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International Arbitration: What it's About

Arbitration is a popular topic but many people in the business world may still wonder what it means. Some aren’t sure about the difference between arbitration and litigation, while others mix arbitration up with mediation.


Arbitration and litigation have this much in common: both provide a final and binding resolution to a dispute. That distinguishes both from mediation. Mediation is a nonbinding process. It is in essence an enhanced version of settlement negotiations, in which a neutral mediator assists the parties in reaching a resolution of their dispute. But the mediator does not decide the case if the parties reach an impasse. They are free to walk away.


Litigation and arbitration are related concepts, but differ in important respects. It helps to view litigation as the default method of resolving a business dispute. If the person down the road owes you money, you can take that person to court. The process is all but free—in the United States at least, it typically costs a few hundred dollars to file a lawsuit. Either party can demand a jury to decide questions of fact, although a judge applies the rules of law. If the plaintiff prevails, and again assuming a garden variety local dispute, the plaintiff will be awarded a judgment for the amount of the claim. The local sheriff can be sent out to seize assets and sell them to collect the judgment.


Difficulties of Interstate and International Litigation


What if it isn’t a local dispute? In the United States, the Constitution requires courts of each state to give “full faith and credit” to judgments from other states. But one party to the dispute may contest jurisdiction in the other party’s state. This often leads to messy litigation over whether one party can be sued in the other’s home state. It can also lead to a “race to the courthouse,” in which each party tries to foreclose the choice of jurisdiction by suing the other first.


Parties to a contract can try to head off these issues by agreeing ahead of time on where any contract-related lawsuits must be brought. Lawyers call these provisions “forum selection clauses.” But each party may balk at agreeing to litigate in the other’s home turf. What about selecting a neutral state? Possible, but some states have laws discouraging their courts from adjudicating cases with no local flavor. South Carolina, for example, has a “door closing statute”[1] that requires some connection to South Carolina (for example, a party based here or conduct that took place here) before a suit against a corporation can be brought in South Carolina. Since states subsidize the cost of litigation, they have an incentive to exclude cases with no ties to the locality.


At the international level, these problems are compounded. Each party to a deal may view the other’s legal system with suspicion. Both will tend to assume that the “home turf” advantage on the other side will be difficult to overcome. Even if one side has the leverage to extract from the other an agreement to litigate in its home courts, what about enforcement of a judgment? Will courts in the loser’s country enforce the winner’s “home field” judgment? At present, the international enforcement of court judgments can be a guessing game. There is no widely accepted international convention on the enforcement of legal judgments. Some countries, including the United States, enforce the judgments of other countries based on a principle known as “comity,” but whether this principle will be applied involves some uncertainty.


International Arbitration


International arbitration offers a solution to these difficulties. Unlike mediation, arbitration provides a binding resolution to contract disputes (usually with no appeal). But unlike litigation, arbitration is not conducted in courtrooms built at public expense, or before judges whose salaries are paid by the government. Instead, the parties pay the cost of resolving the dispute by agreeing to hire arbitrators to do the job. They give up having a court decide their case for free in exchange for greater control over the dispute resolution process and increased certainty as to how it will be handled.


A key aspect of arbitration is that it is consensual. Litigation is compulsory—one party can in theory force the other to go to some court somewhere (or lose by default). But arbitration is typically agreed to in advance as a term of the parties’ contract. Without an agreement to arbitrate, the parties are stuck with litigation—and its uncertainties and complications at the international level. By agreeing to arbitrate, the parties contract around these complexities by choosing a private method of international dispute resolution over going to court.


At its core, the concept of arbitration is very simple: the parties agree that one or more people will be appointed to review the evidence and decide the dispute (often referred to as “ad hoc” arbitration). A single arbitrator is not unusual, but three seems to be more common. Each party typically appoints one arbitrator and the two then select a third. The parties can also agree on where to hold the arbitration. Unlike litigation, which is subject to detailed rules about where cases can and cannot be brought, arbitration can be held wherever the parties want—including a neutral, mutually convenient (or inconvenient) location. That gets around the natural reluctance to resolve disputes in someone else’s home country.


Arbitration-Related Laws and Treaties


Courts in the United States were once hostile to the idea of arbitration.[2] But in 1925, Congress passed the Federal Arbitration Act (FAA),[3] which required courts to enforce arbitration clauses in contracts involving interstate commerce. At the international level, the United Nations Convention on the Recognition of Arbitral Awards,[4] better known as the “New York Convention,” was adopted in 1958 and has since been ratified by a host of nations, from Afghanistan to Zimbabwe.[5] The United States ratified the New York Convention in 1970 and passed a law putting the New York Convention in force that same year.[6] Article II of the New York Convention requires contracting states to recognize arbitration agreements and to refer the parties to arbitration where their contract so requires.


Arbitration Rules


In theory, an arbitration agreement need say no more than that any disputes will be arbitrated by one or more arbitrators at a set location. But that still leaves a lot to fill in. What procedure will be followed in the arbitration? What evidence are the arbitrators allowed to consider? How do the arbitrators go about rendering their decision? Do the parties have any way to get documents and other information from each other? Again in theory, these questions could all be addressed in detail in the parties’ contract. But it is easier to arbitrate in accordance with an established set of rules and procedures. The United Nations Commission on International Trade Law (UNCITRAL) publishes a set of arbitration rules[7] that, if referenced in the parties’ arbitration clause, can provide the basic procedural overlay for the arbitration. There are some disadvantages to this approach, however; for example, if the parties cannot agree on a single arbitrator, or their appointed arbitrators cannot agree on the third, the UNCITRAL Rules direct the parties to the secretary general of the Permanent Court of Arbitration in The Hague. That official must then “designate the appointing authority,”[8] who in turn is to choose the necessary arbitrator. This seems like a roundabout method of picking an arbitrator.


The alternative to ad hoc arbitration is for the parties to select one of various institutions that specialize in international commercial arbitration. They are found all over the world. Some operate globally, whereas other focus on geographic regions or in topical areas. The International Chamber of Commerce (ICC), for example, maintains a roster of approved arbitrators and publishes its own set of arbitration rules. Other well-known international arbitration organizations include the London Court of International Arbitration (LCIA) and the Singapore International Arbitration Center. America offers the International Institute for Conflict Prevention & Resolution and International Center of Dispute Resolution (ICDR) (part of the American Arbitration Association), among others. These institutions offer a level of administrative oversight, in addition to a set of arbitration rules. They usually provide a “model clause” for inclusion in commercial contracts, saving the parties the trouble of drafting one.


The selection of an arbitration service need not limit where the arbitration takes place (assuming an in-person hearing is even necessary). The ICC Rules, for example, state that the place or “seat” of arbitration can be fixed by the parties.[9] London is the default seat of arbitration under the LCIA rules, but the parties can agree on a different location.[10] Some cities, such as New York and Atlanta, offer physical arbitration centers where arbitrations hearings can be scheduled. Thus parties can agree in their contract to arbitrate in accordance with an existing set of rules and procedures (such as UNCITRAL’s or the ICC’s), but can also choose a mutually acceptable metropolitan arbitration center as the seat for arbitration.


Arbitration Practice


Assuming the parties have agreed to arbitrate in accordance with a certain set of rules or before a particular arbitration institute, the party with a grievance can usually file a demand for arbitration with the arbitration service. In many cases, the aggrieved party also appoints its arbitrator at this time. It then falls to the opposing party to appoint its own arbitrator. The third arbitrator is usually chosen by the first two. If the two party-appointed arbitrators cannot agree on a third, the arbitral body will typically step in and appoint one (under some rules, the institution selects the third arbitrator unless the parties agree otherwise).


If one party to an arbitration agreement refuses to participate (or, as often happens, files a lawsuit instead), a court can order the parties to arbitration and stay litigation brought in violation of the arbitration clause.


Once the panel has been formed, it is common for the parties to submit detailed statements of their claims. Depending on the rules, the parties may be entitled to request documents or other information from each other. Although arbitration is intended to be less expensive and complicated than litigation, the parties are sometimes permitted to take a limited number of witness depositions—again depending on what the specific arbitration rules allow. Often the parties are allowed to arbitrate based on documents alone, without the need for a formal hearing. This option can be very helpful in relatively simple cases where the stakes aren’t too high. Otherwise, the panel can schedule one or more hearings to receive witness testimony. Although arbitrators are often familiar with the rules of evidence used in courts, evidentiary rules are typically relaxed, or even discarded, in arbitration proceedings.


After all the evidence is received, the panel will confer and render a decision. Again depending on the rules and the parties’ prior agreement, the decision may take the form of a one sentence award for a sum certain, or a lengthy decision explaining the basis for the panel’s decision in meticulous detail. Although there may be a limited opportunity to request reconsideration or amendment of the award depending on the arbitration service, in general there is no appeal to a more senior tribunal. In most cases, the panel’s decision is final. The ICC’s International Court of Arbitration, for example, reviews draft arbitral awards for form and may draw the panel’s attention “to points of substance,” but does not usurp the panel’s “liberty of decision.”[11]


Enforcement of Arbitral Awards


Arbitration, as previously noted, is private. An arbitrator does not have the power to send a sheriff or marshal out to seize and sell property, let alone hold someone in contempt for failing to obey an order. Arbitrators are not judges. Of what value, then, is an award from an arbitration panel? The answer is that an award can usually be turned into a court judgment and enforced in the usual fashion. The New York Convention as adopted in the United States allows for an arbitral award to be “confirmed” by a court, at which point it becomes a judgment like any other.[12] Very few defenses to confirmation are available—typically it must be shown that the panel exceeded its jurisdiction or that one or more arbitrators were guilty of some form of bias or corruption. Ordinary errors of fact or law are not subject to review by the court. Again, the panel’s decision is meant to be final assuming the dispute was in fact subject to arbitration and no misconduct occurred.


Under Article III of the New York Convention, each contracting state is then required to “recognize arbitration awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon.” Article V allows signatory states to refuse such enforcement, but again only for a limited set of grounds—although the public policy of the enforcing country is among them. Although experience varies by country, most nations seem to be upholding the New York Convention reasonably well. There is no analogous international instrument for recognition of court judgments, at least not one with widespread adoption.[13]


Thus arbitration allows parties to an international contract to choose neutral ground for resolution of disputes, and to have them resolved by a private body with no necessary connection to either party’s home state. The New York Convention gives contracting parties some level of assurance that an award can be reduced to a judgment in any signatory country, including the loser’s home country. Although the arbitration process can take considerable time, most view it as more expeditious than the litigation alternative. Arbitrators must, it should be stressed, be paid for their services. But the cost of paying the panel is at least offset by the savings in overall litigation expense assuming the arbitration is faster and less complicated than litigation. In most cases, arbitration is also confidential, whereas the sealing of court records is often refused.


State Arbitration Laws


The question sometimes arises as to whether one or another state in the United States offers a favorable body of arbitration law. Most states have adopted some version of the Uniform Arbitration Act (“UAA”), a model law originally published by the Uniform Law Commission in 1955 and revised in 2000.[14] The UAA resembles the FAA in most respects and can be viewed as extending the FAA to purely intrastate commerce. A handful of states have also adopted specialized international commercial arbitration statutes. These statutes have been patterned mainly on UNCITRAL’s “Model Law on International Commercial Arbitration,”[15] published initially in 1985 and amended in 2006. The UNCITRAL Model Law was intended to provide a measure of international uniformity with respect to arbitration law and has been adopted by a number of nations.[16] In the United States, the UNCITRAL Model Law has been adopted (according to UNCITRAL) by only eight states. One is Georgia, which adopted an international commercial arbitration statute patterned on the UNCITRAL Model Law in 2012.[17] Although North Carolina is not on UNCITRAL’s list, it did adopt an international arbitration law closely resembling the UNCITRAL Model Law in 1991.[18] South Carolina is not on UNCITRAL’s list.[19]


How important is a state international arbitration statute? Most court proceedings involving international arbitration are likely to end up in federal court. The United States’ adoption of the New York Convention gave federal courts jurisdiction over matters falling under the New York Convention, including the right of a defendant to remove a New York Convention case to federal court. Enforcement of international arbitration agreements and awards is governed by the New York Convention and federal law, not state law.


Provisional Remedies and Interim Measures


The one exception may be what are referred to as “provisional remedies” or “interim measures.” These are procedural devices intended to preserve the status quo pending the outcome of arbitration. One party, for example, might seek a preliminary injunction against the other taking some form of harmful action. Another would be a seizure of money or other property to serve as security against a future award. Where available, such remedies can provide a party to arbitration with considerable commercial leverage. Injunctions are available in federal court.[20] Federal law, however, does not provide any generally applicable method for obtaining security in advance of an award. Instead, under Rule 64 of the Federal Rules of Civil Procedure, a party may take advantage of any available state law remedies for seizure of property, such as attachment or garnishment. That would include attachment remedies built into a state commercial arbitration statute. North Carolina offers just such an attachment remedy, as does New York.[21]


Seizure remedies, however, are driven by the presence of assets to seize. A favorable North Carolina attachment remedy is of little help if the counterparty has no bank accounts or other assets in North Carolina to attach. North Carolina also allows for entry of “[a]ny other order that may be necessary to ensure the preservation or availability either of assets or of documents, the destruction or absence of which would be likely to prejudice the conduct or effectiveness of the arbitration.”[22] Although this language does not seem to have been tested in court, it can be read as permitting an order that one or the other party post security in advance of a potential award.


Can the same provision of North Carolina law be invoked in federal court? The answer is unclear. State seizure remedies are clearly available in federal court, but an order to post security is not a seizure remedy. No federal case seems to have considered this point.

Perhaps more to the point, court is not the only place to seek provisional or interim measures. Most of the better-known international arbitration rules allow the arbitral tribunal to award “interim or conservatory measures,” including those for the posting of security.[23] So far federal courts in the United States have seemed open to the idea of confirming and enforcing interim security awards.[24]


In short, the combination of a tested body of arbitration rules and a court’s power to enforce them may be just as effective as the best state law remedies, and should in theory be enforceable in all federal courts rather than on a state-by-state basis. While states seem to be enacting international arbitration statutes with a view toward attracting arbitration business, state law is probably not at the top of the list in terms of considerations. Where to arbitrate within the United States seems more a function of convenience, facilities and the pool of available arbitrators. As noted above, contracting parties can select any of several highly regarded arbitration services and still agree to arbitrate in whatever location suits them best.


Arbitration should never be considered a knee-jerk substitute for litigation. Old-fashioned litigation still offers the advantage of a state-subsidized court system. In the United States and other countries, appellate courts provide the loser with another level of review, which is seldom the case in arbitration. But the fact remains there is no truly international court for private commercial disputes. By agreeing to arbitration before one of the recognized international bodies, contracting parties in effect agree on a private “world court,” independent of their respective countries, to resolve disputes. That solution is often viewed as preferable to battling over which party’s national court gets to decide the case.


Notes

[1] S.C. Code Ann. § 15-5-150.


[2] According to an older South Carolina case, a pre-existing agreement to submit contract disputes to arbitration was “contrary to the public policy and void, as an attempt to oust the courts of their jurisdiction and establish in their place a contract tribunal.” Jones v. Enoree Power Co., 92 S.C. 263, 75 S.E. 452, 454 (1912).


[3] 9 U.S.C. §§ 1-16.


[4] 21 U.N.T.S. 2518, 330 U.N.T.S. 38, 21 U.S.T. 2517, T.I.A.S. No. 6997 (June 10, 1958).


[5] The full list can be found at http://www.newyorkconvention.org/list+of+contracting+states.


[6] Codified at 9 U.S.C. §§ 201-208.


[7] UNCITRAL Arbitration Rules (2010).


[8] UNCITRAL Arbitration Rules, Art. 6(2).


[9] Rule 18, ICC Arbitration Rules (International Chamber of Commerce 2017).


[10] Art. 16, LCIA Arbitration Rules (2014).


[11] Rule 34, ICC Arbitration Rules.


[12] 9 U.S.C. § 207.


[13] Only a handful of countries have ratified The Hague Convention on Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters. See https://www.hcch.net/en/instruments/conventions/status-table/?cid=78


[14]A list of adopting states can be found on the ULC’s website, www.uniformlaws.org.


[15]United Nations Commission on International Trade Law, “UNCITRAL Model Law on International Commercial Arbitration” (amended 2006).


[16] See http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration_status.html.


[17] Ga. Code Ann. § 9-9-20-§ 9-9-59.


[18]See North Carolina International Commercial Arbitration Act of 1991, N.C. Gen. Stat. § 1-567.30-§ 1-567.87.[18]


[19]In 1978, South Carolina adopted the 1955 version of the “Uniform Arbitration Act,” which is geared more toward domestic arbitration See S.C. Code §15-48-10-§15-48-240.


[20] See Fed. R. Civ Proc. 65.


[21] N.C. Gen. Stat. § 1-567.39; N.Y. C.P.L.R. 7502 (McKinney).


[22] N.C. Gen. Stat. § 1-567.39(c)(6).


[23] E.g. UNCITRAL Rules, Art. 26(2)(c); ICC Art. 28(1); ICDR Art. 24(1); LCIA Art. 25(1)(i).


[24] British Ins. Co. v. Water Street Inc. Co., 93 F. Supp. 2d 506 (S.D.N.Y. 2000); Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. Source One Staffing LLC, 2017 WL 2198160 (S.D.N.Y. 2017).

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