International Commercial Arbitration

Compared with litigation in national courts, international arbitration presents two distinct and crucial advantages. First, in international contracts between parties from different countries, arbitration allows the parties to avoid litigating in each other’s national courts. For example, an American party who contracts with a Chinese party may not want to litigate any disputes in the Chinese courts; likewise, the Chinese party may not want to litigate any disputes in the US courts.

A party may want to avoid litigating disputes in a foreign court for various reasons: the legal system may be unfamiliar; the party may feel that the foreign court system is too slow, burdensome, or costly; moreover, a party may feel that the foreign court may be biased, or flat out corrupt, and a party may not trust the foreign court’s capacity to fairly adjudicate the dispute. Thus, for strategic reasons, it is often the case in international business transactions that neither party wants to litigate any potential disputes in the other party’s courts. This is why parties end up negotiating an international arbitration clause as a compromise: it is often the only acceptable means of resolving a dispute for parties who may mutually reject each other’s suggested choice of courts.

Second, international arbitration awards can be enforced in nearly every country in the world. Arbitration awards, like court judgments, are not self-executing and must be enforced by a court where the losing party’s assets are located. In international disputes, enforcement issues are complicated by the fact that there exist few international treaties that allow court judgments from one country to be easily enforced in another country. This often makes recovery of assets a complicated affair. By contrast, well over a hundred countries have signed an international treaty on enforcement of international arbitration awards, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) or New York Convention for short. This treaty means that, subject only to limited circumstances, each signatory country must recognize and enforce arbitration awards. Thus, the New York Convention facilitates enforcement of arbitration awards worldwide. By way of example, consider a party who wins a dispute against another party whose assets are spread out in multiple countries. If the winning party litigated in court and receives a favorable court judgment from country X, that party will have to check that each and every country where the losing party’s assets are located will recognize and enforce country X’s court judgment – the procedures for recognition and enforcement will likely be different in each country, and some countries may flat out refuse to enforce judgments from country X. By contrast, if the winning party receives a favorable arbitration award, the New York Convention will make it easier for that party to recognize and enforce the award in the various countries. In turn, this means that it is more likely that the winning party will be able to recover the full amount of damages awarded to it by an arbitral tribunal.

Arbitration presents other advantages. Principal among these are speed and cost efficiency. Generally, arbitration proceedings are subject to less formal rules and procedures than court litigation, which can help speed up a dispute. In addition, arbitration awards are generally not subject to appeals (except for certain very narrow and limited grounds), which can also help bring down time and costs of a given dispute. However, these advantages are not automatic; rather, they depend upon the specific circumstances of the dispute, including the size of the dispute, whether the opposing party will try to obstruct the process, the particular rules chosen by the parties to govern the proceedings, and the selection of the arbitrators. A competent arbitration law firm will help navigate these issues and try bring a dispute to a close as quickly and cost-efficiently as possible.

Finally, parties can select arbitrators with specialized knowledge about a certain issue or industry. This can be very advantageous for disputes in a highly specialized industry. By way of example, the coffee industry relies on specialized arbitrators who are also experts on the quality of coffee beans. Specialized arbitration institutions that deal with coffee disputes maintain rosters of arbitrators who must have a certain number of years in the coffee industry and meet other industry-related qualifications. Having a specialized arbitral tribunal adjudicate a dispute can save time and costs, because the parties do not need to spend resources educating the tribunal about the specific industry and type of dispute. Morever, having a specialized arbitral tribunal makes it more likely that the tribunal will arrive at a fair and correct result. When negotiating arbitration agreements, parties can specify that the tribunal members must have specific experience in an industry or type of dispute (e.g., minimum 15 years of experience in a field; current members in good standing of a certain professional association etc).

Of course, there are times when arbitration is not necessarily the right choice. Because the parties must pay for the arbitrators’ services as well as administrative fees for arbitration institutions (such as the ICC) that administer the arbitration proceedings, sometimes it may not be worthwhile to arbitrate potential disputes rather than go to court. In other words, if the costs of arbitration equal a very significant percentage of the amount in dispute, it does not make sense to arbitrate the dispute for either party. A party weighing the advantages and disadvantages of international arbitration must carefully consider the cost of arbitration as well as other factors. Again, a competent law firm can help a party weigh these pros and cons.

International arbitration is a method for resolving business disputes between parties; it is an alternative to resolving disputes in court. Most often, international arbitration is created by contract: the parties who enter into a commercial contract agree to draft an arbitration clause into the contract itself. By including an arbitration clause, the parties agree to submit any future potential disputes to arbitration – that is, the disputes are to be decided by an arbitral tribunal composed of one or more arbitrators selected by or on behalf of the parties. The arbitral tribunal will usually decide the dispute according to a set of rules (for example, the ICC Rules of Arbitration) that the parties have designated in the arbitration clause itself. Arbitration takes a dispute out of the courts and is therefore an alternative to court litigation – it is helpful to think of arbitral tribunals as “Privatized Judges,” and arbitration institutions as “Privatized Courts” with their own sets of procedural rules (Note, however, that parties may also choose ad hoc arbitration, where no arbitration institution is selected).

In practice, arbitrations tend to take place in hotel or law firm conference rooms. The parties and the arbitral tribunal agree on a place and time to meet; once an arbitration proceeding begins, the arbitrator(s) will decide the dispute much as a judge would in court (with some important differences, discussed below). The resulting decision, called an arbitration award, has the same binding force as a court judgment: international treaties and the domestic laws of most countries accept arbitration as a valid form of dispute resolution and will treat an agreement to arbitrate, as well as the resulting award, as valid and enforceable. This means that, subject to certain important limitations, an arbitration award will be recognized and enforced in the courts of virtually every country in the world. International arbitration has become a commonly used method of resolving disputes, especially in international contracts between parties from different countries. Indeed, international arbitration is often the only mutually agreeable means of resolving a dispute between two parties.