When In Rome (Or Cairo, Or Shanghai, Or Caracas … )

Tuesday, June 19, 2012 - 15:54

The statistics are telling: the number of international investment arbitrations has doubled in a mere two years;[1] various institutions administering international commercial arbitration have reported similarly robust growth in caseload over the past several years.[2] The steady – and continuing – rise in the scope and scale of international arbitration has prompted one analyst to refer to it as “the new litigation.”[3]

Why is international arbitration now so popular? Is it better than the alternatives? And if not, what can be done about it? This article addresses those issues.

First, what is international arbitration? It is, quite simply, a form of alternative dispute resolution between parties from different countries. International arbitration occurs in two contexts: the first, known generally as commercial arbitration, is where the parties specifically contract to arbitrate in the event of a dispute. The contract between the parties will contain an arbitration clause (as opposed to a choice of forum clause for litigation).  

The second, increasingly popular form of international arbitration is known as investment treaty arbitration. This kind of arbitration arises when a party from one country invests[4] in another country that has a trade or investment treaty with the investor’s country. The treaty gives the investor the right to arbitrate directly against the government of the other country for treaty violations. Those violations can range from outright expropriation of assets to unfair tax treatment.  

There currently exist about 2,750 of these treaties, known as bilateral investment treaties.[5] Certain multilateral trade treaties provide similar rights to arbitrate against governments.[6]

The mechanics of international arbitration are not uniform. Because commercial arbitrations are creatures of contract, the parties can craft arbitration clauses that shape any dispute to their mutual satisfaction (on which more below). So, for example, an arbitration clause can call for one arbitrator or three, for the application of a substantive law that has nothing to do with the nationality of the parties or the locus of the dispute, or for mandatory mediation prior to bringing a claim. Investment arbitrations follow a more set path, but they too can vary in procedure.

The arbitration clause will usually specify a particular arbitral body to administer the arbitration. This is as close as arbitration gets to having a “court” or a “forum.” The rules of the arbitral body will govern the timing of submissions such as written pleadings and witness statements. Unless the parties specifically agree otherwise, the familiar devices of U.S. discovery – depositions, interrogatories, and requests to admit – form no part of international arbitration. Document discovery is available, but it is generally greatly limited in scope by comparison with federal and state litigation practice.  

Rules of evidence usually do not apply in arbitrations. Sometimes the parties will agree to abide by a set of rules designed specifically for international arbitration.[7] Those rules, however, do not begin to resemble the Federal Rules of Evidence or state analogs in their prohibitions and complexity.  

Arbitration hearings – the equivalent of trials – are generally more relaxed affairs than their courtroom counterparts. There will usually be witness testimony of some kind and cross-examination;[8] there are often opening and closing arguments; there are sometimes post-hearing briefs. There is, of course, no jury, just the arbitrator(s).

The parties have considerable latitude in selecting arbitrators. Some are former judges; others are arbitration specialists. A few have specific expertise in the field at issue in the contract (this is common in contracts of a technical nature). Unless the arbitration clause calls for it, there is no requirement that an arbitrator be a lawyer, much less be admitted to practice in the jurisdiction of the governing law in the contract.

Several months after the hearing, the arbitrator(s) will issue a ruling, akin to a judgment. The ruling is known as an award. A final award should dispose of all the factual and legal issues before the arbitral tribunal.  

There is no recourse to appeal from an award. Many investment arbitrations are subject to a limited review procedure known as annulment.[9] Under that procedure, a losing party must show that the award was procedurally defective on certain specific grounds.  

A party can petition the court of any state where the losing party has assets to recognize and enforce an award. The grounds for a court’s refusing to do so are likewise limited, under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention. To date, some 150 countries are parties to the New York Convention.[10]

What, then, are the reasons for opting for arbitration over litigation? The first is simply compromise. In an international contract, often neither party is willing to submit to the jurisdiction of the other’s courts. Arbitration offers a neutral forum for any dispute resolution.  

That compromise does not come without cost. As arbitration has become more common, disillusioned consumers have noted that it can be both more expensive and more time-consuming than domestic litigation.[11]

That of course depends on the point of comparison: litigation in, say, the commercial courts of London or in U.S. federal district court can be faster than international arbitration. But it is unlikely to be greatly cheaper.  

By contrast, a dispute in a court in (for example) Brazil or India may not cost as much as a hard-fought international arbitration, but the latter will almost certainly yield a result before the former. In that sense, international arbitration is something of a happy (or unhappy) medium.  

There is another reason why non-American parties opt for arbitration clauses over U.S. forum selection clauses: they do not like U.S. discovery practices. The U.S. is virtually alone in permitting litigants the panoply of discovery devices available through the Federal Rules of Civil Procedure and their state equivalents. Even document discovery is alien to practitioners in civil law jurisdictions; one can imagine how they react to the prospect of depositions. American-style discovery, therefore, is seen not only as unnecessarily expansive and expensive, but also as unduly intrusive.

The limited discovery has advantages: controversies without extensive document production and without depositions are liable to cost less. They may also be resolved more quickly.[12]

But if a key document exists deep in the opposition’s files, the discovery process in arbitration is unlikely to reveal it. In that sense, therefore, limited discovery can be a double-edged sword.

In similar vein, the absence of an appeal procedure in international arbitration can be an advantage or a disadvantage. On one hand, it curtails the length of the dispute and provides the parties with finality. On the other hand, a losing party has limited recourse if the tribunal got it wrong. Although the New York Convention provides grounds for a domestic court’s refusing to recognize and enforce an award, those grounds are limited.[13] Mistake of law is not among them. When parties enter arbitration, therefore, they will not have recourse to de novo legal review.

The solution is to pick arbitrators carefully and well. Over the past several decades, a cadre of highly experienced and respected arbitration specialists has emerged. Some of them double as counsel in other arbitrations; others devote their time exclusively to sitting on arbitral panels.  

In arbitrations with three arbitrators (as opposed to just one), each party[14] almost invariably gets to pick one arbitrator. The two arbitrators often select the third, by operation of the arbitration clause or the applicable rules. They will certainly have a large say in his or her appointment. The third arbitrator serves as the chair of the tribunal.  

Most of the arbitral rules provide for arbitrator challenge procedures. Like domestic court recusal rules, the arbitrators themselves usually decide whether the challenge is well founded.  

None of these procedures provides a perfect safeguard against a bad tribunal. But (unlike a bad judge) the parties can at least feel that they had a say in the process of picking the people who will decide their dispute.

What can parties to arbitration do to make the process consistent with their needs and expectations? Three steps come to mind. First, parties should consider what they want out of an arbitration – or indeed if they want recourse to arbitration at all – before any dispute arises.

Almost no one drafts a dispute resolution clause in the expectation that it will be invoked. Yet 100 percent of all eventual disputes involving a dispute resolution clause in a contract rely on the terms of that clause. It therefore behooves the drafter(s) of the contract to think carefully about what kind of dispute might arise and how, if it does, they should deal with it.[15] This may call for doing more than simply inserting a boilerplate arbitration clause from a previous, unrelated precedent agreement.  

Even if the agreement and the arbitration clause are already in force, it is not too late to suggest revisions to the arbitration clause to the counterparty.  

Second, parties should use the arbitration clause to define the procedures in any dispute as precisely as they wish to. The single advantage of arbitration over litigation is that the parties can agree to virtually any processes and procedures that they find mutually acceptable. Do the parties believe that they ought to resolve any dispute within 60 days of its arising? Then they can so stipulate. Is discovery completely unnecessary in that particular case? So be it. Parties are frequently frustrated by international arbitration because they have not made the most of its advantages over litigation. To do so, they must build those advantages into the terms of the dispute resolution clause itself.

Third, consumers of international arbitration can capitalize on technology to increase efficiency and reduce costs. Unlike a court proceeding, there is nothing to prevent an arbitration from occurring entirely by video conference, with arbitrators, counsel, and even witnesses in separate locations. Much of the expense of arbitration comes from duplicating the procedure of the traditional courtroom, albeit with less formality. But it need not be that way.

* * *

International arbitration is likely here to stay. Companies doing business globally should be familiar with its benefits and drawbacks. Arbitration’s greatest asset is little-recognized and rarely optimized: its flexibility. If parties choosing (or thrust into) arbitration want the best out of the process, they need to make the most of that flexibility.

 


[1] See Record Year for ICSID Caseload, Global Arbitration Review, February 7, 2012.

[2] See, e.g., ICDR International Arbitration Reporter, Issue One; ICC Arbitration Statistical Report (http://www.iccwbo.org/court/arbitration/index.html?id=41190); Getting the Deal Through: SIAC (http://www.kimchang.com/UserFiles/files/GTDT-Arbitration2012_SIACchapter.pdf).

[3] Thomas Stipanowich, Arbitration: the ‘New Litigation,’ 2010 U. Ill. L. Rev. 1.

[4] The term “investment” is not always defined in the relevant instruments; when it is, it is usually defined very broadly.

[5] World Trade Organization Staff Working Paper ERSD-2010-13 (September 2010) (http://www.wto.org/english/res_e/reser_e/ersd201013_e.pdf).

[6] They include NAFTA, CAFTA, and the Energy Charter Treaty.

[7] IBA Rules on the Taking of Evidence in International Arbitration, available at http://www.ibanet.org/LPD/Dispute_Resolution_Section/Arbitration/IBA_Rules_Evidence/Overview.aspx.

[8] Although there are no specific rules on direct examination, the typical practice is that witnesses submit written statements in advance of the hearing. Those statements serve as their testimony in lieu of direct examination.

[9] Convention on the Settlement of Disputes between States and Nationals of Other States (“ICSID Convention”) Art. 52.

[11] See, e.g., Michael Peel and Jane Croft, Arbitration: Case Closed, Financial Times, April 15, 2010.

[12] International arbitrations nonetheless can routinely take 2-3 years from the Request for Arbitration to the issuance of an Award.

[13] See New York Convention Article V. The grounds for refusing recognition are: i) the arbitration clause was not valid; ii) the losing party was not given notice of the arbitration or was unable to present its case; iii) the scope of the award was beyond the scope of the arbitration clause; iv) the tribunal was improperly constituted; v) the award was not final, or was already set aside by another court; vi) the dispute is not susceptible of resolution by arbitration under the law of the place where recognition is sought; vii) recognizing and enforcing the award would be contrary to the public policy of the place where recognition and enforcement are sought.

[14] Or group of party Claimants and Respondents – the arbitration equivalent of Plaintiffs and Defendants.

[15] Where the source of the right to arbitrate is a bilateral investment treaty, a private party’s ability to negotiate the terms of dispute resolution is obviously greatly limited. The private party nonetheless can enter into specific agreements with a state in respect of a particular project; the private party can use any such agreement to delineate the contours of any arbitration.

 

Paul H. Cohen is a Partner in the New York office of Thompson & Knight, where he represents clients in international arbitration, transnational litigation, and both domestic and international regulatory inquiries. William M. Katz, Jr. is a Partner in the Dallas office of Thompson & Knight, where he focuses his practice on antitrust, securities, corporate governance, class action, and complex business litigation and arbitration matters. 

Please email the authors at paul.cohen@tklaw.com or william.katz@tklaw.com with questions about this article.