This is Part Two of a Two-Part Series on the use of Arbitration in International Project Finance Transactions
Part One of this article discussed the increasing role of arbitration as the preferred method for resolving disputes in international commercial transactions - particularly project finance transactions. In reviewing the ascendance of arbitration as a dispute resolution mechanism in such transactions, Part One examined the various international arbitral conventions and each of their advantages and disadvantages. This second installment will look beyond the underlying conventions and examine specific components of an arbitration provision.
Arbitration Provision Components
Because the scope of each specific arbitration provision may vary from one arbitral institution to another (e.g., the International Chamber of Commerce Court of Arbitration (ICC), the American Arbitration Association (AAA), the London Court of International Arbitration (LCIA), the United Nations Commission on International Trade Law (UNCITRAL), and the International Center for Settlement of Investment Disputes (ICSID)), from one arbitral convention to another and from one arbitral situs to another, particular attention should be given to the issues discussed below in choosing which institutional rules to apply or in drafting ad hoc rules.
Governing Procedure. Most arbitration clauses provide at once for jurisdiction and governing procedure by simple incorporation by reference. An example is the short and simple statement recommended by the ICC: "All disputes arising in connection with the present contract shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules." Following the ICC's suggestion, this formula is frequently "complemented" in boiler-plate arbitration clauses with a stipulation of the place of arbitration, the number of arbitrators, the applicable law, as well as the language in which arbitration shall be conducted. In the same vein, the American Arbitration Association's standard international clause provides as follows: "Any controversy or claim arising out of or relating to this contract shall be determined by arbitration in accordance with the International Arbitration rules of the American Arbitration Association." Other details may be added, relating to such matters as the place of arbitration, number of arbitrators and the language to be used in the arbitration. Similarly, the UNCITRAL rules recommend the following for ad hoc arbitrations: "Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules in effect in the date of this contract." Again, the parties may specify the appointing authority, the number of arbitrators, the place of arbitration and the language to be used.
Exclusivity. Any arbitration provision should include a statement specifying whether arbitration is the exclusive mechanism for resolving all (or certain specific types of) disputes arising under the contract.
Choice of venue. Perhaps the most important step in drafting an arbitration provision for a cross-border transaction is selecting a legal system that is neutral, compels arbitration where the disputants have selected arbitration as the dispute resolution mechanism in their underlying agreement, and permits arbitration to be conducted with the least judicial interference. Equally relevant is the ability of the arbitration panel under the forum state's legal system, to determine, as a preliminary matter, its own jurisdiction (competence de la competence). In addition, the choice of venue may be critical for several other reasons. First, many states, including the United States, have conditioned their accession to the New York and Panama Conventions upon the existence of a reciprocal local law (Editor's note: As discussed in Part One of this article, such conventions "stipulate support for the use of arbitration and specify the conditions for enforcement of foreign arbitration agreements and awards.") Thus, an arbitral award given in a non-Convention member state may not be enforceable under the Convention. Further, enforcement under the applicable Convention will be impossible in a given State where such member State has ratified the Convention but has not implemented the treaty under local law or has done so subject to certain reservations. Second, the procedural law of the selected locale will govern the proceedings unless otherwise previously specified by the parties. In addition, the New York Convention has been interpreted to mean that judicial review of arbitral awards may be conducted only by the courts of the country whose procedural law was used in the arbitration, notwithstanding the country of origin of the substantive law of the contract. Finally, the proximity of the evidence to the place of arbitration (particularly in the case of disputes involving international construction contracts) as well as the convenience of witnesses should be given great weight in selecting the venue. Indeed, failure to select a venue could have dire consequences. For example, in International Standard Elec. Corp. v. Bridas Sociedad Anonima Petrolera, 745 F. Supp. 172 (S.D.N.Y. 1990), the court rejected a U.S. company's attempt to have an arbitral award against it vacated in New York, directing it to avail itself of the legal system of Mexico where the arbitration had been held. Because the parties had failed to choose a venue, the ICC, under whose rules the arbitral proceeding was conducted, designated Mexico City as a neutral and convenient site.
Textual Construction. A provision directing the arbitration tribunal to decide all questions in accordance with the terms of the document under which the dispute arose is central to any effective arbitration provision. The purpose of this is to rein in any Solomonic instincts that the arbitrators may have and thus avoid the possibility of the arbitrators acting, as they may, for example, under the ICC rules, as amiable compositeurs (who may arbitrate a dispute without resort to any specific substantive law). In general, arbitrators have the power to decide disputes without regard to specific legal principles, relying instead on their own concepts of equity and fairness and what is sometimes referred to as "lex mercatoria." One commentator has described lex mercatoria as an amalgam of globally-accepted principles which cover international commercial relations. Indeed, one of the most frequently mentioned merits of arbitration is that it is unfettered by the need to apply binding legal principles, fairness and equity being the watchwords. In this regard, it should be noted that an arbitrator's ability to ignore legal precedent may be a particularly useful feature, where for strategic reasons or for reasons of national pride, one or more of the contracting parties insists on the use of its own nation's substantive laws.
Governing Law. The substantive law of the country which the contracting parties select to govern the arbitral proceedings could be outcome-determinative. For instance, the laws governing the permissibility of liquidated damages and punitive damages vary widely from jurisdiction to jurisdiction, as does the availability of adequate equitable relief. Similarly, procedural laws governing arbitration vary from country to country and should be clearly set forth. For example, in many American states, such as California, arbitration may be stayed until related court actions are complete. Similar opportunities to delay the commencement of arbitration are available under English law. If left unaddressed, the 1980 Rome Convention provides that the governing law may be inferred from the choice of venue or the nationality of the arbitrators. Further, the arbitrator may apply conflict of law principles, weighing, among other things, the nationality of the parties, the venue of the arbitration, the institutional or ad hoc rules applicable to the arbitration, the subject of the arbitration, the place of signature of the agreement and the place of performance of the agreement. As a general matter, it is important to seek the advice of local counsel in the country whose governing law was chosen in order to fully appreciate the ramifications of such choice. Additionally, parties may wish to protect themselves against changes in the selected governing law (particularly where one of the parties is a developing country) by including stabilization clauses providing that the governing law in effect on the execution date shall be applicable.
Selection of Arbitrators. The number and qualifications of, as well as the procedure for appointing, arbitrators (including a requirement that the arbitrators be fluent in the language of the proceedings) should be stated. If possible, the parties should reserve the right to specify the desired qualifications of the arbitrator(s) including occupation and nationality. The nationality issue may, in fact, be crucial. Because of the profound differences between the civil law and the common law systems, the selection of an arbitrator with a common law background as opposed to one with a civil law background can have a significant effect in the conduct of the proceedings, and, ultimately, in its outcome. One French observer has quipped: "When you have a [case] with English lawyers and arbitrators, they behave as if they were in an English court, insisting on cross-examining witnesses, calling expert witnesses and reading out documents - even though the evidence has already been put to the arbitrators in the filed documents. U.S. lawyers are even worse, still behaving as if a jury was there." See Dominic Egan, Splendid Isolation, Legal Bus., May 1994, at 65-67 (quoting Yves Derains). It is also important to note that there may be restrictions on who may serve on an arbitral panel in some countries. In Spain, for instance, each arbitrator must be a lawyer if the dispute concerns a legal issue.
Jurisdiction. The procedure for establishing the jurisdiction of the applicable arbitration tribunal and for commencing arbitration should be clear to all parties. These procedures should include requirements for notice of the commencement of any arbitration. Under the ICC rules, a dispute will not be handed over to arbitrators for resolution until the ICC Court has made a determination, as a preliminary matter, that, prima facie, an arbitration agreement under the rules exist. Similarly, ICSID's secretary general must find and register a determination that the case is not "manifestly outside the jurisdiction" of ICSID. By contrast, AAA panelists have the competence to pass on jurisdictional matters. Failure to do so is a basis for overturning the award in court.
Consent to Personal Jurisdiction. The "consent to jurisdiction clause" (usually found in the boiler-plate section of agreements) should expressly provide that such consent to personal jurisdiction is only for the purpose of entering and enforcing a final arbitral award. Nevertheless, the right to seek relief from a court should be curtailed except where necessary to: (i) seek interim injunctive relief not involving the payment of damages, or (ii) enforce an arbitral award granting interlocutory relief against the other party or an award for the obtaining of evidence (whether discovery of documents, interrogatories, affidavit or testimony of witnesses which the arbitrators direct shall be admitted in the arbitral proceedings), or (iii) make an application to a court of competent jurisdiction for registration of the judgment on the arbitral award entered. Because arbitral tribunals lack contempt powers, a recalcitrant respondent may, with impunity, refuse to obey the directive of the arbitral tribunal during the proceedings. Judicial intervention may therefore be necessary.
Commencing Arbitration. Arbitration is usually commenced by notifying the opposing party thereof by way of a "notice of arbitration" (AAA International Rules), a "request for arbitration" (ICC), or a "request" (ICSID). It is advantageous to view this notice as an opportunity not only to make a first impression but also to set the agenda. The amount of detail to include should be guided as much by the minimum benchmark of the applicable institutional rules as by a party's need to tell its story in sufficient detail so as to identify issues that are in dispute and those that are not.
Discovery; Evidentiary Rules. The rules of the various arbitration institutions and the arbitration statutes of most countries provide for limited discovery. This has long been touted as an advantage arbitration has over litigation. However, to avoid unfair surprise and to inform the parties of the factual and legal issues before arbitration, the scope of discovery should be clearly delineated. This is particularly important if the arbitration will take place in a non-U.S. locale. As regards evidentiary matters, most arbitrators generally admit all evidence that is introduced, ignoring the technicalities of the rules of evidence. Thus, the parties may wish to specify applicable rules of evidence.
Language of the arbitration proceedings. The parties should include a provision that all proceedings of the arbitrators, including arguments and briefs, should be conducted only in the language specified in the underlying agreement.
Written Decision/Confidentiality. The parties may elect to keep the arbitration proceedings and the award confidential. The parties may also specify that the arbitrators render their decision in writing, setting forth the reasons therefor within a defined period after the request for arbitration. A written decision, however, is a double-edged sword. While it may provide sufficient grounds for overturning an unlawful or unfair award, it may also create an opportunity to prolong the dispute.
Entry of judgment. A provision should be included that the judgment upon the award rendered by the arbitrator(s) may be entered in any court of record of competent jurisdiction. This should avoid any necessity of obtaining a judgment on the award in the courts of the country where the award is rendered before being able to obtain enforcement in the courts of a foreign state. In addition, the judgment currency and the manner of payment of the award should be set forth.
Res Judicata. In order to avoid what may amount to a Pyrrhic victory, the arbitration clause should provide that all, to the extent permissible by law, final arbitral awards are unappealable, binding and enforceable from the day it is rendered. This clause should discourage intransigent parties from using the machinery of the courts (which, depending on the arbitral situs, have given inconsistent interpretations as to what constitutes a "binding" judgment under the New York Convention) to frustrate the enforcement of an arbitral award. Further, if the respondent's state does not adhere to the New York or the Panama Convention, there should be a separate provision binding the parties to enforcement of the award in accordance with the New York or the Panama Convention. This is especially useful where the arbitration involves a State or an instrumentality thereof; in such a case, it would also be prudent to provide for a waiver of sovereign immunity in connection with the arbitration or the enforcement of an award issuing therefrom.
Continuing Performance. The parties may specify that the initiation and prosecution of arbitration proceedings shall not suspend or modify the obligations of any party pending the issuance of an arbitration award, except to the extent such obligations are being contested in the arbitration.
Payment of Costs and Legal Fees. To avoid surprises, the parties should specify what proportion of the costs of the arbitration each party shall be responsible for and whether legal fees are to be awarded by the arbitrators.
To facilitate and stimulate the smooth flow of international trade and services, a forum other than a court is often needed to ensure fast and equitable resolution of international business disputes. Arbitration is uniquely suited to this role because it is sufficiently flexible to allow parties with differing legal and cultural backgrounds as well disparate business interests to tailor the dispute resolution provisions to their specific needs. However, it is imperative that the parties familiarize themselves with the many important issues that may influence the conduct and the outcome of an arbitration and, accordingly, include arbitration provisions that work seamlessly with the boiler-plate clauses in international commercial agreements.
*Elena Madariaga is a foreign attorney practicing in Cadwalader's New York office.