Proskauer Rose International Practice Guide Proskauer Rose LLP |
      Proskauer on International Litigation and Arbitration:
       Managing, Resolving, and Avoiding Cross-Border Business or Regulatory Disputes
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  1. Increasingly, parties are submitting disputes arising out of international contracts to arbitration. While this is true for general commercial contracts, it is a particularly marked trend in the construction, energy and investment dispute areas.
  2. The success of international arbitration can be explained by several major advantages it offers in comparison with litigation, especially litigation in foreign courts. However, certain disadvantages also need to be taken into account by parties in deciding whether to enter into an arbitration agreement. Both the main benefits and the principal drawbacks of international arbitration are outlined below.
  3. Most of the specificities of international arbitration result from its principal feature: party autonomy. Arbitration is, indeed, a creature of contract and can be fashioned by parties in many ways. Parties are thus free to select the place of arbitration, the language of the arbitration, the procedure governing the arbitration, the number and identity of arbitrators constituting the tribunal, the type of evidence they wish to allow and so on.
  4. Freedom to Choose a Neutral and Competent Decisionmaker
    1. Parties to a contract are often reluctant to submit to the jurisdiction of the other party’s home courts. The mutual unwillingness to risk having a dispute decided by a tribunal that is believed to be more sympathetic to the other party’s interest is usually one of the main reasons contracting parties agree to submit future disputes arising out of their contract to arbitration.
    2. Arbitral tribunals can be composed of either one or three arbitrators. In the latter case, which is the most frequent in complex arbitrations, each party is generally free to select one independent arbitrator. The parties can then agree on the chairman, or allow the two party-appointed arbitrators to make that selection. In the event these attempts fail, the chairman will have to be chosen by an appointing authority.
    3. One of the most valued features of international arbitration is thus the parties’ ability to choose their tribunal, and thereby to ensure that their dispute is heard by a tribunal that they trust, that they consider to be independent, impartial and competent in the relevant subject-matter and that they know has the required availability.
    4. Where a high level of technical competence is required, the parties will select arbitrators that are known to have that competence.
    5. Also, arbitrators are expected to spend more time on a case than judges can usually afford to. This is particularly valuable in complex matters and favors the issuance of high-quality decisions.
  5. Speed
    1. Until fairly recently, speed was considered to be one of the main advantages of international arbitration. In the past few years, however, practitioners have increasingly questioned whether arbitration is today still a speedier procedure than litigation.
    2. Several features of international arbitration favor speedy proceedings:
      1. First and foremost, unlike court decisions, arbitral awards are final and not subject to appeal. While court cases where large amounts are at stake will thus often have to go through an appeals procedure and sometimes even a third review procedure by the highest court, international arbitration in principle ends with a final award. The only exception is where the losing party seeks to obtain a vacatur from the courts of the seat of arbitration. As the requirements for a vacatur are, however, extremely strict in most countries, that situation is comparatively rare.
      2. The lack of a pre-existing detailed set of procedural rules governing the proceedings in theory allows arbitral tribunals and parties to devise the most efficient procedure for a particular dispute.
      3. Arbitrators in principle have more flexible schedules than judges and can make themselves available in the evenings and during weekends and holidays.
    3. International arbitrations have, despite these features, become increasingly lengthy, for a variety of reasons:
      1. The disputes submitted to arbitration are increasingly complex.
      2. While the parties and the tribunal are free to determine the procedure they wish to follow, it has become almost customary for them to agree on a fairly lengthy procedure.
      3. Increasingly, arbitrators agree to order documents to be produced, inevitably affecting the length of the proceedings.
      4. Some arbitrators agree to serve despite overly busy schedules, thus causing hearing dates to be set and awards to be rendered months later than otherwise possible.
      5. When the arbitration has its seat in a country which has not enacted modern international arbitration laws, one of the parties can disrupt the proceedings by causing courts to interfere with them.
      6. It is often difficult for arbitral tribunals to resist a party’s dilatory tactics and deny time extensions. Indeed, tribunals are often very careful not to provide a party with a basis to argue that it was not treated fairly and that it was unable to present its case.
    4. Of course, whether the speed of international arbitration proceedings compares favorably with that of court proceedings will depend on the court system one compares it to. When parties enter into a particular contract, they are ordinarily in a position to determine which national courts are likely to hear any dispute under the contract if they do not agree to international arbitration. The efficiency of those courts will be one of the elements factoring into the parties’ choice of international arbitration for the resolution of their disputes. Many court systems, including those in developed countries, experience a significant backlog of cases and thus substantial delays.
  6. Cost
    1. While the cost of arbitration was also traditionally considered an advantage of arbitration over litigation, that judgment is today being revised. International arbitration proceedings have been increasingly influenced by the litigation process, and have grown more and more complex and, accordingly, expensive. While international arbitration is by many still considered to be less expensive than US litigation, that is often not true for less costly litigation in civil law countries.
    2. The fact that international arbitral awards are not subject to appeal can, however, make a significant difference in costs. Also, the enforcement of an arbitral award in a foreign country will mostly be simpler and thus more inexpensive than enforcement of a foreign court judgment. By contrast, increases in cost can result from a party’s recourse to national courts, be it to obtain relief in aid of arbitration or, to the contrary, to hamper the arbitration process.
    3. Certain costs arising in connection with an international arbitration proceeding are inevitable in any international dispute: witnesses often reside in different countries and do not always speak the same language. Similarly, documents are often located in several countries and written in several languages. Whether the parties are arbitrating or litigating their dispute, they will usually have to bear the resulting travel and translation costs.
    4. Contrary to litigation, however, parties to an arbitration have to pay the arbitrators’ fees and expenses and, where institutional arbitration is chosen, the administrative costs of the arbitral institution. By far the most significant costs in both litigation and arbitration are, however, attorneys’ fees. Those fees will vary significantly depending on the complexity of the procedure and can thus in theory be reduced by streamlining the arbitral process.
    5. Another significant factor in relation to costs is that international arbitration rules and arbitration agreements often provide that the legal fees of the prevailing party can or must be borne by the losing party.
  7. Confidentiality
    1. The desire to keep a dispute and its resolution confidential frequently plays an important role in a party’s decision to agree to arbitration. Indeed, arbitral proceedings are private and, unlike court proceedings, are not part of the public record.
    2. Parties need to bear in mind, however, that unless they have specifically agreed to confidentiality, the parties to an arbitration are not obligated to maintain the proceedings confidential and may well decide to divulge the existence and details of the proceedings. Also, public companies may be required to disclose the proceedings. It may, further, be inevitable to disclose an award in the context of enforcement proceedings.
  8. Ability to Select Place and Language of the Arbitration
    1. Arbitration is convenient in that it allows the parties to freely determine many aspects of their procedure. In particular, the parties are free to choose where they wish the arbitration to take place, a decision that should systematically be made in the contract’s arbitration agreement itself, at a stage where the parties are much more likely to find an agreement than after a dispute has arisen.
    2. The parties can thus define which place of arbitration is most convenient for them. Negotiations typically result in agreements pursuant to which the law of one party’s country is to govern the contract while the place of arbitration is to be in the other party’s country.
    3. The decision cannot, however, always be dictated by convenience only: the parties also need to take into account how arbitration-friendly the chosen location is in order to avoid disruptive court intervention.
    4. Agreeing to arbitration also allows the parties to pick the language in which they would like the proceedings to be conducted. Unlike the situation where a dispute is litigated, the place of arbitration does not predetermine the language and parties can agree on the language that is most convenient.
    5. Parties can also agree to have the arbitration proceed in two languages. It is more frequent, however, that parties agree on one language while expressly allowing documents to be filed in two or more languages without translation.
  9. Flexibility of Process
    1. Litigation before national courts is governed by the rules of procedure and of evidence applicable in the court’s jurisdiction. Such rules are usually very detailed and intricate and lead to a fairly time-consuming procedure.
    2. By contrast, the parties to an international arbitration are free to fashion the arbitral process to suit their needs and preferences. With the possible exception of certain very general requirements of the law of the place of arbitration, no particular set of procedural or evidentiary rules is in principle applicable to an international arbitration proceeding.
    3. Where the parties have decided that their arbitration is to proceed under an arbitral institution’s rules, such as, for instance, the Rules of Arbitration of the International Chamber of Commerce, those rules will apply to the procedure. Even such institutional arbitration rules provide only broad procedural guidelines and leave the determination of more specific rules to the parties or, if the parties do not reach any agreement in this respect, to the arbitral tribunal.
    4. Often arbitrations proceed without any particular set of applicable procedural rules, and tribunals determine issues of procedure, evidence or discovery when and if they arise as they deem fit under the circumstances of the particular case. From a procedural standpoint, arbitrations can thus be simpler and more flexible than court proceedings.
    5. Despite this theoretical flexibility, international arbitrations are in reality proceeding in accordance with an increasingly uniform pattern. The procedure will thus usually include, in addition to the request for arbitration and the answer, two rounds of written submissions with supporting written evidence and written witness statements, hearings at which witnesses will be examined and cross-examined and oral submissions will be made, and post-hearing briefs (see Section IV(B)).
    6. The fact that in international arbitration national procedural rules will not apply also presents the additional advantage for counsel that they will not need to familiarize themselves with the procedural rules of each jurisdiction their companies do business in.
  10. Limited Discovery
    1. A major difference between international arbitration and US litigation is that in the former discovery is generally limited, and sometimes totally excluded. Depending on the situation of a party in a particular dispute, that can be viewed as either an advantage or a disadvantage. It is mostly viewed as an advantage by parties with a civil law background, as they are unfamiliar with and often hostile to discovery.
    2. Contrary to litigation in civil law countries, however, a certain degree of discovery is often permitted by arbitration tribunals. Parties who are favorable to discovery will thus prefer international arbitration to litigation before courts in a civil law country.
    3. The degree of discovery allowed in international arbitration will vary greatly from one case to the other, and will often depend on the legal background of the tribunal. Whether or not a party wishes the tribunal to allow discovery should thus factor into its selection of an arbitrator.
    4. As with most procedural elements in international arbitration, the parties are free to agree to the scope of discovery they choose to allow in the arbitration. If the parties agree to US-style discovery, the tribunal will have to comply with that agreement. It is in practice rare, however, for parties to refer to discovery in their arbitration agreement, and it is generally impossible for them to reach an agreement on the issue once a dispute has materialized.
  11. Absence of Appeal
    1. International arbitral awards are final and cannot be appealed, at least in the vast majority of countries. There remains a very limited scope for judicial review of arbitral awards in the context of a judicial procedure to set aside or to vacate an award. In countries that have ratified the New York Convention (see Section IV(A) (4)(b)), such vacatur can occur only in very exceptional circumstances.
    2. The fact that awards cannot be appealed can, depending on the circumstances, be viewed as an advantage or as a disadvantage. Indeed, it ensures that there will be only one procedure and that the losing party will not be able to delay enforcement by initiating time and cost-consuming appellate proceedings. On the other hand, it can be very frustrating to parties not to be able to have another tribunal review a flawed award.
    3. The impossibility to appeal arbitral awards is thus an advantage only where the tribunal has rendered a well-founded award. In order to minimize the risk of a flawed award, and unless the amounts at stake in the arbitration are too low to justify a three member tribunal, it is thus as a general matter recommended that the parties agree on three arbitrators rather than one.
  12. Enforceability
    1. One of the key advantages of arbitrating rather than litigating international disputes is the relative ease with which an international arbitral award rendered in one country can be enforced in another country. This advantage is crucial, as the prevailing party in an international dispute frequently has to enforce the judgment or award rendered in its favor in another country in which the unsuccessful party has assets.
    2. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards has been ratified by over 140 countries and, subject only to a very limited list of exceptions, requires signatory states to recognize arbitral awards rendered in other countries (see Section IV(A) (4)(b)). It is recommended that, before entering into an arbitration agreement, a party check whether at least one of the countries in which the other party has its assets is a signatory to the convention.
    3. There is no equivalent multilateral treaty in which countries agree to recognize and enforce each other’s judgments. The recognition of a judgment obtained in a foreign court will thus usually be subject to the domestic rules on the recognition of foreign judgments of the country in which recognition is sought. Generally, such rules allow for much more extensive review of the judgment than the New York Convention does with respect to foreign awards, and recognition and enforcement are more likely to be denied.
  13. Potential Need for Court Intervention
    1. A potential complication of the international arbitration process arises from the fact that in certain situations the intervention of courts becomes necessary. That is the case mostly where either the arbitral tribunal has not been constituted yet, or where the coercive power of a court is needed to obtain or enforce an interim measure. (For a discussion of litigation ancillary to international arbitration, please refer to Chapter 22 of this Guide.)
    2. Court intervention may be needed, and is foreseen by many recent arbitration statutes, where the parties are unable to appoint an arbitral tribunal. Where the arbitration takes place pursuant to an arbitral institution’s rules, such rules generally empower the arbitral institution to resolve any impasse and select the tribunal. Difficulties requiring court intervention thus mostly arise in ad hoc arbitration, where the parties have failed to designate a third party to resolve difficulties in the appointment process (see Section IV(A) (3)(c)).
    3. Many national laws recognize the concurrent jurisdiction of courts and arbitral tribunals with respect to provisional or protective measures. Both institutional arbitration rules and national laws thus often provide that a party’s application to a court for provisional relief does not constitute a waiver of its right to arbitrate the dispute. A party may in fact have no choice but to have recourse to courts when the arbitral tribunal is not yet constituted.
    4. Because arbitral tribunals lack imperium, or coercive power, their procedural orders are necessarily less effective than those of courts and may have to be enforced through a separate court order. It is thus mostly recognized that a party can apply to a court for protective measures even when the tribunal is constituted.
    5. Depending on the law of the place of arbitration, courts can also be asked to help facilitate the production of evidence, including ordering third parties, over whom the arbitral tribunal has no authority, to produce documents or to testify.
    6. Such court interventions can thus complicate the procedure and constitute a potential disadvantage of international arbitration.
  14. Arbitrators’ Inability to Consolidate Actions or Join Third Parties
    1. Because of the consensual nature of arbitration, arbitrators cannot generally consolidate actions absent an agreement by both parties. That can constitute a significant drawback where disputes between the same parties relate to different contracts that have not been subjected to the same arbitration agreement. Such disputes may have to be resolved before either two arbitral tribunals or an arbitral tribunal and a court, thus leading to increased costs and to two distinct decisions that may not constitute a satisfactory overall resolution.
    2. Also, the privity of the arbitration agreement bars arbitrators from ordering the joinder of parties who have not signed the arbitration agreement. Such joinder can occur only where a legal theory allows the tribunal to find that the third party can be considered to have agreed to arbitration even though it is not formally a signatory.

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