Large, transnational corporations increasingly face the question of whether to litigate their disputes in local courts or to include in their agreements provisions providing for the resolution of disputes by alternative means — namely, arbitration.
On December 8, 2015, Skadden presented a webinar titled “Back to Basics: A Primer on the Differences Between Litigating and Arbitrating International Disputes,” which reviewed some of the key differences between resolving disputes by arbitration and litigation that parties may wish to consider before selecting one of these means of adjudication.
In negotiating a transaction, parties have the opportunity to include provisions in their contracts that will shape any dispute resolution proceedings that may ultimately take place. The ability to agree on such provisions is often referred to by practitioners as “party autonomy.” These provisions include the choice-of-law provision that will provide the law that governs disputes arising under the agreement and the interpretation of the contract; the manner by which the parties will resolve their disputes, i.e., litigation or arbitration; and the place of adjudication, whether it be in the courts or in arbitration.
Parties in international transactions often select the law of New York or England to govern their disputes, as both offer a considerable amount of jurisprudence concerning issues that frequently arise in complex, commercial transactions. However, parties should, in consultation with their counsel, select the governing law with which they are the most comfortable. Similarly, when choosing a location for the adjudicative proceedings, parties should consider the cultural and legal norms that may exist in jurisdictions with which they are less familiar, both in the litigation and arbitration context.
Key to selecting a location for an arbitration is whether the country in which the proceedings are held is a signatory to a treaty providing for the recognition and enforcement of arbitration agreements and awards, such as the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), or the 1975 Inter-American Convention on International Commercial Arbitration (Panama Convention). The New York Convention — which, with over 150 signatory countries, is the most widely recognized such treaty — contains a comprehensive scheme that permits courts to “recognize” arbitration agreements and “refer” a dispute to arbitration, as well as to recognize and enforce arbitral awards. New York Convention, June 10, 1958, arts. II(1)-(3), III-IV, 21 U.S.T. 2517. The New York Convention aims to promote the recognition and enforcement of arbitral awards, subject to very limited exceptions. See id., art. V; Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n.15 (1974) (“The goal of the [New York] Convention, and the principal purpose underlying American adoption and implementation of it, was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries.”).
Parties who decide to arbitrate their disputes also can choose the procedural rules that will govern the proceedings as well as an arbitral institution to administer the proceedings. Several major international arbitral institutions provide procedural rules for arbitration and administer the proceedings. Commonly used institutions for international arbitrations are the International Chamber of Commerce, the International Centre for Dispute Resolution, the London Court of International Arbitration, the Singapore International Arbitration Centre and the Hong Kong International Arbitration Centre. These institutions offer procedural rules that provide a framework for the arbitration but still permit parties to control many aspects of the proceedings, such as the type of disclosure, if any, that will be available. Alternatively, the parties can choose to have their arbitration governed by the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, but not to have an institution administer the arbitral proceedings.
Additionally, there are guidelines promulgated by institutions such as the International Bar Association (IBA), including the IBA’s Rules on the Taking of Evidence in International Arbitration (2010) and Guidelines on Conflicts of Interest in International Arbitration (2014). Parties and arbitrators often will rely on these types of guidelines when adopting the procedures to apply to a particular arbitration.
When selecting the arbitrators, parties should keep various factors in mind. Typically, parties will have their dispute heard by a panel of three arbitrators, with each side appointing one arbitrator and the third being selected by the two party-appointed arbitrators. While many arbitral institutions provide that all arbitrators will be neutral, parties may want to consider explicitly requiring in their agreement that all arbitrators are to be neutral and not affiliated with any party to the arbitration. Further, as another means of maintaining neutrality, parties may want to provide that the chair is of a different nationality than any of the parties to the proceedings.
Certain procedures are common to both arbitration and litigation proceedings. Disclosure of documents, a key feature in most litigations, is often available in arbitral proceedings, typically depending on the preference of the parties and the discretion of the arbitral tribunal. Parties should not expect, however, that document disclosure will be as broad in scope as what is permitted in most federal and state court litigation proceedings in the United States. See e.g., IBA Rules on the Taking of Evidence in International Arbitration, art. 3(a)(ii) (May 29, 2010) (requiring document requests to contain “a narrow and specific requested category of [d]ocuments that are reasonably believed to exist.”). In addition, U.S. parties should not expect that all types of discovery are permitted, as discovery mechanisms such as depositions and interrogatories generally are not available in international arbitration. See e.g., Int’l Centre for Dispute Resolution, Int’l Dispute Resolution Procedures (June 1, 2014), art. 21(10) (“Depositions, interrogatories, and requests to admit as developed for use in U.S. court procedures generally are not appropriate procedures for obtaining information in an arbitration under these Rules.”). The arbitration proceedings will often culminate in a live hearing, which provides the parties an opportunity to make oral opening and closing statements, present live witnesses and expert testimony, and to cross-examine those witnesses. London-Seated Arbitrations Arbitrations in London are subject to certain requirements that may not exist in other locations. For example, the Arbitration Act of 1996 provides specific requirements as to the sufficiency of a written agreement that contains the parties’ agreement to arbitrate. The Arbitration Act also permits arbitrators to grant interim relief that directs the preservation of property that is the subject of or otherwise relevant to the arbitral proceedings. Disclosure also is typically available in London-seated arbitrations, although parties should not expect to obtain the same level of disclosure that they would, for instance, in a U.S.-seated domestic arbitration or litigation. In particular, parties should not expect that depositions will be available in London-seated arbitral proceedings, where witnesses typically submit their direct testimony in the form of written witness statements. Cost-shifting orders are common in London-seated arbitrations, as the prevailing view is that the losing party will pay the costs and fees associated with the proceedings incurred by the successful party.
The Role of Courts in International Arbitration
Even when parties choose arbitration as their method of dispute resolution, the local courts may nevertheless become involved at various stages.
Enforcing Arbitration Agreements
Parties typically seek the assistance of local courts when attempting to enforce an agreement to arbitrate. This may take the form of a motion to compel arbitration with an unwilling participant. Parties may attempt to avoid arbitration where there is disagreement as to whether a dispute is covered by the parties’ arbitration agreement. A motion to compel arbitration also may be brought against a party who, while not a signatory to the agreement, may be bound by the arbitration agreement under the relevant law.
When deciding whether a dispute is subject to arbitration, New York courts typically consider whether there is a valid agreement to arbitrate. See e.g., Energy Transp., Ltd v. M.V. San Sebastian, 348 F. Supp. 2d 186, 202 (S.D.N.Y. 2004) (applying two-factor test: (1) whether contract contains a valid agreement to arbitrate and (2) whether dispute falls within scope of arbitration agreement). New York courts will, under limited circumstances, permit the extension of an arbitration agreement to a nonsignatory. This can take the form of either permitting a nonsignatory to compel a signatory to arbitrate or allowing a signatory to compel a nonsignatory to arbitrate. See e.g., Borsack v. Chalk & Vermillion Fine Arts, Ltd., 974 F. Supp. 293, 302 (S.D.N.Y. 1997) (extending arbitration agreement to nonsignatory plaintiff where plaintiff was found to be a third-party beneficiary of the underlying contract).
Courts in New York also may use their equitable powers to issue an anti-suit injunction preventing parties from litigating in a foreign forum a dispute that is covered by their arbitration agreement. See, e.g., Paramedics Electromedicina Comercial, Ltda. v. GE Med. Sys. Info. Techs., Inc., 369 F. 3d 645, 654 (2d Cir. 2004) (noting that “[t]he federal policy favoring the liberal enforcement of arbitration clauses … applies with particular force in international disputes.”).
Parties also may seek other forms of preliminary relief from the courts in order to preserve the status quo pending resolution of the dispute. Such relief may include pre-award attachment of assets to prevent the dissipation of funds, specific performance of an agreement, or other forms of relief that cannot be granted in the arbitration proceedings including because an arbitral tribunal has not yet been formed.
Parties also may turn to the courts for assistance in obtaining discovery of information for use in the arbitral proceeding. In the United States, Section 7 of the Federal Arbitration Act (FAA) provides arbitral tribunals with the authority to order a party to appear before it as a witness or to produce evidentiary materials at a hearing. 9 U.S.C. § 7. Where a party fails to comply with such an order, a petition may be made before the appropriate district court for an order to “compel the attendance of such person or persons before said arbitrator or arbitrators, or punish said person or persons for contempt.” Id. In the U.S. courts, parties also may request discovery “for use in a proceeding in a foreign or international tribunal,” pursuant to 28 U.S.C. § 1782.
Enforcement of Arbitral Awards in the U.S. Courts
Once an arbitral award has been obtained, there are various methods that parties can use to obtain recognition and enforcement in the United States. Chapter 1 of the FAA includes provisions for the enforcement of arbitral awards that are made in the United States, while Chapters 2 and 3 of the FAA incorporate the New York and Panama Conventions, respectively, both of which provide procedures for the recognition and enforcement of final arbitral awards governed by those conventions. 9 U.S.C. §§ 1, 2, 3.
Recognition usually will take the form of a summary proceeding to convert the arbitral award into a money judgment where the award calls for the payment of money damages. Enforcement, the means by which the successful party obtains payment, can take the form of the attachment of the award debtor’s property, including bank accounts and other assets. Where the award creditor lacks knowledge about the location of the award debtor’s assets, parties may be granted limited discovery to obtain information about the location of the award debtor’s assets.
Hague Convention on Choice of Court Agreements
As noted above, the New York Convention, with more than 150 signatories, generally makes it far easier to enforce arbitral awards in multiple countries than to enforce court judgments. By contrast, there is no single international treaty governing the recognition of court judgments. Indeed, the United States is not a party to any treaty on the recognition and enforcement of foreign judgments, and it often comes as a surprise to U.S. practitioners that U.S. judgments are not routinely enforced worldwide.
The Hague Conference on Private International Law’s Convention on Choice of Court Agreements of June 30, 2005 (Choice of Court Convention) seeks to remedy this disparity in circumstances where parties to a commercial transaction agree in advance on a specific national court to resolve their disputes. The Convention came into force on October 1, 2015, after ratification by the European Union and Mexico. The Choice of Court Convention has been signed by the United States but has not yet been ratified. Legislation for the implementation of the Hague Convention in the United States currently is being considered.
The Choice of Court Convention applies “in international cases to exclusive choice of court agreements concluded in civil or commercial matters.” Id., art. 1(1)). Thus, where parties have agreed that their commercial dispute will only be resolved in a specific national court, pursuant to the Hague Convention, this agreement will be recognized by the courts of other signatory states. This means that courts in signatory states other than the forum chosen by the parties, will “suspend or dismiss proceedings to which an exclusive choice of court agreement applies,” unless one of the limited exceptions applies. See id., arts. 5-6.
Where the parties have an exclusive choice of court agreement and a judgment has been entered in a court of the parties’ chosen state, that judgment is to be recognized and enforced by the courts of other signatory states, in accordance with the requirements of the Hague Convention.
Id., art. 8. Limited grounds for nonrecognition of judgments are provided in Article 9 and include that the agreement was “null and void under the law of the State of the chosen court,” id., art. 9(a); “a party lacked the capacity to conclude the agreement,” id., art. 9(b); there was improper service and/or insufficient time to prepare a defense, id., art. 9(c)(i)-(ii); the judgment was obtained by procedural fraud, id., art. 9(d); the judgment is contrary to the public policy of the state where it was entered, id., art. 9(e); and principles of res judicata and collateral estoppel, id., arts. 9(f)-(g).
Although recently enacted, the Choice of Court Convention seeks to put the enforcement and recognition of judicial decisions on par with arbitral awards, a change that has been much-desired by some practitioners in the field. At the same time, parties may still favor arbitration as the preferred form of international dispute resolution because the Choice of Court Convention does not deal with some of the other fundamental reasons for choosing arbitration, including: (1) the fact that neither party wants to be in the other party’s home court, making it difficult to agree on an exclusive court for resolution of disputes; (2) the procedural flexibility in arbitration to shape a dispute resolution process that takes account of the legal traditions of both parties and, significantly, to select the specific individuals who will adjudicate the dispute; and (3) the increased privacy and confidentiality arbitration may provide.