a cordial future relationship. When a company is the best source of a product or is a valued customer, this can be a very important factor to consider.

As was mentioned earlier, the cost of arbitration in money and time is usually less than is the case with litigation. A degree of privacy exists in arbitration that does not exist in public courts. Privacy can often be very valuable in business relationships.

In arbitration, the parties can participate in the selection of a tribunal to some degree, more so in some tribunals than in others. The parties may also select the process rules they wish to use in their arbitration.

As you expand your market share globally, it is hoped that you will never be in need of international arbitration services. However, if a dispute should arise as you pursue your global business affairs, remember that there are options to going to court. There are even options within options in the sense that different arbitration tribunals and venues offer variations of services. The more thought and specificity you put into your contract initially, the more benefit you may gain if you ever need to have a dispute resolved.

Comments (1)

Is the Arbitration Award of Woodrow WIlson dated November 22, 1920 regarding frontier between Armenia and Turkey still in force?. Respectfully, Tsaghik Gurunyan ...tsaghik gurunyan 4/8/2009 3:42:50 PM

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