COMMENTARY | COLUMNISTS | GORDON KAPLAN

Using international arbitration to resolve contract disputes

The problem is familiar to business executives engaged in negotiating contracts between parties in two different countries: All the essential commercial terms have been agreed upon, but the parties are deadlocked over the choice of law to govern the contract, as well as the courts that will have “exclusive jurisdiction” to decide disputes under the contract. Each party, fearful of being at a disadvantage in litigating disputes under the law and before the courts of the other, tends to dig in its heels and seek its own advantage by insisting on contract provisions that require litigation of disputes under its own law in the courts of its own home jurisdiction.

The obvious and perhaps inevitable solution is a compromise: contract provisions that stipulate the exclusive resolution of disputes through binding arbitration under the rules of an internationally recognized and “neutral” international arbitration tribunal, such as the International Court of Arbitration of the International Chamber of Commerce or the London Court of International Arbitration. Before saying more about these institutions, however, consider first the main advantages usually associated with using binding arbitration to resolve international contract disputes.

Neutrality

The parties are free to stipulate in the contract an international arbitration tribunal that they see as independent, impartial and competent. Major institutions can administer arbitrations around the world, and the proceedings do not need to take place in the city or country where the institution or either party is headquartered.

Governing law

The parties also have wide latitude in choosing the governing law of the contract, including even the law of some “neutral” third country. U.S. and Russian contract parties, for example, might well decide that English law will be the governing law for their contract. And if for some reason the parties fail to designate a governing law, most of the major tribunals will make the choice for them.

Expertise

The parties may select arbitrators with specialized technical or commercial knowledge who will understand specific issues in the case.

Confidentiality

While many arbitral tribunals have rules that impose obligations of confidentiality, the parties may also agree on their own set of confidentiality obligations regarding the arbitration proceedings, the award or any settlement, or any documents exchanged in or created for the proceedings.

Finality

Arbitral awards are final and, except in limited circumstances, not subject to appeal.

Speed

Arbitration usually produces a resolution more quickly than litigation in a national court.

Expense

While arbitration can itself run up significant costs, its finality and relative speed will usually make arbitration considerably less expensive than litigation.

Enforceability

Awards of an arbitration panel are generally easier to enforce than court judgments in the international context because of the widespread acceptance of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, an international treaty that requires the courts of contracting states to recognize and enforce arbitration awards made in other contracting states. The United States and more than 140 other countries have ratified the convention, making it the international standard for the cross-border enforcement of arbitration awards. There is no equivalent multilateral treaty by which countries agree to the reciprocal enforcement of court judgments.

The most widely used institutions for the supervision and administration of international arbitration are the International Court of Arbitration of the International Chamber of Commerce, which was founded in 1923 and is based in Paris, and the London Court of International Arbitration, which traces its origins back to 1892 and is headquartered in London.

Despite their origins in France and England, both institutions are recognized as “neutral” international bodies, with the resources and outlook needed to handle arbitration proceedings on a worldwide basis. And while the International Chamber of Commerce has had more cases than the London Court of International Arbitration, the latter has developed a reputation that it is perhaps more practical-minded and “commercial” in its approach.

Both institutions publish readily available cost schedules but use different approaches in the way costs are assessed. The International Chamber of Commerce takes into account the amount in dispute; it also provides a helpful online “cost calculator” that enables prospective parties to estimate costs based on the amount in dispute and the number of arbitrators. The London Court of International Arbitration, by contrast, applies an hourly rate for time actually spent by arbitrators and administrators.

A final word of caution to a business executive who is negotiating an international contract and has agreed to use arbitration to resolve disputes under the contract: Pay careful attention to getting the arbitration provisions right. Provisions that are poorly drafted or defective can result in expensive and time-consuming disputes down the line, sabotage the arbitration itself, or even make an arbitration award unenforceable. The use of arbitration provisions recommended by major institutions should avoid most major problems, but even such “standard” provisions will require careful review to make sure they fit the specific needs of the parties in the context of the particular contract at hand. The “standard” size may not fit all.

Kaplan is an international corporate and business law attorney in San Diego and can be contacted at gordonkaplanlaw.com. Send comments to editor@sddt.com. All comments are forwarded to the author and may be used as Letters to the Editor.

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