Arbitration of Disputes in International Transactions
Litigation vs Arbitration
Litigation is the less-preferred method of dispute resolution in many countries.
Litigation is an expensive process likely to permanently damage the business relationship and is inherently unpredictable as to result.
Arbitration is preferable to legal action since it is often faster and less costly . It removes the stigma of blame or fault associated with one who is found guilty or liable.
Advantages of Arbitration over Litigation
Enforceability of Arbitral Awards
a. More than 70 countries recognize and enforce foreign awards as parties to New York Convention (see Sec. V). b. Awards can be attacked only under very limited circumstances.
2. Impartiality of Decision Maker. Neither party may be able to find neutral tribunal in other country.
3. Confidentiality. Arbitrations and awards are normally private; court proceedings and judgments are public.
4. Technical Expertise. Parties may choose arbitrators with technical backgrounds.
5. Discovery . Limited discovery in arbitration, so less burdensome.
6. Expense. Usually less expensive than litigation.
7. Expeditious Resolution.
8. Familiarity. Party is often unfamiliar with foreign legal system.
Advantages of Arbitration for Export Transactions
Avoidance of either party’s domestic courts
Ease of enforcement
The arbitration clause may:
Appoint an arbitration institute
Name the arbitration location
Law and rules that will govern
Qualifications of the arbitrators
Language in which the arbitral proceedings will be conducted
An arbitration clause should state the specific rules to be applied, such as the rules of the ICC or American Arbitration Association (AAA).
Entry of judgment language (may be entered in any court) is essential to show intent that any arbitration award is to be final and binding.
Jurisdiction in international arbitration is based exclusively upon consent of parties.
MECHANISMS FOR ARBITRATION
Ad hoc Arbitration
2. Institutional Arbitration
Ad Hoc Arbitration
Parties specify in agreement all aspects of arbitration, including applicable law, rules under which arbitration will be carried out, method for selecting arbitrator, language, place of arbitration and arbitrable issues.
Rules of arbitration institution may be used without submitting to administration by that institution.
Parties may select ad hoc arbitration to reduce costs, to accelerate arbitration and to structure proceedings to suit needs.
Parties specify in agreement an arbitration institution to administer the arbitration from time of demand for arbitration through award.
Institution chosen may administer arbitration according to its own rules or rules of another institution.
Optional Rules to be Applied
Arbitration Rules of the United Nations Commission on international trade Law (UNCITRAL) (1976), which are widely accepted, "off the shelf" rules designed to be used in ad hoc arbitrations; they are not related to an arbitral institution;
International Center for Settlement of Investment Disputes (ICSID) Rules cover only state/investor disputes (see Sec. IV);
Rules of International Chamber of Commerce (ICC);
Rules of American Arbitration Association (AAA).
Rules of Inter-American Commercial Arbitration Commission (IACAC) (adapted from the UNCITRAL Rules);
Factors to Consider in Selection of Rules
a. Selection of arbitral site if not specified; b. Costs including allocation; c. Selection of arbitrators; d. Powers of arbitrator; e. Language of proceeding; f. Substantive law to be applied; g. Use of experts; h. Time allowed to arbitrators to make awards; i. Power of administering authority over awards; and j. Availability of provisional relief.
UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention)
It is by far the most important international agreement on commercial arbitration and may be credited for much of the explosive growth of arbitration in international business disputes.
- Ratified by US in 1970
- More than 80 countries have undertaken international legal obligations to recognize and enforce arbitral awards
- People’s Republic of China is the most recent member
- In general, arbitral awards rendered in countries party to NY convention are readily enforceable in all other signatory countries .
Summary: New York Convention
The two basic actions contemplated by the New York Convention are the recognition and enforcement of foreign arbitral awards and the referral by a court to arbitration .
1 st Action
It refers to arbitral awards made in the territory of another (Contracting) State.
This field of application is defined in Article I. The general obligation for the Contracting States to recognize such awards as binding and to enforce them in accordance with their rules of procedure is laid down in Article III. A party seeking enforcement of a foreign award needs to supply to the court (a) the arbitral award and (b) the arbitration agreement (Article IV).
The party against whom enforcement is sought can object to the enforcement by submitting proof of one of the grounds for refusal of enforcement which are limitatively listed in Article V(1). The court may on its own motion refuse enforcement for reasons of public policy as provided in Article V(2).
If the award is subject to an action for setting aside in the country in which, or under the law of which, it is made ("the country of origin"), the foreign court before which enforcement of the award is sought may adjourn its decision on enforcement (Article VI). Finally, if a party seeking enforcement prefers to base its request for enforcement on the court's domestic law on enforcement of foreign awards or bilateral or other multilateral treaties in force in the country where it seeks enforcement, it is allowed to do so by virtue of the so-called more-favourable-right provision of Article VII(1).
2 nd Action
The second action is the referral by a court to arbitration. Article II(3) provides that a court of a Contracting State, when seized of a matter in respect of which the parties have made an arbitration agreement, must, at the request of one of the parties, refer them to arbitration (unless the arbitration agreement is invalid).
In both actions the arbitration agreement must satisfy the requirements of Article II(1) and (2) which include in particular that the agreement be in writing.
Iran Aircraft Industries vs Avco Corporation 980 F.2d 141
Avco Corp, a US company, asserted claims against certain Iranian entities before an Iran-US Claims Tribunal, created by Algiers Accords between the US and Iran in order to resolve criminal seizure of US hostages during the Carter Administration. The tribunal rejected Avco’s claims and upheld a number of those of the Iranian parties, producing an award against Avco of approximately $3.5 M. The iranians sought to enforce the award in the US and the following decision was rendered denying the enforcement.
The NY convention provides for nonenforcement of judgment where: “the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case”.
The NY Convention requires US courts to enforce foreign arbitration awards.
Enforcement of an arbitration award may be withheld if the losing party was denied due process.
Conciliation or mediation is a required precursor to any arbitration.
It is highly recommended that a med-arb clause be utilized in most contracts.
Advantages of Mediation
Mediation has been shown to be highly successful in resolving disputes promptly and preserving the long-term solidarity of the contractual relationship.
If mediation is unsuccessful, the parties will have a better understanding of the issues in dispute, which is likely to lead to a more efficient arbitration.
Conciliation makes special sense in an international business dispute because of the increased chance that misunderstandings are due to cultural and language differences.
The standard arbitration clause above can be transformed easily into a med-arb clause by inserting the ff language:
“ The parties agree first to attempt to settle the dispute through mediation administered by the AAA and its Commercial Mediation Rules or ICC Rules of Optional Conciliation before resorting to arbitration.”
Therefore, it is recommended that the arbitration clause state expressly that the parties have agreed to submit voluntarily to conciliation before they proceed with a formal arbitration.
Mediation , a form of alternative dispute resolution (ADR), aims to assist two (or more) disputants in reaching an agreement.
Whether an agreement results or not, and whatever the content of that agreement, if any, the parties themselves determine â€” rather than accepting something imposed by a third party. The disputes may involve states, organizations, communities, individuals or other representatives with a vested interest in the outcome.
International Chamber of Commerce (ICC)
ICC handles the majority of international arbitrations and is usually acceptable to foreign companies because it is not affliated with any single country.
Commission on Arbitration under ICC
The Commission on Arbitration aims to create a forum for experts to pool ideas and impact new policy on practical issues relating to international arbitration, the settlement of international business disputes and the legal and procedural aspects of arbitration.
Rules of Arbitration in ICC
The International Court of Arbitration (the “Court”) of the International Chamber of Commerce (the “ICC”) is the arbitration body attached to the ICC.
The function of the Court is to provide for the settlement by arbitration of business disputes of an international character in accordance with the Rules of Arbitration of the International Chamber of Commerce (the “Rules”). If so empowered by an arbitration agreement, the Court shall also provide for the settlement by arbitration in accordance with these Rules of business disputes not of an international character.
The Court does not itself settle disputes . It has the function of ensuring the application of these Rules.
Notice and Communications (Article 3)
All pleadings and other written communications submitted by any party, as well as all documents annexed thereto, shall be supplied in a number of copies sufficient to provide one copy for each party, plus one for each arbitrator, and one for the Secretariat. A copy of any communication from the Arbitral Tribunal to the parties shall be sent to the Secretariat.
A notification or communication shall be deemed to have been made on the day it was received by the party itself or by its representative, or would have been received if made in accordance with the preceding paragraph.
Periods of time specified in or fixed under the present Rules shall start to run on the day following the date a notification or communication is deemed to have been made in accordance with the preceding paragraph . When the day next following such date is an official holiday, or a non-business day in the country where the notification or communication is deemed to have been made, the period of time shall commence on the first following business day. Official holidays and non-business days are included in the calculation of the period of time. If the last day of the relevant period of time granted is an official holiday or a non-business day in the country where the notification or communication is deemed to have been made, the period of time shall expire at the end of the first following business day.
Commencing the Arbitration
A party wishing to have recourse to arbitration under these Rules shall submit its Request for Arbitration (the “Request”) to the Secretariat, which shall notify the Claimant and Respondent of the receipt of the Request and the date of such receipt.
The Request shall, inter alia , contain the following information:
a) the name in full, description and address of each of the parties;
b) a description of the nature and circumstances of the dispute giving rise to the claim(s);
c) a statement of the relief sought, including, to the extent possible, an indication of any amount(s) claimed;
d) the relevant agreements and, in particular, the arbitration agreement;
e) all relevant particulars concerning the number of arbitrators and their choice in accordance with the provisions of Articles 8, 9 and 10, and any nomination of an arbitrator required thereby; and
f) any comments as to the place of arbitration, the applicable rules of law and the language of the arbitration.
Answer to the Request; Counterclaims
The Secretariat shall send a copy of the Request and the documents annexed thereto to the Respondent for its Answer to the Request once the Secretariat has sufficient copies of the Request and the required advance payment.
Within 30 days from the receipt of the Request from the Secretariat, the Respondent shall file an Answer (the “Answer”) which shall, inter alia , contain the following information:
a) its name in full, description and address;
b) its comments as to the nature and circumstances of the dispute giving rise to the claim(s);
c) its response to the relief sought;
d) any comments concerning the number of arbitrators and their choice in light of the Claimant’s proposals and in accordance with the provisions of Articles 8, 9 and 10, and any nomination of an arbitrator required thereby; and
e) any comments as to the place of arbitration, the applicable rules of law and the language of the arbitration.
Any counterclaim(s) made by the Respondent shall be filed with its Answer and shall provide:
a) a description of the nature and circumstances of the dispute giving rise to the counterclaim(s); and
b) a statement of the relief sought, including, to the extent possible, an indication of any amount(s) counterclaimed.
The Claimant shall file a reply to any counterclaim within 30 days from the date of receipt of the counterclaim(s) communicated by the Secretariat
Effect of Arbitration
Where the parties have agreed to submit to arbitration under the Rules, they shall be deemed to have submitted ipso facto to the Rules in effect on the date of commencement of the arbitration proceedings, unless they have agreed to submit to the Rules in effect on the date of their arbitration agreement.
If the Respondent does not file an Answer, or if any party raises one or more pleas concerning the existence, validity or scope of the arbitration agreement, the Court may decide, without prejudice to the admissibility or merits of the plea or pleas, that the arbitration shall proceed if it is prima facie satisfied that an arbitration agreement under the Rules may exist . In such a case, any decision as to the jurisdiction of the Arbitral Tribunal shall be taken by the Arbitral Tribunal itself. If the Court is not so satisfied, the parties shall be notified that the arbitration cannot proceed. In such a case, any party retains the right to ask any court having jurisdiction whether or not there is a binding arbitration agreement.
If any of the parties refuses or fails to take part in the arbitration or any stage thereof, the arbitration shall proceed notwithstanding such refusal or failure.
Place of Arbitration
The place of the arbitration shall be fixed by the Court unless agreed upon by the parties.
The Arbitral Tribunal may, after consultation with the parties, conduct hearings and meetings at any location it considers appropriate unless otherwise agreed by the parties.
The Arbitral Tribunal may deliberate at any location it considers appropriate.
The time limit within which the Arbitral Tribunal must render its final Award is six months . Such time limit shall start to run from the date of the last signature by the Arbitral Tribunal or by the parties of the Terms of Reference.
When the Arbitral Tribunal is composed of more than one arbitrator, an Award is given by a majority decision. If there be no majority, the Award shall be made by the chairman of the Arbitral Tribunal alone.
the settlement shall be recorded in the form of an Award made by consent of the parties if so requested by the parties and if the Arbitral Tribunal agrees to do so.
Every Award shall be binding on the parties. By submitting the dispute to arbitration under these Rules, the parties undertake to carry out any Award without delay and shall be deemed to have waived their right to any form of recourse insofar as such waiver can validly be made.
The American Arbitration Association ( AAA ) is a private enterprise in the business of arbitration, and one of several arbitration organizations that administers arbitration proceedings. The AAA also administers mediation and other forms of alternative dispute resolution . It is headquartered in New York City .
Many contracts include an arbitration clause naming the AAA as the organization that will administer arbitration between the parties. The AAA does not itself arbitrate disputes, but provides administrative support to arbitrations before a single arbitrator or a panel of three arbitrators. The arbitrators are chosen in accordance with the parties' agreement or, if the parties do not agree otherwise, in accordance with the AAA rules.