INTERNATIONAL COMMERCIAL
ARBITRATION



Arbitration is the process by which parties to a dispute submit their differences to the binding judgment of an impartial third person (or group of persons) selected by mutual consent. The perceived advantages of arbitration in a domestic context are magnified in an international transaction; savings in time and expense may be considerable, and preventing litigation in the other party's "home" judicial system is often far more preferable than exposure to the uncertainties of a different nation's laws and procedures. Accordingly, arbitration has become the primary method for resolving international business disputes.

The most important advantage of arbitration over litigation in the international context is the relative ease with which an award can be enforced. An international arbitral award can be enforced without further judicial inquiry into the merits of the dispute in more than 100 countries around the world. These are countries that have signed the 1958 United Nations Convention on the Recognition and Enforcement of Arbitral Awards (also known as the New York Convention). Under the New York Convention, the winning party can enforce the arbitration award much more easily than a court judgment in a foreign country.

For example, suppose that Merit Systems, Inc. of New York has a contract dispute with an firm in India, and there is no arbitration agreement, either in their contract or subsequent to their dispute. Whose law applies? New York law? U.S. law? Do both India and the United States have jurisdiction over the case and the parties? If a judgment is taken in the United States without the Indian firm's participation, would the courts in India honor the judgment? All such questions are set aside in the event the parties agree to arbitrate in, say, Geneva, Switzerland, under the rules of the International Chamber of Commerce, and applying Indian law (or whatever law the parties choose). An award by the arbitral panel in Geneva would also be enforceable by Indian courts, since India has signed the New York Convention.

THE ARBITRAL PROCESS

How does the international arbitration process work? In the typical case, the parties agree in writing to refer their dispute to arbitration. That agreement may take place either before or after the dispute arises. Second, the arbitral tribunal must make a decision (not just a recommendation) that is final, and within the scope of its authority. Third, with very few exceptions that provide a basis to appeal an arbitration award, the award can generally be enforced through court orders if the losing party does not voluntarily satisfy the terms of the award. Each of these steps is discussed in greater detail below.

THE AGREEMENT TO ARBITRATE.

An arbitration agreement establishes by mutual consent the willingness of the parties to be bound by an arbitrator's decision, and also defines the issues on which an arbitrator may render an award. The parties may determine the number of arbitrators (usually one or a panel of three), the place of arbitration, the rules under which the arbitration will take place, and the applicable law.

There are two basic types of arbitration agreements. The most common is an agreement to submit future disputes to arbitration (a predispute arbitration agreement). Generally, this will be a relatively short clause in the more general contract between the parties. For example, the Balfour Corporation, based in Massachusetts, might contract with Mitsubishi Heavy Industries, based in Japan, using the following single paragraph agreeing to submit to arbitration any future disputes relating to the contract:

The parties to this contract agree that, in the event of any dispute or disagreement of any kind arising out of this contract or matters pertaining to this contract, that such disputes be settled by arbitration before a panel of three arbitrators in Geneva, Switzerland, under the auspices of the International Chamber of Commerce.

If there is no predispute arbitration agreement and a dispute arises, the parties may draw up a set of questions to be decided along with procedural rules specifically suited to the dispute at hand to guide the arbitral tribunal. This is called a "submission." More often, however, the agreement to arbitrate precedes any dispute, and it is customary to incorporate the procedural rules of an institution such as the American Arbitration Association, the Inter-American Commercial Arbitration Association, the International Chamber of Commerce (ICC), the International Center for the Settlement of Investment Disputes, or the London Court of International Arbitration. By incorporating the rules of these institutions, parties adopt an administering agency to assist the arbitral process.

As an example, consider the above predispute arbitration agreement between Balfour and Mitsubishi. Among other contingencies, the ICC Court will: (1) decide if there appears to be a binding arbitration agreement under which the ICC is authorized to act; (2) decide whether there should be one or three arbitrators, if the parties have not specified the number; (3) appoint arbitrators in accordance with its rules; (4) determine the place of arbitration, if not already agreed upon by the parties; (5) set time limits; (6) review the draft of the arbitral tribunal's award; and (7) administer issues of fees and expenses of the arbitrators. The reader is cautioned, however, that arbitrations conducted under institutional auspices may be more expensive than an arbitration where the rules and procedures have been crafted by the disputants to ensure the greatest efficiency.

Where the parties do not incorporate a set of institutional rules, an arbitration clause should—at a minimum—contain the following:

Where parties to a dispute are unlikely to agree on such details after the dispute has arisen, making reference to arbitral institutional rules is nearly essential.

THE ARBITRATOR'S POWERS AND THE ARBITRAL DECISION.

The arbitral tribunal—whether it be a single arbitrator or a panel—obtains its power from the agreement to arbitrate and the willingness of a legal system to enforce that agreement or any arbitral award made pursuant to that agreement. Hence, if the arbitrator or arbitral panel decides a matter that is beyond the scope of the arbitration agreement, recognition and enforcement of the award may be refused. Also, certain kinds of agreements to arbitrate may be invalid under national law. For many years, U.S. courts refused to honor agreements to arbitrate certain kinds of disputes, such as claims based on violations of federal securities or antitrust statutes. Public policy, it was felt, was better served by having such federal law-based claims heard in the judicial system rather than by arbitrators. Gradually, however, the U.S. Supreme Court led the way in allowing arbitration of such claims. At present, arbitration of claims based on federal employment discrimination, antitrust, racketeering, and securities laws are all arbitrable. Few, if any, restrictions remain in U.S. law as to the kinds of controversies that can be arbitrated.

In other countries, however, the kinds of disputes that can lawfully be arbitrated may be limited. In Latin America, for example, commercial arbitration has not been generally accepted. A government con-tract may not be arbitrable in some countries unless a statute expressly allows it, and there are sometimes difficult issues involved in holding a particular government to its agreement to arbitrate disputes arising under a contract; issues of sovereign immunity and its waiver are often involved.

Even when there is little doubt about the arbitrability of a particular kind of claim, there may yet be some doubt as to whether the parties' predispute arbitration agreement was intended to cover certain issues. That is, the "scope" of the arbitrator's decisional powers as given by the parties may be contested. But predispute arbitration agreements are generally phrased rather broadly ("all disputes arising under or in relation to this contract") and are generally interpreted liberally by the courts. In any case, it is the arbitrator who makes the initial determination as to whether a particular issue or set of issues is within the scope of his or her arbitral authority, and not the court.

Much could be said about the arbitral hearing itself, and the kinds of evidence that are allowed and the kinds of procedures that are typical. But the reader is best advised to consult the more extended references at the end of this article, and to bear in mind that, in general, arbitrations are often conducted with fairly strict time limits, that informality is the norm, that not all evidence is heard, and that the well-known judicial rights of cross-examination and discovery are largely absent under most international institutional arbitral rules. Moreover, by custom and law in many countries, the arbitrator is not required to state the judicial equivalent of "findings of fact" or "conclusions of law"—it is sufficient that the arbitrator make a decision in writing, but not that he or she defend it.

This was probably appropriate in simple disputes where, for example, the arbitrator was called upon to render a prompt decision as to whether delivered goods did or did not correspond to a sample or to a known trade description or industry standard. Nevertheless, with the increasing complexity of arbitrations to include claims in securities, antitrust, employment discrimination, and the like, there is a discernible trend that favors giving reasons in awards. And since the arbitrator or panel has a duty to ensure that the award, once made, is valid and enforceable, the particular institutional rules (whether they are the UNCITRAL rules, the ICC rules, or some other set of institutional rules) must be consulted to see that the award is in proper form (and, thus, enforceable).

Under the UNCITRAL arbitration rules (formulated by the United Nations Commission on International Trade Law), for example: (1) the award must be in writing; (2) the reasons for the award must be stated; and (3) the award must be signed by the arbitrators and must bear the date and place of the decision. Under rules of the International Center for the Settlement of Investment Disputes, there are additional requirements for a valid award, such as designating counsel for the parties, a summary of the proceedings, and a statement of facts as found by the tribunal.

The tribunal must issue its award within any time limits set forth in the submission or the institutional rules incorporated by the parties. For example, if parties submit a dispute to arbitration and require that a decision be made within 60 days, then any arbitral award taking place after 60 days would not be valid and enforceable. Under rules of the American Arbitration Association, the award must be made no later than 30 days from the close of the hearings; unless an extension had been obtained, an award dated beyond the 30-day period would not be valid and enforceable.

JUDICIAL REVIEW AND ENFORCEMENT OF ARBITRAL AWARDS.

Once the arbitrator or arbitral tribunal has made its award it seldom has any further function with respect to the parties. The award, being final and binding, does have important legal consequences, and may be enforced against a nonpaying party or enforcement of the award may be delayed when the losing party seeks to "vacate" the award. But even if the losing party succeeds (which is relatively rare) the arbitrator or arbitral tribunal does not generally rehear the dispute unless the losing party: (1) appeals to the courts in the country where the arbitration was held; and (2) obtains an order requiring resubmission of all or part of the dispute. Almost always, however, the award marks the end of the tribunal's involvement with the parties on that particular dispute.

After the arbitration, the winning party may wish to register or deposit the award with a court in the country where the arbitration took place. In theory, this should not be necessary: the parties have agreed that an arbitrator should render a final and binding award, and implicit in that agreement is that no further action needs to be taken by the winning party. But not all awards are promptly and voluntarily paid; the losing party, after all, is likely to disagree with the tribunal's decision, and may well be looking for grounds on which to resist enforcement of the award. Registration or deposit of the award with a court of competent jurisdiction can in some cases put additional psychological pressure on the losing party to comply sooner rather than later, and in some cases, registration or deposit may be a necessary prerequisite to enforcement.

The winning party can often use the award to put pressure on the losing party, whether through explicit or implicit threats of commercial reprisal or noncooperation, or through the threat of adverse publicity. If such pressure fails, the winning party may have to seek execution by court proceedings on the bank accounts or other assets of the losing party. If the award has been deposited or registered, it may thereafter be enforced as though it were a judgment of the court. In many countries, however, and as envisioned by the New York Convention, a final and binding award may be enforced in a country other than where the arbitration took place, provided that the two countries are both signatories to the New York Convention.

A losing party can comply with the award, use it as a basis for negotiating a settlement, or may challenge the award. The bases for challenge, however, are few indeed. Aside from showing bias or favoritism on the part of arbitrators, the principal means of successfully challenging an arbitration award deal with procedural issues. Challenges on procedural issues may be made, for example, where the arbitrator failed to decide an issue submitted by the parties, failed to allow a continuance of the hearing even though good cause was shown, or considered and decided issues beyond the scope of the agreement or submission by the parties. It is abundantly clear as of 1999 that, internationally, challenges to arbitral awards based on the merits (in contrast to procedural challenges) will seldom succeed. In some countries, a tribunal's decision that is in manifest disregard of the law may be set aside by judicial review. This is not, however, a generally recognized basis for setting aside an arbitral award in the United States.

An award may be challenged in at least two ways. One way is for the losing party to ask a court to modify or set aside the award, while another way is to ask the court to remit the award to the arbitral tribunal for reconsideration and revision. If an award is set aside, the award loses its legal validity in the country where it was made, and also any country adopting the New York Convention.

Under the New York Convention, recognition and enforcement of the award may be refused where the losing party offers proof:

  1. That the agreement on which the arbitration is based involves one or more parties with a legal incapacity, or that the agreement is not valid under the proper law of the contract or the lex arbitrii (the law of the country where the award was made).
  2. The losing party was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present its case.
  3. The award contained decisions on matters beyond the scope of the tribunal.
  4. The composition of the arbitral tribunal was not in accordance with the agreement of the parties.
  5. The subject matter of the decision is not capable of settlement by arbitration under the law of the country where the arbitration is held.
  6. Recognizing and enforcing the award would be contrary to the public policy of the country whose court is asked to enforce the award.

These objections are largely procedural—none of them attacks the correctness of the particular decision (such as "Was delivery of the goods timely? And, if not, what are appropriate damages to the buyer?"). Rather, these objections largely concern whether the tribunal exceeded the scope of its authority or ignored basic rules of procedural fairness or its own set of procedural rules. When they lead to nonenforcement of an arbitral award, these objections serve to remind us that private international arbitrtion can operate only within the broader context of public laws and institutions.

SEE ALSO : International Law

[ Chris A. Carr and

Donald O. Mayer ]

FURTHER READING:

Born, Gary B. International Commercial Arbitration in the United States: Commentary and Materials. Boston: Kluwer Law and Taxation Publishers, 1994.

Carter, James H. "International Commercial Arbitration." Chap. 19 in The International Lawyer's Deskbook, edited by Lucinda A. Low, Patrick M. Norton, and Daniel M. Drory. Washington: Section of International Law and Practice, American Bar Association, 1996.

Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). U.S. Code. Vol. 9, secs. 201-8 (1958).

Craig, W. Laurence, William W. Park, and Jan Paulsson. International Chamber of Commerce Arbitration. 2nd ed. New York: Oceana, 1990.

Redfern, Alan, and Marin Hunter. Law and Practice of International Commercial Arbitration. 2nd ed. London: Sweet & Maxwell, 1991.



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