International commercial arbitration has become the principal method of resolving disputes between States, individuals and corporations in almost every aspect of international trade and commerce.(1) International arbitration developed as a compromise between various common law and civil law traditions. It is essentially a creature of contract, wherein the parties themselves jointly retain the services of a private tribunal for the resolution of their international commercial disputes. Indeed, the parties can even select or create their own rules on how the dispute will be resolved.
The aim of this presentation at the legal session of CMA Shipping 2012 is to provide U.S. maritime attorneys and their clients, accustomed to dealing with domestic charter party disputes under the U.S. domestic Federal Arbitration Act, with an overview of the general principles associated with international commercial arbitration. The presentation will then focus on some of the more serious pitfalls to avoid when drafting an arbitration clause or agreement in an international commercial contract.
WHAT IS INTERNATIONAL COMMERCIAL ARBITRATION?
International commercial arbitration is a process for resolving international commercial disputes between transnational parties through the use of private arbitration tribunals rather than through public civil court litigation. It is a hybrid and only works because it is held in place by a complex system of laws. These laws may include international multilateral treaties, international bilateral treaties, as well as the national laws of many countries.(2)
Even a simple international arbitration may require reference to many different systems or rules of law:
- The law governing the parties’ capacity to enter into an arbitration agreement;
- The law governing the arbitration agreement;
- The law governing the actual arbitration proceeding itself – the “curial law” of the arbitration , or the lex arbitri;
- The law or set of rules which the arbitral tribunal has to apply to the substantive matters in dispute (the proper law of the contract);
- The law governing recognition and enforcement of the award (which may be more than one law if recognition and enforcement is sought in more than one country in which the respondent has assets);
- The conflict of law rules that may be applied in selecting each of the foregoing laws.
Subject to some restrictive provisions of national laws, the parties under the doctrine of “party autonomy” are free to agree on the procedure to be followed by the arbitration tribunal in conducting the proceedings, as long as the substantive and procedural laws to be chosen are legitimate, do not contravene public policy and treat the parties equally. Special emphasis is placed on the arbitration laws of the country which is the place (or seat) of the arbitration and the laws of the country or countries in which recognition and enforcement of the arbitration award is sought. These laws must be carefully scrutinized because they may permit the State court to set aside the award or refuse enforcement on limited grounds.
THE MAIN REASON FOR CHOOSING ARBITRATION OVER LITIGATION FOR RESOLVING INTERNATIONAL DISPUTES
The primary objective for a claimant in an international arbitration is to win the arbitration and obtain a valid arbitration award from an arbitration tribunal. Most importantly, the award must be recognized and enforceable against a respondent in any country or countries where the respondent may have assets. Parties may also wish to exercise more control over their disputes by specifying the rules that will govern the arbitration and what specific arbitral body will be deciding the matter.
There are no viable treaties or national laws compelling domestic courts to enforce foreign civil court judgments. The same is not true for international arbitration awards. The universally recognized New York Convention(3) requires signatory countries to recognize and enforce arbitration agreements and to stay the litigation of disputes in their civil court systems when the dispute is subject to a valid arbitration agreement. The widely used New York Convention has the broadest scope of application and eliminates some of the uncertainties associated with international trade and commerce. Subject to two reservations that may restrict its application, the Convention provides a uniform legal framework for the enforcement and recognition of foreign arbitration agreements and awards in 142 contracting States out of 193 States recognized by the United Nations at the time of this writing.(4) This makes international commercial arbitration awards relatively easy to enforce throughout the world. Indeed, this may be international arbitration’s most noteworthy feature. The formalities required for recognition and enforcement are simple. The party seeking such recognition and enforcement is only required to present to the enforcing court a duly authenticated original award or certified copy and the original agreement to arbitration or certified copy of same.(5)
THE MEANING OF “INTERNATIONAL” AND “COMMERCIAL”
As might be expected, international commercial arbitration concerns itself only with disputes that are international and commercial in character. The New York Convention, which is the leading convention in international law, applies to the enforcement of awards not considered domestic in the State where their recognition and enforcement is sought. The New York Convention therefore recognizes that different legal regimes may apply to domestic awards and to those international awards which transcend national boundaries.(6)
The nationalities of the parties and their place of residence or business may also factor into determining if an arbitration is to be given international status. For example, in the United States Section 2 of the Federal Arbitration Act places restrictions upon enforcement of agreements and awards between U.S. citizens, unless the agreement or award involves property located abroad or has some other reasonable nexis with one or more foreign countries.(7)
The New York Convention does not attempt to define “commercial.” Instead, the Convention provides that a State acceding to the Convention may declare that it will apply the Convention only to differences arising out of legal relationships which are considered commercial under the national law of the State making the decision.(8) Therefore it is important to determine whether the legal relationship out of which the arbitration arose is or is not a commercial relationship. If it becomes necessary to seek recognition or enforcement of an award, look at the law of the State concerned to see what definition it has adopted for the term “commercial”.
THE ROLE OF CONVENTIONS IN INTERNATIONAL ARBITRATION
Sovereign States may agree to enforce foreign arbitration agreements and awards in a variety of ways. Some of the mechanisms utilized are multilateral agreements, bilateral agreements and bilateral investment agreements. It is essential for a party to an international commercial contract to be in a position to utilize an international convention providing for the mandatory enforcement of arbitral awards in a State in which the other contracting party has assets. The most important conventions are multilateral. They bind three or more States to enforce international arbitration agreements and awards. Such conventions will have been incorporated into the national laws of the contracting States.
The Geneva Protocol of 1923
The first important international convention was the Geneva Protocol of 1923, drawn up under the auspices of the League of Nations.(9) Its main objective was to ensure that arbitration clauses were enforceable internationally and to guarantee that arbitration awards would be enforced in the States in which they were issued. The Protocol was limited in its effect to States availing themselves of commercial reservations. The United States never adopted the Geneva Protocol.
The Geneva Convention of 1927
The principle purpose of this Geneva Convention was to widen the scope of the Geneva Protocol so that an award made in one contracting State would be enforceable in the territory of any of the other contracting States.(10) The major drawback of the Geneva Convention was the requirement that a party seeking enforcement of an award first had to prove that the award was final and obtain leave from the issuing State for enforcement abroad. This cumbersome procedure was known as “double exequatur.”(11) The United States never adopted the Geneva Convention.
The New York Convention of 1958
The New York Convention replaces the Geneva Protocol as well as the Geneva Convention as the primary aid to the enforcement of international arbitration awards. This 5 page document is the most important international treaty relative to international commercial arbitration and is regarded by many as one of the major contributing factors to the rapid development of arbitration as the main means of resolving international trade disputes.(12) Indeed, the United States Supreme Court has acknowledged the importance of the Convention’s role in international trade in the 1985 case Scherk v. Alberto-Culver Co.(13) However, the Convention has faced certain difficulties because of the lack of any uniform approach by the courts of various contracting States relating to the grounds upon which enforcement may be refused under the Convention. It does, however, provide for a much more simplified and effective method of obtaining recognition and enforcement of a foreign arbitral award.(14)
The New York Convention defines the specific grounds upon which recognition and enforcement of an arbitration award may be refused by a State court.(15) A court of a contracting State can refuse recognition and enforcement of an award only on the basis of one of the defenses enumerated in Article V of the Convention. These defenses are:
- lack of a valid arbitration agreement;
- denial of an opportunity to be heard;
- an excessive exercise of jurisdiction by an arbitrator in deciding matters beyond the scope of the arbitration agreement;
- following any procedure contrary to the parties’ agreement; and
- lack of binding effect or annulment of the award in the State where rendered.
These procedural defenses must be asserted and proven by the resisting party, and they are not intended to permit judicial review of the merits of the dispute.
Two additional defenses against recognition can be raised by the court on its own initiative.(16) These defenses are:
- the subject matter is not arbitrable; and
- enforcement would violate the forum State’s public policy.
The award may also be refused if the challenging party can prove that the award is not binding.(17)
The New York Convention applies only to awards that are foreign awards made in a territory of a State other than the State where recognition and enforcement is sought and to international awards not considered domestic.(18) It should be emphasized that the New York Convention does not prescribe how an arbitration is to be conducted. It only lists the grounds upon which enforcement may be refused.(19)
To qualify for New York Convention coverage, there must be a written agreement creating a commercial legal relationship that contains an agreement to arbitrate in a signatory State.(20) Therefore, it is most important for the international contract to provide for the site of the arbitration to be held in a State that is a signatory of the Convention. This will also improve the chances of securing recognition and enforcement of the award in other signatory States. This is due to the fact that the Convention requires a court in a contracting State to recognize and enforce foreign arbitral agreements and awards, subject to some specific exceptions, and to refer parties to arbitration after they have entered into a valid agreement to arbitrate their disputes.(21)
TYPES OF INTERNATIONAL ARBITRATION
When drafting an international commercial contract, the parties must consider a number of issues when negotiating the arbitration clause. The first issue is whether an arbitration will be administered by an organization established for that purpose or ad hoc – that is, self-administered.(22)
An institutional arbitration is one in which the parties consent to resolve their dispute before a panel of arbitrators from one of the major arbitration institutions, under the specific rules and administrative support of that institution.(23) Such institutional support is essential to ensure that the arbitration proceeds in an orderly fashion. The parties can generally work within the framework of the institution’s rules and yet can vary them to suit their specific needs. However, expressed wording should be included in the arbitration clause if the institutional rules are to be altered because a party will not unilaterally be permitted to vary the rules during the course of the arbitration.
It should be emphasized that the cost associated with institutional arbitration for administrative service is usually expensive. Because of the cost factor, parties contemplating institutional arbitration should familiarize themselves with the services, rules and fee structure of the institution under consideration. For example, under the ICC Institutional Rules, the parties pay a fixed fee in advance for the costs of the arbitration. This fixed fee is assessed on an ad valorem basis; the larger the claim and counterclaim, the higher the fee.
Ad Hoc Arbitration
Unlike an institutional arbitration, an ad hoc arbitration is one which resolves a dispute without the oversight and administrative assistance of an institution and without designating any reference to a particular set of institutional rules.(24) The parties are free to develop their own rules to fit the issues under dispute in order to suit their own purposes.
One of the main advantages of ad hoc arbitration is that the parties avoid the high administrative fees charged in an institutional arbitration. Additionally, the parties may agree that the arbitration will be conducted according to an established set of rules, such as the Society of Maritime Arbitrators Rules (SMA) or the UNCITRAL Rules. These rules can be utilized without involving an institution for their administration. This also saves the parties the cost and effort of drafting their own rules. The rules can also be fashioned to meet the immediate needs of the parties for the particular dispute in question.
The main disadvantage of ad hoc arbitration is it only works if there is complete cooperation between the parties.(25) Once a dispute arises, this seldom occurs, and the State courts may have to intervene in the arbitral process – not an ideal situation. Worst still, State courts may not be in a hurry to involve themselves in the resolution of the dispute that is not local, hereby negating the arbitral advantage of expediency.
TYPES OF ARBITRATION AGREEMENTS
In International commercial arbitration, there are two types of arbitration agreements.(26) The first and most common is the “arbitration clause,” which deals with future disputes. It is usually found in the main contract as a separate clause and is general in scope.
The second type of arbitration agreement is the “submission agreement,” and it deals with resolving existing disputes. It is usually a lengthy document and is very detailed in design.
VALIDITY OF THE ARBITRATION AGREEMENT
Formal Requirement – The Need for a Writing
Under the New York Convention, the only formal requirement is that the arbitration agreement must be reduced to a writing.(27) Article II explains that the term “agreement in writing” shall include an arbitration clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams. Since Article II states that “it applies to an agreement in writing,” it will not be possible to rely on the Convention if there is no written agreement.
One should appreciate that the New York Convention is over 60 years old and came into effect internationally well before the advent of electronic emails. Would an exchange of emails be sufficient to satisfy the written agreement requirement of the Convention? Probably yes, with most signatory States. But why take a chance?
The safest approach is to insure that the arbitration agreement is recorded in a recognized form of writing, such as an expressed arbitration agreement in the signed main contract or clearly incorporated in the signed main contract from another document.(28)
Capacity of the Parties
A lack of capacity of a party to arbitrate will be fatal to the enforcement of any arbitration award. This will happen when one of the intended parties to the arbitration agreement lacks the capacity, under the law of its domicile, to participate in an arbitration.(29) The New York Convention provides for non-enforcement of an award if the parties to the arbitration agreement are under some incapacity. Whether the party is subject to some incapacity is defined under the law applicable to the arbitration agreement. Article V (1) (a) of the Convention provides that the law governing questions of incapacity of parties is “the law applicable to them.”
Likewise, when the arbitration agreement is invalid under the governing law agreed to by the parties or under the law of the country where the award is made, it will not be enforced in the designated State of enforcement.(30)
For a natural person, capacity may depend on nationality or place of residence or the place of entering into the arbitration agreement. With regard to a legal entity, such as a corporation, the law applicable to its capacity will be the law of its domicile. This will be the law of the State which created that entity, be it a corporate or State entity.(31)
The court of the State in which recognition and enforcement are sought will utilize its own conflict of law rules to decide which law applies to the issue of capacity. The fact that a corporation has the power to enter into arbitration agreements by the law of the forum State of the arbitration will generally not be enough to grant the corporation such power if it lacks it in the State of its domicile.(32)
It should also be noted that under some national laws, States or State agencies are prohibited from entering into private arbitration agreements unless approval is first obtained from the relevant State authorities. Therefore, when dealing with a State or a State agency it is advisable to verify the capacity of the State entity to enter into the arbitration agreement.(33) This should also be confirmed in writing in the main contract.
Autonomy of the Arbitration Clause
In international arbitration, the arbitration clause is normally considered separate from and independent of the main contract in which it is contained.(34) Indeed, the autonomy concept of the arbitration clause is considered by many to be a cornerstone of international arbitration. Its significance is that an allegation that the main contract is void does not halt the arbitration process. This is because the main contract being void potentially does not deprive an arbitral tribunal of its jurisdiction conferred by the arbitration clause to decide the issue of invalidity of the main contract.(35) In some countries, the autonomy concept is extended to give the arbitral tribunal permission by national law and institutional rules to determine its own jurisdiction under the principle often referred to as Kompetenz/Kompetenz. In the United States, the court will decide the jurisdiction of the arbitral tribunal.(36)
The autonomy concept also has the effect that even if the main contract is invalid, the arbitration clause remains valid, unless it is shown that the cause of invalidity also specifically applies to the arbitration clause. It is of paramount importance that the arbitration clause should be capable of this separate existence, as it is the base upon which the arbitration is founded. Without such an arbitration agreement, there can be no valid arbitration.(37)
In the United States, the liberal federal policy favoring arbitration has lead the U.S. Supreme Court to hold that an arbitration clause contained in a contract is a separate, independent agreement. The doctrine of separability of the arbitration clause from the main contract was first recognized by the United States Supreme Court in Prima Paint Corp. v. Flood & Conkin.(38) The doctrine is still of utmost importance in the field of international commercial arbitration today.
Law Applicable to the Arbitration Agreement (Lex Arbitri)
The New York Convention (Art. V.1 (a)) provides for the refusal to enforce an award if the arbitration agreement is not valid under the law selected by the parties or, failing any indication of such law, under the law of the country where the award was made. Because the arbitration agreement is often contained in the arbitration clause which forms part of the main contract, it will usually be governed by the same law as governs the substantive rights of the parties under the main contract.(39) In the absence of any express clause, there is a strong presumption that the arbitration clause is governed by the same law as the rest of the main contract.(40)
In the case of a submission agreement, which is drawn up after the main contract, the arbitration agreement may be subject to a different governing law. That law may be specifically selected by the parties under the submission agreement. Furthermore, the law may also be different from the law governing the arbitration proceeding itself.(41)
The concept of arbitrability involves determining which types of disputes may be resolved by arbitration and which must be determined by courts. Each State may decide, in accordance with its own public policies, which categories of dispute should be exclusively resolved in State courts.(42)
Traditionally, certain types of disputes were considered not capable of settlement by arbitration. Some of the categories included criminal law issues, matrimonial status, bankruptcy, antitrust claims, security transactions, competition laws, patents and trademarks.(43)
The New York Convention (Art. V.2 (a) & (b)) reserves to each signatory State the right to refuse enforcement of an award where the subject matter of the dispute is not capable of resolution by arbitration under the law governing the arbitration agreement; the law of the place the arbitration (the Lex Arbitri); and, the law of the place of enforcement. It should be noted that the United States has given the public policy exception narrow construction. Enforcement of an award will be refused only if enforcement would violate the forum State’s most basic notions of morality and justice.(44) For example, as a matter of public policy a dispute concerning the salvage of a U.S. warship should not be submitted to arbitration.(45)
Those engaged in negotiating international arbitration agreements should be aware that commercial disputes are now arbitrable under the laws of most countries. Constraints upon arbitrations are more likely to be encountered in domestic arbitrations. Still, it is prudent for parties to research applicable laws when negotiating international contracts to determine if arbitrability may pose a potential problem in future arbitration disputes.
Law Applicable To Substantive Issues
Very seldom does an arbitration clause contain a reference to the substantive law that governs the interpretation of the main contract.(46) However, the main contract will usually have a separate provision stating that the law of a specific State, or sometimes an international trade law (lex mercatoria), shall govern the substantive law of the contract. This is the so called “choice of law clause.”(47)
It is generally desirable to specify in the main contract the substantive law that will govern the parties’ disputes. This law may also be referred to as the “governing law,” “applicable law,” “private law,” or “proper law” of the contract.(48) The governing law clause should refer to the substantive law of the State specified and exclude the operation of the choice of law rules of such State. The clause should also make explicably clear that the chosen law is the substantive law of the chosen State.(49)
Under the generally accepted principle of party autonomy, the parties to an international commercial agreement are free to decide how their disputes should be arbitrated as long as the choice of law is bona fide and not contrary to public policy.(50) Parties to the agreement should take advantage of this freedom and insert a well-reasoned choice of law clause into their main contract.
As nature abhors a vacuum, so does the law. If the parties fail to choose the substantive law for their contract, the choice will be made for them by the arbitral tribunal.(51) The tribunal will attempt to act fairly to both parties, through one or both parties may not be satisfied with the choice. This will usually involve following the conflict of law rules prevailing at the seat the arbitration.(52)
Law Governing The Arbitration Procedure
Selection of the seat of an arbitration is extremely important in the drafting of any international arbitration agreement. The proper selection of the arbitration locale or seat is critical, not only because of the practical advantage for the convenience of witnesses, parties, arbitral tribunals and the location of documentary evidence concerning the dispute, but also because when an arbitration is conducted in a particular State, the procedural laws of that State may well affect the ultimate rights of the parties.(53)
The rules that govern an international arbitration are: first, the mandatory provisions of the law of the place of the arbitration (the lex Arbitri); secondly, the rules that the parties may have chosen to govern the proceedings such as the ICC, LCIA, ICDR (AAA) or UNICTRAL Rules. This means that in international arbitration, the tribunal and the parties have maximum flexibility to design a procedure suitable for the particular dispute with which they are concerned.(54) In essence, the parties’ freedom to choose the seat of the arbitration is not merely a physical choice, but more importantly, it is also a legal choice. That choice will determine the law applicable to the arbitration procedure.
Since the arbitration laws of one State may differ from those of another, matters which one State regards as falling within its lex arbitri may not be so regarded by another State.(55) With this proviso, the lex arbitri of a given State is likely to extend to such matters as:
- validity of the arbitration agreement;
- jurisdiction of the arbitrators;
- appointment, removal and replacement of arbitrators;
- time limits;
- conduct of the arbitration;
- interim measures of protection;
- power to consolidate arbitrations;
- equal treatment of parties;
- statement of claim and defense;
- default proceedings;
- court assistance, if required;
- form and validity of the arbitral award; and,
- finality of the award (including any right of recourse against it under national law).
As a precautionary note, it should be emphasized that parties who allow an arbitration tribunal to ignore a mandatory requirement of the lex arbitri run the risk of obtaining an award which may be set aside under the local law or refused recognition and enforcement under the New York Convention.(56)
DISCOVERY AND EVIDENCE IN INTERNATIONAL ARBITRATION
Dealing with discovery and evidentiary issues that often arise during the course of an international commercial arbitration can be troublesome and extremely difficult to resolve. This is especially true when parties to international contracts are from different countries with varying business customs. Likewise, the multinational members of an arbitration tribunal coming from divergent legal backgrounds can add to the problem. This is especially true when the arbitral tribunal is a hybrid panel of lawyers or academics from different legal systems.(57)
Civil Law Arbitration Procedures
One should appreciate that many civil law countries do not provide for any, or very limited, discovery in litigation.(58) The same holds true for arbitration proceedings in some civil law countries.(59) As a result arbitration tribunals in these countries often refuse to entertain broad discovery requests.(60)
Civil law arbitration proceedings are distinguished from those in common law by a major emphasis on documentary evidence.(61) Witnesses, if any, are heard only after a series of exchanges of statements, briefs and documents by both parties. Hearings are much briefer than in common law jurisdictions. Their function is only to highlight disputed issues already placed before the tribunal by documentary evidence and written briefs analyzing and interpreting such evidence.(62)
At the hearings, documentary and written testimonial proof is freely admitted as evidence. Arguments on the quality of proof tend to concern issues of credibility rather than admissibility. Civil law arbitrators are not constrained by formal rules of evidence utilized in common law litigations.(63)
Civil law arbitrators have a duty to evaluate not only the weight of the documentary evidence, but also its authenticity. Expert opinions may be received in written report form.(64) Such reports are admissible, but have only the weight of an oral declaration.(65) Oral examination of an expert is rare. If it does occur, the duration of the examination is brief. In the absence of decisive documents, arbitrators may hear witness testimony to fill in gaps. Tribunals may even make onsite inspections in order to ascertain relevant facts.(66)
Civil arbitrators lack power to compel non-party witnesses to appear before them.(67) The tribunal, however, may suggest to a party that certain witnesses or documents under its control be made available to establish disputed facts. Failure to comply with such a suggestion generally leads the tribunal to draw an adverse inference against the recalcitrant party.(68) Therefore, it behooves a party to heed the tribunal’s suggestion.
Common Law Arbitration Procedures
Most of the attendees of this session are from the United States and so are familiar with common law court procedures. Basically, common law arbitration proceedings are less formal than court litigation and place an emphasis on oral testimony and the examination of witnesses. Common law proceedings are adversarial in nature, and each party presents its witnesses under oath or affirmation.(69) The testimony is then subjected to verification by rigorous cross examination. Documentary evidence is authenticated by witness testimony. Documentary evidence is considered secondary to live testimony that has been subject to cross examination.(70) It should also be noted that common law arbitrators generally have the power to compel discovery or have a court compel witnesses to appear before the tribunal with relevant documents. Civil law arbitrators lack this power.(71)
The broad discovery practices followed in the common law system are often viewed by civil law lawyers as invasive, insufficient and costly.(72) However, common law lawyers, especially in the United States, are likely to see things differently. They may frown on the civil law concept of limited disclosure and feel evidentiary hearings should not be held without full discovery in the first instance.
Generally, the procedural rules of the major international arbitration institutions provide only vague guidelines for pre-hearing discovery. For example, Article 3 (1) of the ICC Rules fails to address discovery beyond requiring that the parties provide the tribunal and adverse party with the documents upon which it intends to rely on in support of its claim or defense.(73) Article 20 (5) permits the tribunal to summon any party to provide additional evidence and Article 20 (1) permits the tribunal to establish the facts of the case by all appropriate means.
Article 19 (2) of the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration provides that, in the absence of an agreement between the parties, the arbitral tribunal may conduct the arbitration in such a manner as it considers appropriate.(74) Under Article 27 the tribunal, or a party with tribunal approval, may also request assistance from a competent court in taking evidence.
The United Nations Commission on International Trade Law (UNCITRAL) Rules, utilized in ad hoc arbitrations, provide that at any time during the arbitral proceedings, the tribunal may require the parties to produce documents, exhibits or other evidence relevant to their case (Art 24 (3)).(75) In addition, the UNCITRAL Rules provide that if a tribunal appoints an expert to aid it in the determination of any issue, the parties should give the expert all relevant information or produce all relevant documents that the expert may request from them (Art 27 (2)).
The International Arbitration Rules of the American Arbitrations International Center for Dispute Resolution provide that the tribunal may order parties to produce documents, exhibits or other evidence it deems necessary and appropriate. The AAA International Rules, however, do not specify how to conduct discovery. (See American Arbitration Association, International Arbitration Rules of the American Arbitration Association) (as amended and effective September 1, 2001); However, the Rules give the tribunal discretion regarding the conduct of arbitral proceedings, provided the parties are treated equally and have a fair opportunity to present their cases. (Art. 16 (1)).
The IBA Rules on the Taking of Evidence
The International Bar Association Rules on the Taking of Evidence in International Arbitration (“IBA Rules of Evidence”) were revised and updated by resolution of the IBA council in London on May 29, 2010.(76) As stated in the preamble, the Rules are intended to provide an efficient, economical and fair process for the taking of evidence in international arbitrations, particularly those between parties from different legal systems. They are designed to supplement the legal provisions and the institutional, ad hoc and other rules that apply to arbitration conduct.
The Rules may be adopted in whole or in part. They may be varied or used as guidelines in developing evidentiary procedures conducted on the principles that each party shall act in good faith and be entitled to know, reasonably in advance of any evidentiary hearing, the evidence on which the other parties rely.
When the parties to an arbitration are engaged in a discovery dispute and are from different legal backgrounds, it is necessary to come to some compromise in order to amicably resolve that dispute and move on with the arbitration. Article 3 of the IBA Rules provides for a limited form of disclosure which is closer to that found in civil law countries. The Rules adopt a system whereby a party can request identified documents, giving a description of why the requested documents are relevant and material to the outcome of the case. Such party must state that the requested documents are not in the possession, custody or control of the requesting party and further state why the requesting party presumes that the documents are in the possession, custody or control of its opponents. Within the time ordered by the tribunal, the party to whom the request is addressed shall produce to the tribunal, and to the other parties, all the documents requested in its possession, custody or control to which no objection is made. If the party objects to some or all of the requested documents, the party shall state its objections in writing to the tribunal and the reasons for such objections. The tribunal will then consider and rule on the request. It is clear from the way Article 3 is drafted that the requesting party carries the burden of convincing the tribunal that any requested document is relevant and material to the outcome of the case.
It should be emphasized that the IBA Rules do not automatically apply to an arbitration proceeding. They must be adopted by the parties. Indeed, the IBA Rules are so important in the resolution of discovery disputes that tribunals, on their own initiative, may suggest, if the parties have not already agreed, to proceed under the IBA Rules in order to harmonize various discovery procedures used in international arbitration proceedings in civil and common law countries.
THE FEDERAL ARBITRATION ACT
The United States Congress initially enacted the Federal Arbitration Act (FAA) in 1925 to provide for the enforcement of domestic arbitration agreements and to furnish various rules for arbitration proceedings that fall under the Act.(77) The FAA includes specific provisions that deal with United States domestic arbitrations (9 U.S.C. § 1-16). The FAA recognized arbitration as a binding alternative to litigation, and it established a national policy favoring arbitration in the United States.
In 1958, the United Nations held an international conference in New York to adopt the New York Convention. This Convention requires courts of contracting States to give effect to arbitration agreements and also to recognize and enforce arbitration awards issued in other States. Previously, the enforcement of international arbitration agreements and awards was sporadic and depended on principles of international comity and the Geneva Treaties of 1923 and 1927, which were adopted by very few States. The United States acceded to the New York Convention in 1970 when Congress adopted the Convention by amendment as Chapter 2 of the FAA, (9 U.S.C. § 201-208). Specifically, Chapter 2 of the FAA applies the New York Convention to arbitration agreements and awards that relate to commercial disputes that are not considered domestic.
In 1975, the Inter-American Convention on International Commercial Arbitration (the “Panama Convention”) was adopted by South American countries belonging to the Organization of American States. The United States Congress later adopted the Panama Convention in 1990, and it became Chapter 3 of the FAA (9.U.S.C. § 301-307). Both of these Conventions are part of the statutory scheme of the FAA. These sections (9 U.S.C. § 201-301) comprise the international FAA and require U.S. federal courts to support international arbitrations over and above the provisions of the domestic FAA (9 U.S.C. § 1-16).(78)
Sections 208 and 308 of the international FAA explicitly incorporate the provisions of the domestic FAA into actions brought under the international FAA to the extent that the domestic FAA is not in conflict with the international FAA. Accordingly, courts interpreting international FAA cases rely on the provisions and case law of the domestic FAA in their discussions. One of the main conflicts between the domestic and international FAA is found in their statute of limitations. The three-year statute of limitation of the international FAA takes precedence over the one-year limit in the domestic FAA when applicable.(79)
Another potential conflict between the domestic and international FAA may occur in the area of subject matter jurisdiction. The domestic FAA does not grant federal courts subject matter jurisdiction. The domestic FAA requires the parties to establish an independent basis for federal jurisdiction, such as admiralty jurisdiction, diversity of citizenship or a federal question, before it will apply. However, the international FAA creates its own independent federal subject matter jurisdiction. If litigation is brought in a U.S. state court, it can be removed to federal court under § 205 and then stayed by the federal court pending arbitration.
The international FAA is limited to the enforcement of arbitration awards which are foreign in nature. Article 1 (1) coverage of the New York Convention is limited to agreements and awards which are either “non-territorial” or “non-domestic” under national law. FAA § 202 places further restrictions on the enforcement of agreements and awards between United States citizens. These agreements or awards will not fall under the Convention unless the legal relationship arising from the arbitration agreement involves property located abroad, envisions performance or enforcement abroad, or has some other reasonable relationship with one or more foreign States. Under this section, a corporation is deemed a citizen of the United States if it is incorporated or has its principle place of business in the United States.
An award is non-territorial if it is made in the territory of a State other than the United States. Likewise, an agreement to arbitrate is non-territorial if it requires arbitration in a territory of a State other than the United States. For arbitration awards and agreements between United States citizens, the requirement of FAA § 202 must still be met.
With regard to non-domestic awards, the New York Convention leaves the definition of “non-domestic” to national law. The FAA fails to define “non-domestic.” However, § 202 places certain limits on the coverage of arbitration awards and agreements between U.S. citizens. In the case of Bergesen v. Joseph Muller Corp.(80) the Second Circuit Court of Appeals solved the dilemma by utilizing a two prong-test to determine if an award was non-domestic. An award will be considered non-domestic if it is made within the legal framework of another country or it involves parties domiciled or having their principle place of business outside the enforcing State. A general rule for distinguishing a foreign award from a non-domestic award is to determine where the award was issued. A foreign award will always be issued abroad, while a non-domestic award will usually be made in the United States.
UNCITRAL’S ROLE IN INTERNATIONAL ARBITRATION
The United Nations Commission on International Trade Law (UNCITRAL) was established by the United Nations General Assembly in 1966.(81) In establishing the Commission, the General Assembly recognized that disparities in national laws governing international trade create barriers to the flow of trade. It regarded the Commission as the vehicle by which the United Nations could play a more active role in reducing these barriers. The Commission, now comprised of sixty member States, was given the mandate to further the progressive harmonization and unification of the law of international trade.(82)
With respect to international commercial arbitration, the Commission accomplished this mandate, in part, by promoting uniform practices and procedures and by creating model laws and rules for international arbitration. Unlike institutional arbitral organizations, such as the ICC, UNCITRAL does not itself administer or become involved in individual arbitration proceedings.(83) UNCITRAL followed its mandate by drafting and adopting:
- UNCITRAL Arbitration Rules in 1976;
- UNCITRAL Conciliation Rules in 1980;
- Recommendations to assist arbitral tribunals and other interested bodies with regard to arbitrations under the UNCITRAL Arbitration Rules of 1982;
- UNCITRAL Model Law on International Commercial Arbitration in 1985;
- UNCITRAL Notes on Organizing Arbitral Proceedings in 1996;
- UNCITRAL Model Law on International Commercial Conciliation in 2002; and,
- Revised UNCITRAL Arbitration Rules in 2010.
UNCITRAL also seeks to coordinate the work of organizations active in international trade and to promote wider acceptance of the rules it develops. One of UNCITRAL’s specific objectives is the promotion of the New York Convention as a means of resolving international commercial disputes.(84)
UNCITRAL Notes on Organizing Arbitral Proceedings
In 1996, UNCITRAL, after consulting with experts from various legal systems and national arbitration bodies, published a useful guide entitled “UNCITRAL Notes on Organizing Arbitral Proceedings.”(85) The purpose of the Notes is to assist arbitration practitioners by providing an annotated list of matters which the parties and tribunal in an international arbitration may wish to consider in establishing procedural rules during the course of an arbitration.(86) The Notes may be used in both ad hoc and institutional arbitrations.
There is no legal requirement that binds the arbitral tribunal or parties to utilizing the Notes. The tribunal is free to use the Notes as it sees fit and is not required to give reasons for disregarding them. The Notes can be used as a checklist for matters which will generally have to be addressed during the course of an arbitration.(87) Some of the subjects covered by the Notes are:
- the language of the proceedings;
- determination of the place of arbitration (if not previously agreed upon);
- deposits for arbitration costs;
- confidentiality of information presented in the arbitration;
- arrangements for the exchange of written submissions;
- time schedule for written submissions;
- the form of written submissions;
- defending points at issue;
- relief and remedy sought;
- documentary evidence requirements;
- time limits for document submissions;
- on-site inspection procedures it needed;
- witness lists and order of testimony;
- expert witness requirements;
- hearing date scheduling; and,
- order of oral argument presentations.
It should be emphasized that the Notes are not suitable for use as arbitration rules since they do not establish any obligation on the part of the tribunal or the parties to act in any particular manner.(88) Neither do the Notes attempt to promote any particular arbitration practice or establish a preference for any procedure.(89) When the Notes are utilized it should be kept in mind that the discretion of the tribunal in organizing the proceedings may be limited by arbitration rules, by other contract provisions agreed to by the parties, or by the law applicable to the arbitral procedure. Furthermore, the use of the Notes cannot imply any modification of the arbitration rules that the parties may have previously agreed upon.(90)
THE UNCITRAL ARBITRATION RULES
Until August 15, 2010, the UNCITRAL Arbitration Rules of 1976 provided a comprehensive set of procedural rules upon which parties to international contracts could agree for the conduct of arbitration proceedings arising out of their commercial dealings.(91) The 1976 Rules were widely used in ad hoc arbitrations as well as administrative arbitrations. The Rules covered all aspects of the arbitral process, setting out procedural rules regarding the appointment of arbitrators and the conduct of the arbitral proceedings, and establishing rules for the form, effect and interpretation of arbitration awards.(92)
In 2006, the Commission decided that the 1976 Rules should be extensively revised in order to meet developments in arbitral practice over the last thirty years with the goal of enhancing the efficiency of the arbitration process. The objective was achieved on August 15, 2010, when the new UNCITRAL Arbitration Rules, as revised, came into effect.(93) The revised Rules can apply to arbitrations where the arbitration agreement incorporating the Rules was concluded on or after August 15, 2010. Unless the parties agree otherwise, the original version of the 1976 Rules will remain in force for arbitrations as to which the agreement to arbitrate was concluded before that date. Thus, there is a real possibility that the 1976 Rules will have a direct impact on many future arbitrations for years to come.
UNCITRAL Arbitration Rules of 1976
The 1976 Rules consist of 41 Articles that are divided into four separate Sections entitled:
- Introductory rules;
- Composition of the arbitral tribunal;
- Arbitral proceedings; and,
- The award.
Section I (Article 1 to 4) establishes the scope of the arbitration and provides a mechanism for initiating the arbitration process. It also acknowledges that any mandatory national law provisions will prevail over the Rules in the event of conflict.
Section II (Articles 5-14) deals with the number of arbitrators and their appointment, challenges and replacements. It is the intention of the Rules that the parties should nominate a person or institution as the arbitrator appointing authority to break deadlocks if the parties fail to agree on the composition of the arbitral tribunal. Under Articles 10-12, a party may challenge an arbitrator for lack of impartiality or independence.
If it becomes necessary to replace an arbitrator, a substitute is appointed by using the same method by which the original appointment was made. If a sole or presiding arbitrator is replaced, any previous hearing must be repeated. However, if a party-appointed arbitrator is replaced, the matter is then determined at the discretion of the tribunal.
Section III (Articles 15-30) addresses the conduct of the proceedings. The tribunal has broad discretion on how the proceedings are conducted. Article 15 mandates that the parties be treated equally and be given full opportunity to present their case. A hearing must be held if either party requests it. There must be one consecutive exchange of written submissions under Article 18 and 19. If the tribunal appoints an expert, the parties have a right to cross-examine the expert at a hearing and have their own expert address points at issue. The tribunal under Articles 16 and 17 can also determine the place and language of the arbitration unless the parties have previously agreed to same.
Section IV (Articles 31-41) deals with the award and concerns various provisions regarding costs. Article 31 provides that, except for questions of procedure, all awards and other decisions of the tribunal must be made by majority. The tribunal may issue interim, interlocutory or partial awards under Article 32, and the award may be made public with the consent of both parties. Rules relating to the choice of law application are set out in Article 33. If the parties have failed to designate the applicable law, the determination will be made for them by the tribunal. The remaining Rules under Article 38-41 deal with various issues concerning the costs of the arbitration.
It is generally not necessary to add any additional procedural provisions when the 1976 Rules are utilized. The Rules are well reasoned to guide the parties through the entire arbitration process. However, no two arbitrations are exactly alike. The parties are free to supplement the Rules with additional compatible provisions under the party autonomy doctrine utilized in international commercial arbitration practice, if they so choose.
UNCITRAL Arbitration Rules (as revised in 2010)
The UNCITRAL Arbitration Rules, as revised, have been in effect since August 15, 2010. They include dealing with multiple parties, arbitration and joinder, liability and a procedure to object to experts appointed by the arbitral tribunal. A number of new features added to the Rules aim to enhance procedural efficiency, revise procedures for the replacement of an arbitrator, and add a requirement for reasonableness of costs. They also include more detailed provisions on interim measures.
The 2010 Rules consist of 43 articles that, like the 1976 Rules, are divided into four separate Sections entitled:
- Introductory rules;
- Composition of the arbitral tribunal;
- Arbitral proceedings; and
- The award.
Section I (Articles 1-6) establishes the scope of the arbitration and provides a mechanism for initiating the arbitration process. There have been several important changes in Section I, including the removal of the provision that the arbitration agreement be in writing. There is a new requirement that a respondent must file a response to the Notice of Arbitration. Article 2 addresses how notices are transmitted, including when they are received and how the time periods are calculated. Article 2 also clarifies that notices may be transmitted by any means of communication (including facsimile and email) that provides for a record of transmission. Article 3 specifies that the claimant should provide in the Notice of Arbitration a proposal concerning the number of arbitrators and the language and place of arbitration, if not already agreed upon. The respondent must provide a “Response” to the Notice of Arbitration within 30 days.
Article 4 now requires the respondent to submit an answer submission within 30 days of the Notice of Arbitration. Article 4 (2) allows the respondent to assert counterclaims and to join third parties. Article 6 provides that a party may propose an appointing authority at any time during the proceeding. Article 6 (2) provides that the Secretary General of the Permanent Court of Arbitration at the Hague will be the designated authority if the parties fail to agree upon an appointing authority.
Section II (Articles 7-16) includes changes to the role of the appointing authority in appointing of arbitrators and the rule on arbitrator disclosures. Under Article 7, the appointing authority may appoint a sole arbitrator in default. Article 10 (2) permits the parties to appoint a number of arbitrators other than the traditional one or three. Article II clarifies the arbitrator’s disclosure obligations, which continue until the final award is issued. Articles 12-14 deal with procedures for challenging and replacing arbitrators. Article 16 provides immunity for the tribunal and the appointing authority based on any act or omission in connection with the arbitration.
Section III (Articles 17-32) addresses arbitral proceedings and is similar to the 1976 Rules. Article 17 (1) mandates that the arbitral tribunal shall conduct proceedings so as to avoid unnecessary delay and expense. Article 17 (5) allows third persons to be joined in an arbitration provided such person is a party to the arbitration agreement. Article 20-22 allows the Notice of Arbitration to be treated as a Statement of Claim and the Response to be treated as a Statement of Defense. The Statements are now required to contain all documents or evidence relied upon by the submitting party. Article 26 explains the term “interim measures.” Article 26 (8) provides that a party may be liable for any costs and damages caused by the interim measure. Article 27 and 28 expressly refer to the use of videoconferencing at hearings. Article 29 permits the arbitral tribunal to utilize an expert only after consulting with the parties. Article 29 (2) requires the expert to submit qualifications and an impartiality statement. Article 32 requires prompt objections to any non-compliance of the Rules or the objections are waived.
Section IV (Articles 33-43) address the form of the award and is similar to the 1976 Rules. Article 34 (5) establishes that an award can be made public to the extent required by law or for the protection of legal rights. Article 41 (3) provides that the tribunal must promptly inform the parties of its proposal as to how to determine its fees.
UNCITRAL Model Law (as revised in 2006)
The UNCITRAL Model Law on International Commercial Arbitration was drafted in 1985.(94) The Model Law was revised in 2006. It is designed to assist States in reforming and modernizing their laws addressing arbitral procedure so as to take into account the modern needs of international commercial arbitration. It covers all stages of the arbitral process from the arbitration agreement, the composition and jurisdiction of the arbitral tribunal and limited court intervention in the recognition and enforcement of the arbitral award. It also reflects worldwide consensus on major aspects of international arbitration practice.
The Model Law began with a proposal to reform the New York Convention based on the premise that harmonization of the arbitration laws in different countries could be achieved more efficiently by a model or uniform law. The final text of the Model Law was adopted by UNCITRAL in 1985 as a law to govern international commercial arbitration. The text of the Model Law covers the entire arbitrate process. It is a text that many States have adopted as their own law of arbitration, though the United States has not adopted the Model Law. The Model Law presents a special legal regime for international commercial arbitration without affecting any relevant treaty in force in the States adopting the Model Law.
Since its adoption in 1985, the Model Law has struggled to keep up with modern international arbitration needs. UNCITRAL convened a working group in 2000 to revise the Model Law, and revisions to the Model Law were adopted by UNCITRAL in 2006.(95)
The Model law consists of three parts. Part I concerns interim measures in the context of international commercial arbitration and explains 2006 amendments to the Model Law. Part I consists of 36 Articles that are divided into nine separate Chapters entitled:
- General Provisions;
- Arbitration Agreement;
- Composition of Arbitral Tribunal;
- Jurisdiction of Arbitral Tribunal;
- Interim Measures and Preliminary Orders;
- Conduct of Arbitral Proceedings;
- Making of Award and Termination of Proceedings;
- Recourse Against Award; and,
- Recognition and Enforcement of Awards.
The revised Model Law contains detailed provisions for the appointment, challenge and substitution of arbitrators, where necessary. It permits the tribunal to determine its own jurisdiction under the principle of Kompetenz/Kompetenz. Under the autonomy concept the Model Law treats an arbitration clause as an agreement that is completely independent from the main contract. The newly introduced Chapter IV (A) establishes a more comprehensive legal regime for dealing with interim relief.
Part II discusses the Model Law amendment’s contributions to international commercial arbitration practice and gives reasons for States to incorporate the Model Law provisions. Part III recommends that Article II paragraph 2 of the New York Convention be applied, but recognizes that the circumstances described in the New York Convention are not exhaustive. It also recommends that Article VII, paragraph 1 of the New York Convention should be applied to allow any interested party to avail itself of rights it may have under the law or treaties of the country where an arbitration agreement is sought to be relied upon and to seek recognition of the validity of such arbitration agreement.
PITFALLS TO AVOID WHEN DRAFTING ARBITRATION CLAUSES
IN INTERNATIONAL COMMERCIAL CONTRACTS
It is impossible to draft contact terms that will guard against every adverse contingency that may occur in the performance of international commercial contracts that are subject to arbitration clauses or agreements. However, with foresight it is possible to eliminate some of the most common mistakes made by parties when negotiating and drafting arbitration provisions in these contracts. The followings is a non-exhaustive list, in random order, of some of the most common pitfalls to avoid within the context of the various subjects just discussed:
- The most serious mistake made by parties in negotiating and drafting arbitration clauses in international commercial contracts is to give insufficient thought as to how future disputes will be resolved.
- When negotiating an international contract, most parties are overly optimistic and assume there will be no disputes in the performance of the contract. This is a fallacy and a major pitfall in contract negotiations.
- Do not wait until the last minute to negotiate the arbitration clause as if it was an afterthought. Rest assured, if a dispute arises, the dispute resolution clause will be the first clause that the parties focus on. Each sentence will be scrutinized. One small error can ruin an otherwise well drafted international contract.
- Before agreeing upon the location for an arbitration, always choose a county that is a signatory of the New York Convention. This will improve the chances of obtaining recognition and enforcement of the award in other Convention countries.
- Before entering into an international contract with a foreign party, it is prudent to investigate if that party has assets in countries that subscribe to the New York Convention. This will improve one’s chances for enforcing an award against foreign assets.
- Be aware that under the New York Convention the arbitration agreement must be reduced to writing. The writing must either be signed by the parties to the contract or be contained in an exchange of letters or telegrams.
- Be aware that under the UNCITRAL Model Law, as amended in 2006, the arbitration agreement shall be in writing, and its contents can be recorded in any form. This includes an electronic communication if the information is accessible so as to be useable for subsequent reference.
- It is easier to obtain recognition and enforcement of an international arbitral award than a foreign court judgment. The New York Convention is silent with respect to the recognition and enforcement of foreign judgments. Section 202 of the FAA provides that only an arbitral award will fall under the New York Convention. There are no treaties requiring foreign countries to enforce US judgments.
- The New York Convention applies to foreign awards made in a territory of a State other than the State where recognition and enforcement is sought. It also applies to international awards not considered domestic. The Convention is incorporated into US law through Section 201 of the FAA. The Act requires federal courts to support international arbitration over and above the provisions of the domestic FAA. Be aware that characterizing an award as non-domestic will extend the time period of confirmation from one to three years in the US.
- If a party to an international arbitration agreement brings suit in the US, be aware that the defendant may rely on the international FAA as a defense to stay the action pending arbitration. If the suit is brought in state court, the defendant may remove it to federal court. Once in federal court, the defendant may then petition the court to stay or dismiss the action.
- US courts may order arbitration anywhere in the world, provided the arbitral seat is a country that is a signatory to the New York Convention. Be aware that courts will only compel arbitration to the arbitral seat agreed upon by the parties, even if the arbitration seat has become unavailable.
- In the US, arbitration hearings must be held in the location of the place designated for the arbitration unless the parties agree otherwise. The parties are free to agree to other locations and often do so.
- The New York Convention is incorporated into US law through the international FAA. It automatically grants federal courts subject matter jurisdiction over any arbitral dispute arising under the Convention. Be aware that the domestic FAA does not itself grant federal courts subject matter jurisdiction. Parties must still establish an independent basis for federal jurisdiction, such as diversity of citizenship, admiralty jurisdiction or a federal question.
- The seat of the arbitration should be identified in the arbitration clause. Likewise, the seat must be stated in the arbitration award unless the parties agree otherwise. Failure to state the seat may void recognition or enforcement of the award.
- Under the autonomy doctrine, parties are free to choose the seat for the arbitration. In choosing the seat, make sure that the laws of the host country are hospitable to arbitration. Be aware that once the seat had been chosen it may bring to the arbitration its own mandatory arbitration laws. In choosing the seat make sure the host country allows non-nationals and women to appear as counsel and arbitrators in the proceedings.
- The parties should always specify in an international contract the substantive law to govern the contract. If the parties fail to designate the substantive law, the arbitral tribunal, on its own initiative, will do it for them. The tribunal will apply the conflict of law rules it deems appropriate.
- The choice of substantive law should be well developed and predictable. It should be set forth in a choice of law clause separate from the arbitration clause in order to deal with other contact issues that may be independent from arbitral disputes. The choice of law clause should refer to the substantive law of the country specified and exclude the choice of law rules of that country.
- When parties have chosen the language for their contract, they should also specify the language for the arbitration proceeding in the arbitration clause. This will assure that one language, rather than two, is used at the arbitration proceeding. This also assures that parties’ counsels of choice will be able to represent them during arbitral proceedings without the need of interpreters.
- Absent a language choice in the arbitration clause, it is for the arbitral tribunal to determine the language of the arbitral proceedings. Do not assume that the arbitral tribunal will choose your native language. Be advised that the UNCITRAL Rules provide that, unless otherwise agreed upon, the tribunal makes the decision on the language or languages to be used in the proceedings.
- When selecting a country for the seat of the arbitration, it is imperative to have local counsel verify that the contemplated venue permits a choice of language for the arbitral proceedings. Be aware that some countries require proceedings in their country to be conducted in their language.
- Be aware that if an arbitration agreement and the arbitration award are not in the language of the country in which recognition and enforcement is sought, certified translations of both documents must be supplied to the court before recognition and enforcement will be granted.
- Avoid drafting arbitration clauses with excessive specificity. If the clause is excessively restrictive on procedural matters, the restrictions can make it extremely difficult to arbitrate a dispute that is already subject to ad hoc or institutional arbitration rules.
- It is not advisable to list excessively specific qualifications for arbitrator appointments in the arbitration clause. To do so may unduly limit the pool of suitable arbitrator candidates who meet the specifications. Excessive qualifications may also invite efforts by your adversary to have the candidate declared unqualified for the appointment.
- Most arbitral institutions grant parties complete freedom in selecting arbitrators. However, be aware that some institutions require parties to choose arbitrators from institutional rosters. Parties should research institutional arbitrator selection rules before adopting the rules.
- The UNCITRAL Arbitration Rules are the most widely used rules for ad hoc arbitrations. However, they should be supplemental by the use of an appointing authority who will appoint arbitrators when the parties fail to do so.
- Never name an individual as an appointing authority. Always select an office or title. Verify that the selected authority exists and will be willing to make the appointment.
- The laws in most countries provide that the number of arbitrators in a tribunal must be uneven. Usually there are three arbitrators in large disputes. For economy’s sake, sole arbitrators are often utilized in smaller cases. If the parties do not want a triparte panel, make sure that the arbitration clause expressly calls for the appointment of a sole arbitrator.
- Be aware that Section 5 of the domestic FAA mandates that, unless otherwise provided in the arbitration agreement, the arbitration should be conducted by a single arbitrator.
- In a triparte arbitration, if one of the arbitrators dies, resigns or fails to participate in the proceedings, the remaining two arbitrators may not be able to issue a valid award, absent specific authorization from the parties or from the arbitral rules being utilized. Most rules will permit the two remaining arbitrators to continue the proceedings as a “truncated” tribunal. For good order’s sake the parties should state in the arbitration clause whether an arbitration can continue or whether the proceeding must start over when one of the arbitrators ceases to serve.
- The UNCITRAL Notes on Organizing Arbitral Proceedings provide a list of matters which parties may wish to consider when establishing procedural rules during an arbitration. Be aware there is no legal requirement that binds the parties to utilize the Notes.
- When drafting a triparte arbitration clause, give careful consideration whether the award is to be unanimous or by a majority vote. If there is a lack of unanimity the award will usually be issued by a majority. However, if a majority decision cannot be reached, the parties should consider stipulating that the chairperson of the tribunal may issue the award.
- Unlike judges in civil litigations, arbitrators have no authority to issue default judgments. The claimant must always present evidence and prove its case on the merits. This is true even in an ex parte proceeding when the respondent fails to appear.
- A boycotting party with proper notice of the hearing dates assumes the risk of not participating in the proceedings. The arbitration will usually proceed ex parte to conclusion, and the final award will be enforceable against the recalcitrant party if the claimant proves its case.
- International commercial arbitration is a private process. However, it is not a confidential process. In many jurisdictions parties are under no duty to keep the content of the arbitral proceedings confidential.
- The domestic FAA contains no provision requiring the parties or the arbitrators to treat arbitration proceedings as confidential. Parties concerned about confidentiality should address the issue in their arbitration clause.
- Unlike civil litigation practice in common law jurisdictions there is no system of binding precedent or stare decisis in international commercial arbitration. There is no international rule that an award in one case on a particular issue and on a particular set of facts is binding on another arbitration with similar issues and facts.
- Be aware that in the US, the Supreme Court has ruled that arbitrators have no duty to issue reasoned awards unless the parties have provided for same in their arbitration agreement or the arbitration rules chosen require the issuance of a reasoned award.
- Be aware that under the UNCITRAL Model Law, the award must state the reasons upon which it is based, unless the parties have agreed otherwise.
- Be aware of relevant trade rules and usage when drafting international contracts. Article 33 (3) of the UNCITRAL Rules requires arbitral tribunals to take into account trade usages when deciding disputes.
- When drafting an ad hoc arbitration clause, the parties should consider adopting a well-established set of procedural rules, such as the UNCITRAL Arbitration Rules. Drafting individual rules for an ad hoc arbitration is major task that can be time consuming and expensive.
- Be aware that for the purposes of challenging or obtaining recognition and enforcement of an award under the New York Convention, it is essential that the arbitral tribunal state in the award the country from which it was issued.
- Be aware that the New York Convention does not permit a review on the merits of an award to which the Convention is applicable.
- With regard to arbitrability, be aware that under Article II of the New York Convention, a court need not enforce an arbitration agreement if the subject matter is no capable of settlement by arbitration under domestic law. Certain categories of public law claims are too sensitive to give private arbitrations such as family law disputes.
- In the United States, the Supreme Court has held that an arbitral tribunal may award punitive damages unless the tribunal is forbidden to do so by the parties’ contract. However, be aware that most national laws outside the US prohibit punitive damages. Indeed, in some civil law jurisdictions, the concept of punitive is hardly known.
- Refusal to enforce punitive damages under the New York Convention will occur if the subject matter is not arbitral under the law of the country or if recognition or enforcement would be contrary to public policy. When negotiating an arbitration agreement, it is advisable for non US parties to explicitly exclude the possibility to claim punitive damages in the contract.
- It should be emphasized that the New York Convention does not prescribe how an arbitration is to be conducted. It only lists the grounds upon which recognition and enforcement may be refused.
- The lack of capacity of a party to arbitrate will be fatal to the enforcement of any arbitration award under the New York Convention. This will occur when one of the parties to the arbitration agreement lacks capacity, under the law of its domicile, to participate in an arbitration.
- With respect to capacity, be aware that for a natural person, capacity may depend on nationality or the place of residence or the place of entering into the arbitration agreement.
- With respect to capacity for a legal entity, such as a corporation, be aware that the law applicable to its capacity will be the law of its domicile. This will be the law of the State which created the entity.
- When the arbitration agreement is invalid under the governing law agreed to by the parties or is invalid under the law of the country where the award is made, it will not be enforceable in any State.
- Be aware that under some national laws, States or State agencies are prohibited from entering into private arbitration agreements unless approval is first obtained from the relevant State authority.
- When dealing with a State or a State agency, it is advisable to verify the capacity of the State entity to enter into the arbitration agreement. This should also be confirmed in writing in the main contract.
- The New York Convention provides that a State acceding to the Convention may declare that it will apply the Convention only to differences arising out of legal relationships which are considered commercial under the law of the State making the decision. Therefore, it is imperative to determine whether the legal relationship out of which the arbitration arose is or is not commercial.
- The costs associated with institutional arbitration for administrative services can be expensive. Parties contemplating institutional arbitration should familiarize themselves with the fee structure of the institution under consideration.
- Be aware that under the ICC Institutional Rules, a fixed fee is asserted for the cost of the arbitration on an ad valorem basis: the larger the claim and counterclaim, the higher the fee.
- The selection of the seat for an arbitration is extremely important. When an arbitration is conducted in a particular State, the procedural laws of that State will usually be adopted and may affect the ultimate rights of the parties.
- When selecting the seat for an arbitration, avoid jurisdictions where the courts are known to be reluctant to grant interim relief pending the issuance of an award. Be aware that an arbitral tribunal has no authority to order interim relief over third parties without court assistance.
- Under the New York Convention, an award can be refused enforcement if it has not yet become binding. To ensure finality in a non-institutional arbitration, always insert language in the arbitration clause that the award will be final and binding.
- Be aware that in some institutional arbitrations, the awards are final and binding. For example, there is no appeal on substantive questions of law or fact in awards rendered by ICC arbitral tribunals.
- Do not choose institutional arbitration rules that are inconsistent with the arbitration clause. If the arbitration clause is inconsistent with the institutional rules, make it patently clear that the institutional rules are being amended by mutual agreement.
- Be aware that denying parties an adequate opportunity to present their case in an arbitration is a valid defense to the enforcement of an award under the New York Convention.
- If parties wish to set time limits in arbitration clauses for issuing an award, the time limit should be reasonable and realistic. Parties should not strive for speed at the expense of fairness. To do so may jeopardize the award.
- Be aware that time limits for correcting or challenging an arbitration award are usually extremely short. Under UNCITRAL Rules, the challenge must be made within 30 days after receipt of the award. Under the Model Law the time limit is three months.
- When adopting institutional rules, parties should indicate if the rules are the ones then enforce on the date of the contract, or are they the future rules as amended from time to time. Parties can make an educated choice between rules they are familiar with at the time of contract or they can assume future changes will be an improvement on the original rules.
- Be aware that the ICC provides a default rule that unless otherwise stated in the contract, the arbitration proceedings will be conducted according to the ICC rules in effect at the date of the commencement of the arbitral proceedings.
- The broad discovery practices followed in many common law countries are often viewed by civil law lawyers as being invasive, insufficient and costly. Be aware that the procedural rules of the major international arbitration institutions provide only vague guidelines for discovery in arbitrations.
- When parties from different legal backgrounds are engaged in a discovery dispute, it will be necessary to come to a compromise in order to amicably resolve that dispute. To reach that compromise the parties should consider utilizing the International Bar Association Rules on the Taking of Evidence in International Arbitration (“IBA Rules”).
- Be aware that the IBA Rules are designed to supplement institutional and ad hoc rules. The Rules must be specifically adopted by the parties in order to harmonize various discovery procedures used in international arbitration proceedings.
- In domestic litigation, it is generally permissible to consolidate legal actions in order to avoid conflicting decisions on identical legal issues arising from the same facts. The same is true for joining additional parties to a litigation. However, in an international commercial arbitration, it is extremely difficult and often impossible to achieve the same result. This is because the entire arbitral process is based upon the voluntary agreement of parties to be bound by an arbitration clause to resolve their disputes by arbitration.
- Be aware that unless all parties to a multi-related international contract have agreed to the consolidation of all related arbitral disputes, the courts in most jurisdictions are powerless to order the consolidation of arbitrations that arise under separate, but related, contracts. It is beyond the scope of this presentation to address the complicated methods of achieving this objective. However, see Article 10 of the ICC Rules for suggested methods of selecting triparte arbitral tribunals in multi-party situations.
- If the international agreement contains a multi-tier alternate dispute resolution clause (‘ADR”) that requires the parties to engage in negotiations or mediation as a condition precedent to arbitration, make sure that the condition has been satisfied before commencing an arbitration.
- When drafting an ADR clause, it is best to use a short time limit for the condition precedent to occur. Otherwise, that ADR clause may be used as a delaying tactic by a recalcitrant party.
- Before agreeing to a foreign law as the substantive law to the contract, one should consult with local counsel regarding that law in order to determine all the effects that the chosen law may have on the contract.
- When contracting with parties from Middle East countries, be aware that some countries prohibit interest on an arbitration award. One should consult with local counsel to determine if the country prohibits interest on an award. If the answer is in the affirmative, do not include interest provisions in the contract.
- When contracting with parties from China be aware that Chinese law does not permit ad hoc arbitration proceedings in China. Chinese courts may also be reluctant to enforce ad hoc awards issued outside of China.
- Be aware that an ad hoc arbitration only works properly if there is complete cooperation between the parties. Once a dispute arises, this seldom occurs.
- Under Article II of the New York Convention, a court need not enforce an arbitration agreement if the subject matter is one not capable of settlement by arbitration under domestic law.
- Be aware that an arbitration award that is refused enforcement for public policy reasons in one jurisdiction may be enforceable in another jurisdiction not subject to the same public policy considerations.
- Be aware that the fees charged by the ICC for the cost of an institutional arbitration are drawn from percentage schedules directly based on the amount demanded by the claimant in the initial pleading and the amount demanded in the counterclaim filed by the respondent. Because the ICC arbitration costs are directly related to the amounts in dispute parties are dissuaded from claiming astronomical amounts.
- An arbitration clause should explicitly provide that judgment may be entered to enforce the award by any court of competent jurisdiction. This will avoid the necessity of obtaining a judgment on the award in the State where the award was rendered before being able to obtain enforcement in the courts of a foreign State.
- Be aware that an arbitral award may be set aside or refused recognition if the composition of the arbitral tribunal or the arbitration procedure was not in accordance with the provisions of the arbitration agreement.
- In drafting an arbitration clause containing a time limit, specify from what moment time begins to run; the act that is to be performed within the specific time frame; and what the effect of non-performance of the specified act is.
- When an arbitral tribunal issues an award, it may have no knowledge where enforcement will be sought. Be aware that it is the parties’ responsibility to obtain an award that complies with the requirements of the law of the place of enforcement.
- When parties to an international agreement select an arbitral institution to conduct the arbitration, they should appreciate they are adopting the institution’s rules for all aspects of the arbitration.
- If the parties to an international agreement wish to set time limits in the arbitration clause for the rendering of an award, the tribunal should be allowed to extend the time limit. This will avoid the risk of receiving an unenforceable award if it is not rendered within the prescribed time period.
- Parties to an international agreement should specify in the arbitration clause the currency in which the award is to be paid and the exchange rate to be used.
- Do not assume that a counterclaim cannot be submitted until all condition precedents have been fulfilled. A counter claim is put forward in response to an existing claim. Until the claim is referred to arbitrations, there can be no counter to it.
- If parties to an international agreement wish the right to raise counterclaims for the first time during an arbitration proceeding, they should so specify in the arbitration clause.
- If a dispute settles during an arbitration proceeding, the terms of the settlement should be incorporated into a consent award if the settlement involves future performance by either of the parties. The future performance will be enforceable under the New York Convention if the obligations are contained in the consent award.
- When challenging the validity of an award, the challenge can only be made to the court at the seat of the arbitration.
- When an award is challenged and vacated, it will be unenforceable in the country in which it was issued and will usually be unenforceable in all other jurisdictions.
- Most international arbitration rules provide that the arbitral tribunal may order the parties to submit or exchange documents in advance of the hearings. Be aware the tribunal may take an adverse inference against a party if their order is disregarded by a party.
- Lastly, be mindful that international commercial arbitration is a hybrid. It only works because it is held in place by a complex system of multilateral treaties and the national laws of many countries. While it is possible to master the particulars of a handful of multinational treaties, it is impossible to know the laws of over 190 countries. Always seek legal advice from local practitioners on national laws. Failure to do so could result in an unenforceable arbitration clause and an invalid arbitration award.
(1) Nigel Blackaby et. al., Redfern and Hunter On International Arbitration, Oxford University Press (5th Ed. 2009) at 1.
(2) Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, Sweet & Maxwell (2nd Ed. 1991) at 1.
(3) Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T 2518, 330 U.N.TS 38, implemented by Chapter 2 of the Federal Arbitration Act, 9 U.S.C. § 201
(4) A list of all States adopting the New York Convention is published by the Institute for Transnational Arbitration at http://www.cailaw.org/ita
(5) New York Convention, supra Art. 4.
(6) Id. at Art. 1.
(7) 9 U.S.C. § 202.
(8) New York Convention, supra Art. 1 (3).
(9) Geneva Protocol of 1923.
(10) The 1927 Geneva Convention.
(11) Blackaby, supra note 1, at 71.
(12) Redfern, supra note 2, at 63.
(13) 417 U.S. 506 (1974).
(14) New York Convention, supra note 3, Art. 4.
(15) Id. Art. 5 (1) .
(16) Id. Art. 5 (2).
(17) Id. Art. 5 (1) (e).
(18) Id. Art. 1.
(19) Philip Copper, International Arbitration: A Handbook, MPG Books Ltd. (3rd Ed. 2004), at 3.
(20) Supra note 3, Art. 2.
(21) Id. Art. 1 (3).
(22) Rhodes and Sloan, The Pitfalls of International Commercial Arbitration, Vanderbilt J. of Transnational Law (1984) at 22.
(23) Copper, supra note 19 at 31.
(24) Redfern, supra note 2 at 56.
(25) Id. at 57.
(26) Blackaby, supra note 1 at 86.
(27) New York Convention, supra note 3, at Art. 2.
(28) Redfern, supra note 2 at 134.
(29) R. Doak Bishop, A Practical Guide for Drafting International Arbitration Clauses, International Energy Law & Taxation Review 16 (2000) at 3.
(30) New York Convention, supra note 3 at Art. 5 (1) (a).
(31) Redfern, supra note 2 at 147.
(32) Blackaby, supra note 1 at 96.
(33) Id. at 97.
(34) Prima Paint Corp., v. Flood & ConklinMtg. Co., 388 U.S. 395, 402 (1967).
(35) Lawrence Craig, William Park & Jan Paulson, International Chamber of Commerce Arbitration § 5.04 at 65 (2d Ed. 1990) at 65.
(36) First Option of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1955).
(37) Redfern, supra note 2 at 175.
(38) 388 U.S. 395 (1967).
(39) Redfern, supra note 2 at 75.
(40) Blackaby, supra note 1at 166.
(41) Id. at 167.
(42) Redfern, supra note 2 at 137.
(43) Id. at 138.
(44) Parsons & Whellmore Overseas Co., v. Society Generale de L’Industriee de Papeer, 508 F. 2d 969 (2d. Cir. 1974).
(45) B.V. Bureau Wijsmuller v. United States, 1976 A.M.C. 2514 (S.D.N.Y. 1976).
(46) Martin Domke, The Law and Practice of Commercial Arbitration, Gallaghan & Company (1968) at 255.
(46) Blackaby, supra note 1 at 114.
(48) Redfern, supra note 2 at 96.
(49) Id. at 164.
(50) Blackaby, supra note 1 at 197.
(51) Redfern, supra note 2 at 164.
(52) Id. at 124.
(53) Domke, supra note 46 at 149.
(54) Blackaby, supra note 1 at 26.
(55) Redfern, supra note 2 at 79.
(56) Id. at 88.
(57) Craig, supra, note 35 at 376.
(58) Grant Hanessian, Discovery in International Arbitration, International Law News, Winter 2005 at 1.
(59) Blackaby, supra note 1 at 396.
(60) Id. at 393.
(61) Id. at 389
(62) Craig, supra note 35 at 376.
(63) Id. at 376.
(64) Id. at 376.
(65) Id. at 377.
(66) Blackaby, supra note 1 at 411.
(67) Id. at 399
(68) Redfern, supra note 2 at 327.
(69) Id. at 328.
(70) Craig, supra note 35 at 378.
(71) Id. at 377.
(72) Id. at 147.
(73) ICC Rules of Arb. (1998), available at http://www.iccubo.org/court/english/arbitration/pdf-document/rules_arb_english.pdf
(74) 40 UN GAOR Supp No. 17, UNDOC A/40/17 (1985)
(75) UNCITRAL Arbitration Rules, 31 UN GAOR Supp No. 17, UNDOC A/31/17 (1976.)
(76) IBA Rules on the Taking of Evidence in International Arbitration (May 29, 2010) available at http://www.ibanet.org/document/default.aspx?document.uid=68336c49-4106-46BF-AK6-A8F0880444DC
(77) Federal Arbitration Act, 9 U.S.C. § 1-16.
(78) Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth 473 U.S. 614 (1985).
(79) Bergesen v. Joseph Muller Corp., 710 F.2d. 928 (2d Cir. 1983).
(81) Resolution 2205 (XXI) of 17 December 1966.
(82) Mandate and Composition of UNCITRAL, http://www.uncitral.org/uncitral/en/about/origin.html
(83) Redfern, supra note 2 at 479.
(84) Id. at 479.
(85) Report of the United Nations Commission on International Trade Law on the Work of its Twenty Ninth Session, www.uncitral.org/pdf/english/texts/arbitration/arb-notes/arb-notes-e.pdf
(86) Id. para. 1.
(87) Id. para. 2.
(88) Id. para. 3
(89) Id. para. 11.
(90) Id. para. 13.
(92) Redfern, supra note 2 at 480.