International traders inevitably encounter arbitration, or at least arbitration clauses. When all is said and done, commercial parties from one country will rarely agree to submit their disputes to the courts of their foreign commercial partners.
Agreeing to have disputes resolved by international arbitration is the obvious, and usually inevitable, solution. In addition, arbitration has come a long way in recent decades, and is now not infrequently a preferred choice.
As international commerce and investment grow, so do contracts providing for the arbitration of disputes. The number of arbitrations arising from these contracts has also steadily increased. The Paris-based International Chamber of Commerce (ICC) -- the best known international arbitration institution, but certainly not the only one -- in 1999 received a record 529 requests for arbitration, almost twice as many as in 1989, and 10 times the number of arbitration requests it received in 1960.
Indeed, arbitration itself has become an international legal industry with lawyers, arbitrators and arbitration institutions competing hard for business. But the ground rules of arbitration, although not so mysterious, are not always simply stated by those in the arbitration industry.
Here are some rules, and some practical advice, to help demystify this area.
Rule #1: Pay attention to the arbitration clause.
Although this seems obvious enough, it is remarkable how many commercial parties sign contracts with an inadequate or unclear arbitration clause. Contracts with these "bad" clauses are disproportionately likely to give rise to disputes. When a poorly drafted clause is arbitrated, it typically results in expensive and time-consuming fights over procedural or jurisdictional points; worse yet, a truly defective clause can sabotage the arbitration itself, or cause the arbitration award to be unenforceable.
Curable, but often costly, omissions include failing to have the clause specify key points such as the number of arbitrators, the place of arbitration, or the language of the proceeding. Useful guidelines on those and other points follow. More fundamental errors occur when the arbitration clause equivocates as to whether all disputes are submitted to arbitration, is self-contradictory, or is unclear about the rules selected.
The use of the "recommended" clause of such arbitral institutions as the ICC, the American Arbitration Association (AAA) or the United Nations Conference of International Trade Law (UNCITRAL) will avoid most major problems. But to use even these model clauses correctly some thought and discussion should go into specifying and structuring a number of additional elements.
Multinational corporations often try to develop a "standard" corporate clause and insist that their contract and commercial personnel should not deviate from it without approval. For example, a big German industrial group against whom I have repeatedly negotiated or arbitrated always insists on a clause providing for ICC arbitration in Zurich under Swiss law. It happens that they have a large office in Zurich and have analyzed and are comfortable with Swiss contract and arbitration law and with the ICC. In insisting on their clause in negotiations, however, the German multinational argues that it provides for a "neutral" forum and law, and that to deviate from it they would need special permission from their legal department. I am also aware of a number of large U.S. corporations that issue internal handbooks or guidelines to their commercial negotiators on arbitration and certain other key clauses.
This is not a bad approach as it reduces and standardizes risk. But a party's "standard" clause is not always acceptable, and in important or risky contracts a "tailor-made" clause is desirable.
Bottom line: Spend the up-front extra effort to think through and negotiate the arbitration clause. Not doing so can be costly.
Rule #2: Law isn't everything.
Many people imagine that the key skill of a bartender is the ability to remember and mix large numbers of exotic cocktails. Most bartenders know the job very differently: Only a minority of the orders are for cocktails, and few of them are obscure. The real work of the bartender involves a score of other details: ensuring sufficient clean glasses, changing beer kegs, keeping the waitresses honest, making sure the liquor is ordered, and so on.
Similarly, experienced international commercial lawyers spend a relatively small amount of their time dealing with issues of pure law. The contract has to be enforceable at law, but relatively few contract provisions are specifically driven by law instead of practice and commercial needs. Likewise, very few arbitrations turn primarily on questions of law; the vast majority are dominated by issues of fact and questions of how to interpret and apply the contract.
This is not to say that the applicable law is unimportant, but it is often approached incorrectly. Quite frequently parties are, by reflex, reluctant to agree to the other party's law, and therefore often compromise by choosing a third or "neutral" law. Sometimes they are mutually ignorant about the provisions of the chosen law. Not infrequently, however, the more experienced international party -- such as the German multinational alluded to above -- has already done its homework. The term "neutral law" is a misnomer: A sophisticated commercial law is always neutral. French parties do not "win" under French law any more than they do under California law. While there is some marginal logic in choosing the substantive law of the place of arbitration (and Swiss law is often chosen precisely because many international arbitrations are venued in Switzerland), even this choice should be avoided if there is another legal system that should more properly apply. There are also international and arbitration-specific aspects that should often be taken into account in determining the applicable law.
The terms of the contract are and should be primordial in international business, all the more so if the parties have entered into a detailed agreement. Applicable industry and commercial practices also should be applied, and law should generally only fill in remaining issues, if any. This is particularly the case if a party has had to compromise in the selection of a foreign or "neutral" law. An advantage of arbitration is that disputes can sometimes be structured to reflect business intent and practices. For example, a large U.S. corporation recently was to carry out a major energy-related project in Latin America. There was extremely detailed U.S.-style project documentation, but the overall project was to be subject to the law of the Latin American country. The U.S. company's concerns were well addressed by having the applicable "law" recited in the dispute resolution clause as follows:
"The arbitral Tribunal shall decide and determine any dispute by applying: (i) the terms, spirit and intent of the Contract, (ii) the norms and practices of the international energy industry and (iii) the laws of [Latin America Country]."
The place of arbitration was fixed in Switzerland -- in part because under Swiss arbitration law the arbitrators were required to apply the "law" or "rules of law" chosen by the parties. This matter has, happily, not gone to arbitration, but if it did, dispute would be well focused on the parties' true contractual rights and relevant practices in the industry, rather than abstract legal discussion.
The possible effects of a foreign, and perhaps unwelcome, law can be further palliated by other contractual clauses. This may be particularly important where one is dealing with the law of a developing or possible unstable country. For example, it is often wise to include a clause to the effect that should a term of the contract be invalid under "local" law, the parties (and by default the arbitrators) shall fashion a valid alternative clause with the same economic effect.
Bottom line: Think contract, commercial principles and then law.
Rule #3: The language can also be structured.
U.S. business people have the advantage that English is overwhelming used in international commerce, a trend that has only accelerated in recent years. But the language of the contract does not always determine the exclusive language of the arbitration. The recently amended ICC Rules have, for example, weakened the presumption that the language of the contract is that of the arbitration. There is, accordingly, no prudent substitute for explicitly specifying the language to be used in the arbitration.
Particular issues arise where the contract documents are in two languages. Where possible one should avoid having two "equally authentic" texts, particularly if one of the languages is a difficult or "exotic" language that is not widely understood. Some years ago I advised a French corporation in a huge and troubled project with a Russian party; all documents, including meeting minutes and protocols, were in "equally authentic" French and Russian versions. When a fluent Russian speaker was put on the case, it was rapidly discovered that there were frequent substantive deviations between the two texts (with the Russian version being far more beneficial to the Russian party.). This lead to enormous problems (and significant legal fees) in just trying to determine and interpret what the parties had agreed.
Sometimes a party has to accept that the binding version be in the other party's language. But if the "non-binding" version was carefully negotiated and drafted -- and especially if it contains key technical or commercial terms -- it should not be relegated to the status of a mere "translation." This issue also arose in the Latin American energy project discussed above. In that matter, the detailed provisions, including much important language specific to the energy and pipeline business, was first drafted and negotiated in English, and then translated into Spanish. The Latin American customer, however, insisted that Spanish be the governing language for the project. In the event of a dispute, it was important that the key language and industry terms in English be taken into account. That language often had a clear meaning in the context of the international energy business, but was far harder to understand in Spanish translation. The parties ultimately agreed to the following provisions: "... both the English and Spanish versions of the contract shall be used to determine the parties' understanding, and both versions shall be interpreted consistently to the maximum extent possible. Should the two versions nevertheless contradict each other, the Spanish version shall prevail."
In this manner the Latin American party obtained a Spanish governing language, while the U.S. party was not denied the important right to be able to refer to and explain the contract based on the potentially critical English text. For good measure it was also agreed that both Spanish and English could be used in the arbitration. Bilingual arbitrations, it should be noted, are not an overwhelming problem, although they add logistical complications and expense. Where the two languages are major European languages, in which many lawyers and arbitrators are fluent, they often proceed quite smoothly. Indeed the possibility of using two or more languages in a proceeding is one of the potential advantages of international arbitration over court litigation.
Bottom line: You are not in a national court. If there is a language "problem," it should be structured in a contract-specific way.
Rule #4: Consider the rules of the game.
When contracting parties from different countries agree on arbitration, they still sometimes differ on the arbitral rules, institution and place or arbitration. A few guidelines will resolve most of these issues.
First, an arbitration does not have to be submitted to any specific rules, or to the supervision of an arbitration institute. A simple clause such as "arbitration in London under the English Arbitration Act" is generally enforceable and valid. But such completely "ad hoc" arbitration is unusual. It is only appropriate between sophisticated parties with some common culture, and who are experienced in arbitration and know what the local arbitration law provides. In case of doubt ad hoc arbitration should be avoided. One sometimes-appropriate middle ground is to provide for ad hoc arbitration, but also agree that it will be governed by certain agreed rules. The UNCITRAL Rules are the most widely used and accepted "off the shelf" arbitration provisions, but even they should be supplemented by stipulating to the "appointing authority" who will appoint arbitrators where a party fails to.
Where institutional arbitration and rules are chosen, there are numerous acceptable choices. American parties often suggest the AAA as they are familiar with this institution, which handles a vast number of domestic arbitrations. The AAA also has a set of "International Rules," and the number of international AAA cases has steadily increased in recent years. While the AAA is a fine and experienced institution, American parties frequently find it difficult to get the foreign party to agree to AAA arbitration for the simple reason that it is perceived to be American.
As a consequence many contracts are likely to refer to arbitration under the auspices of an "international" or "neutral" organization. Very often an ICC arbitration clause is suggested. ICC arbitration is widely accepted and ICC awards do benefit from a certain international currency and recognition. But ICC arbitration is also a highly supervised procedure where arbitrators, the procedural "terms of reference," and the award itself must be approved by the ICC's "Court." The result is additional time and expense. ICC arbitration is always a "safe" bet and the additional supervision is desirable when there is a concern that the contractual counterparty might be uncooperative and seek to sabotage the case. Where the parties have a certain degree of common culture and cooperation, however, the extra expense and delay of an ICC procedure may be avoided.
The London Court of International Arbitration (LCIA) and the Stockholm Chamber of Commerce (SCC) are among the smaller arbitral institutions with a respectable following. The SCC, in a holdover from the Cold War, still handles many disputes involving countries from the former Soviet block. The World Intellectual Property Organisation in Geneva should also be mentioned for developing significant credibility in international IP disputes, including those involving Internet domain names. The choice of any of the above rules is probably acceptable, and should certainly not be a deal breaker. There are many other arbitration régimes that are perfectly acceptable, but unknown rules or institutions (some of which are actively vying for business) should not be agreed to without some due diligence.
It is important that the agreed place of arbitration be in a country that has ratified the "New York" Convention on the Enforcement of Foreign Arbitral Awards and that has a "modern" arbitration statute. Most of the traditional major places of arbitration (e.g., Holland, London, New York, Paris, Switzerland, Singapore) do not pose serious problems, although each has some peculiarities. More exotic or obscure venues merit greater due diligence and some (Argentina comes to mind) should be avoided until their arbitration law is reformed.
Bottom line: There are many acceptable rules and places of arbitration, but the more unreliable your counter party the tighter you want the rules.
Rule #5: Know what you want in your arbitrator(s).
There is much discussion in arbitration circles about the relative merits of providing for a sole arbitrator or a three-person tribunal. A sole arbitrator is typically quicker and cheaper, but many parties refuse to agree to a sole arbitrator for fear of putting their fate in the hands of one person. They reason that a sole arbitrator may be arbitrary, but that a three-person panel -- one member of which each party has had a hand in choosing -- will not be. If the contract is a small one, however, the parties are probably well advised to consider providing for a sole arbitrator. The ICC has a rough guideline of assigning cases with less than US$1 million to US$2 million in dispute to a sole arbitrator where possible, and this is a sensible rule. But if one (or three) arbitrators are clearly desired then this should be specified in the arbitration clause; it is much more difficult to get agreement on such points once a dispute has arisen.
One underused possibility in international commercial arbitration is the appointment of non-lawyers from the industry as arbitrators. I have caused retired construction-company executives, specialized accountants, and engineers to be appointed as arbitrators to good effect. I would hesitate to appoint non-lawyers as sole arbitrators, unless they have significant procedural experience, but on a three-person panel, where the chairman is inevitably a lawyer, an industry specialist will dominate on most technical issues. It is sometimes advisable to have the contract's arbitration clause specify certain general qualifications for the arbitrator(s); e.g., "experienced in the computer software industry."
A good arbitrator will not win the case for you, but a lazy one can sabotage it. All too often arbitration lawyers promote their buddies as arbitrators to return a favor (in English, the "old boys network;" in French, the "ascenseur" [i.e. returning the elevator]). Nor is the "prominent" and "very distinguished" arbitrator always the answer, unless he or she is also known as a worker bee.
Bottom line: Choose talented working arbitrator(s) specifically suited to the case. Decide early on whether you'll have one or three.
Rule #6: The case will "take on a life of its own."
Some years ago, an American oil services company sent me a large box of documents and correspondence concerning a contract on which their Middle Eastern counter-party had defaulted. The material was not in any particular order and I was surprised to see that it contained many original letters and documents. The brief cover letter stated that they wanted a "quick and dirty" arbitration. What they really wanted was a quick and dirty victory; it rarely works that way. That case was settled, on quite acceptable terms, about a year later, but it required considerably more effort by my firm and the company's in-house lawyers and executives than they had originally anticipated or wanted.
The reality is that most international arbitrations involve fundamental differences about the parties' rights or the amount of damages. Not infrequently, one party is unreasonable or is deliberately uncooperative. The "friendly" consensual arbitration does exist, but it is rare, and is usually settled well before an award is issued.
More typical is a case where issues, claims, and arguments escalate and inevitably involve more time and expense. I have, for instance, brought very few arbitrations where the respondent did not assert a counterclaim, in good faith or otherwise. Although international arbitration is free of a number of the procedural hassles of court litigation (there is, for instance, rarely the draining "discovery" which characterizes U.S. litigation), it is still an adversary proceeding that must be won. Where arbitration is inevitable, a party should not slumber into denial or delay. To the contrary, the arbitration process is one that rewards the party who is sufficiently well organized to present a clear and consistent case from the beginning.
There is an endgame. For all the expense or frustration that arbitration sometimes engenders, it does resolve a huge variety of international disputes every day. International arbitration awards are generally enforceable in the more than 130 countries that adhere to the "New York" Convention under far easier conditions than are court judgments. International arbitration may not be easy, but it does "work." Some prior planning can make it work better for you.
Final bottom line: Proper planning will reduce the risk and uncertainty of international arbitration. Proceed without illusions, but also know that the system works, and is usually the only game in town.
Reprinted from World Trade Magazine, Copyright 2000.