Published in the Maryland Bar Journal Volume XLIII, Number 4, July/August, 2010.
Imagine your client, a United States based engineering company, asking you to draft documents for a joint venture with a Swedish domiciled construction company and a German based fertilizer manufacturer for the construction of a processing plant in Costa Rica. Your mind reels with the myriad of potential issues and disputes that may arise during and after performance. In today’s global economy, the options for resolving disputes are of singular importance in the negotiation and performance of international contracts. Foreign courts can be a morass of unpredictability.
A United States based party forced to litigate in the courts of another country might face frightening obstacles. Not necessarily knowing where litigation may be filed, your client should have concerns. The case may heard by politically biased judges in a court system that is not equipped to resolve complicated commercial problems. Judges might have a bias towards local customs. The hearing may be in an unfamiliar language at inconvenient situs subject to local laws that do not provide appropriate remedies. Your client may confront sovereign immunity, and have difficulty enforcing a favorable judgment in the country where the remedy can be found . You want predictability. The growing trend is towards more flexible methods of dispute resolution – binding arbitration, mediation, or a combination of the two – mediation first and if that is not successful, referring the matter to binding arbitration.
Arbitration of international commercial disputes is conceptually similar to arbitration of domestic commercial disputes. Because of the greater obstacles encountered in navigating the global commercial world, arbitration offers a number of advantages and allows the parties to tailor a dispute resolution model that mitigates against uncertainty. Among the advantages are choice of language, law and situs, impartial arbitrators experienced in the field of dispute, confidentiality, and the ability to enforce awards in other countries and against sovereign bodies. Arbitration may also be quicker from start to finish because awards are final, and there are limited grounds to appeal or vacate. Discovery is also limited, saving the parties time and money. There may be some disadvantages that you should consider. Summary procedures may not be available. Preliminary injunctions might require court action. The case can become bogged down in jurisdictional issues. Cases may not be heard on consecutive days, and gaps could delay a final resolution. If the losing party does not voluntarily abide by the award, the winner will have to go to court anyway.
A favorable court award is of little value unless it can be enforced. Enforcement may be required in another country such as where money or assets can be found. Awards in properly conducted arbitrations have an advantage over court judgments because of multi-lateral treaties. Over one hundred and twenty countries are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (21 U.S.T 2517, 330 U.N.T.S. 38, 1958) – commonly known as the New York Convention of 1958. You may tell your engineering client that Germany, Costa Rica and Sweden are signatories. Some South and Central American countries that have not joined the New York Convention are signatories of the Inter-American Convention on International Arbitration (OAS Treaty Series No. 42, 1975). The United States has ratified both conventions. These conventions, or multilateral treaties, provide for the cross-border enforcement of arbitral awards except is cases of violation of procedural rights or public policy of the country of enforcement. They require the country in which enforcement is sought to recognize arbitral awards as binding. Foreign awards being enforced in the United States are brought before the United States District Courts, and in some cases before state courts. The New York Convention contains the grounds that might justify non-enforcement. Invalidity of the agreement in the jurisdiction issuing the award or under the law chosen in the arbitration clause; incapacity of the party against whom enforcement is sought; if the award is beyond the scope of the agreement; and failure of proper notice are all grounds that could block enforcement. Enforcement may also be denied if the Tribunal was improperly constituted, if the subject matter of the case is not arbitratable under the law of the forum, or if the award violates the public policy of the country of enforcement. Enforcement may also be denied if the award has not yet become binding. To qualify for coverage by the New York Convention, there must be a written agreement creating a commercial legal relationship that contains an agreement to arbitrate in a signatory country. Therefore, it is important for the contract to provide for a situs of any arbitration that is in a country that is a signatory to one of these conventions.
As a drafter of a multinational commercial contract, you must consider a number of questions when negotiating the arbitration clause. The first issue is whether an arbitration will be administered by an organization established for that purpose or ad hoc – that is, self- administered. There are a number of organizations that administer arbitrations and mediations. Most of us are familiar with the American Arbitration Association. Its international division is the International Centre for Dispute Resolution, located in New York City. The ICDR has an experienced staff of case managers who can administer a case from start to finish, much like the clerks of a court system. The ICDR has cooperative agreements with over sixty other arbitral institutions in forty-three countries and a roster of four hundred experienced arbitrators. ICDR case managers are fluent in over a dozen languages. It also provides comprehensive rules of procedure and a roster of qualified arbitrators with experience in many areas of law and commerce. Information about the ICDR can be found on the website of the American Arbitration Association, http://www. adr.org.
Another popular administering body is the Court of Arbitration of the International Chamber of Commerce. It is based in Paris and has a global reach. Information about ICC can be found at http:/www.iccwbo.org. An institution for companies doing business in the Americas is the Inter-America Commercial Arbitration Commission (see http://www.sice.oas.org/dispute/comarb/iacac/iacac1e.asp). It operates through National Sections. The United States is a Section, and arbitrations filed pursuant to this Commission that are to be held in the United States will be administered by the ICDR out of New York. The London Court of International Arbitration (www.lcic-arbitration.com) and the United Nations Commission on International Trade Law Arbitration (Seehttp://www.uncitral.org/pdf/english/texts/arbitration/arb) have international credibility. Some are more geographic in focus such as the China International Economic Trade Arbitration Commission (seehttp://www.cietac.org) and the St. Petersburg International Commercial Arbitration Court (see http://www.spicac.spb). Others are more specialized in focus, such as the World Intellectual Property Organization in Geneva (http://www.arbiter.wipo.int) and the International Centre of Settlement of Investment Disputes which, as its name implies, deals with investment disputes between investors and foreign countries. It is operated by the World Bank. (http://www.worldbank.org/icsid)
Most institutions have their own rules of procedure. The ICDR has a comprehensive set which controls the proceedings, in the absence of agreed upon variations, from start to finish. Another set commonly adopted by parties is promulgated by the United Nations Commission on International Trade Law known as UNCITRAL. They apply to cases administered under the United Nations Commission and are frequently adopted by parties in ad hoc arbitrations and sometimes in proceedings administered by other institutions. The UNCITRAL Rules can be found at http://www.uncitral.org/english/texts/arbitration/arb-rules.htm. While there are variations among the various institutional rules, most address such key topics as the commencement of arbitration proceedings, the demand, statements of defense and counterclaims, selection and appointment of arbitrators, conflicts of interest, challenges to arbitrators, place of arbitration, language and applicable law if not stated in the agreement, powers of the Tribunal including power to determine jurisdictional issues and grant interim relief, form of notices, time limits, admission of evidence, conduct of the hearing, and issuance of an award.
Parties should take great care in drafting the arbitration clause. Most administering organizations have sample clauses, but they contain the bare minimum. Additions should be considered to lock in areas that are important to the context of the types of disputes anticipated. The drafter should consider provisions for choice of law, the number of arbitrators, their fields of expertise, their nationality, the method of selection, the language in which the case will be heard, the situs of the hearing, limitations on issues subject to arbitration, limitations on damages or other remedies, discovery, rules of procedure and evidence, the type of award, and attorneys fees. Not all of these are important in every situation, and the sophisticated rules of the more commonly used administrative institutions may be sufficient. Therefore, it is important to know how the adopted rules deal with these subjects before modifying or supplementing them.
Most parties are concerned with predictability and so the clause should specify the choice of law. In the absence of a stated choice, the Tribunal has flexibility. It could use the law of the situs, the law of the place of performance or its own version of the law of international trade yet not linked to a particular situs – lex mercatoria. The latter may be preferred if the parties are interested in applying concepts of good faith and fair dealing, custom and usage, common sense and equity.
The sample arbitration clause published by ICDR reads: “Any controversy or claim arising out of or relating to this contract, or a breach thereof, shall be determined by arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules.” The ICDR suggests that the parties add (1) “The number of arbitrators shall be (one or three); (2) the place of arbitration shall be ( city, state, country), and (3) the language(s) of the arbitration shall be (state the language(s).” See the ICDR cite at email@example.com.
Domestic arbitration proceedings tend to follow the same procedures as domestic courts, although with less formality. A United States trial lawyer will have no trouble making the transition from the court room to the domestic arbitration tribunal. We are used to the common law way of trying cases. Because international disputes involve non-US parties and may be held overseas, the non-US party may be trained in the civil law system of trying cases. Most English speaking countries adopt the common law system. The Civil law system is more common and is used in Continental Europe, most of Africa, Central and South America, and many other countries. There are a number of notable differences in how a case is presented. Civil law is more code based; common law is case and code based. Presentation of evidence is also handled differently. In civil law countries, the evidence should be laid out in the pleadings as opposed to being introduced at the hearing. The case should be fully developed at the time that the pleadings are filed. There is very little discovery. In fact, the word “discovery” might invoke fits of rage. Limited requests for exchange of documents are permitted, but be prepared to meet a standard of relevancy. Depositions are rare. In the U.S., the arbitrator or judge acts as a referee and gate keeper. The attorneys control the presentation of their respective cases. In civil law forums, the Tribunal or judge controls the case; not the attorneys. Counsel will present the Tribunal with a package of documents and point out the ones that make its client’s case. Witnesses are not used for authentication of documents, and pre-files witness statements are common. If expert testimony is appropriate, the Tribunal may appoint its own expert who will investigate and prepare a report. A Party’s expert will have a limited role. Brutal cross- examination is the exception. The judge or Tribunal may conduct the examination of witnesses. Counsel suggest questions to the Tribunal. Long winded legal briefs are discouraged. A simple outline with a list of important code citations and treatise is more common. Punitive or exemplary damages are usually not allowed unless the parties agree otherwise.
The International Bar Association has promulgated rules for the taking of evidence in international proceedings. The IBA Rules For The Taking Of Evidence In International Commercial Arbitration are designed to bridge the gaps between the practices of different countries. They cover such topics as exchange of documents, identification and testimony by fact witnesses, party appointed and tribunal appointed expert reports and testimony, admissibility of evidence, and conduct of the hearing.
Arbitration of disputes is becoming increasingly favored across the international commercial spectrum, whether the commerce is in developed or developing economies. Statistics show that the number of cases filed with the more established arbitration organizations is on the rise. There is a great deal of source material in texts and on the web to assist the practitioner in weighing the benefits of the relevant countries as well as assisting in crafting a clause appropriate to the situation. Mandatory arbitration assures that all parties are playing on the same field. Although the outcome of the case is never a certainty, the rules of the game are established and enforced. This should be of great comfort to your client.