This article provides a number of practical tips to consider when drafting a contract with an international counterparty.
In this global economy, even small companies find themselves dealing with foreign vendors, customers and employees. But what happens in the event of a dispute? A foreign company may not be subject to the jurisdiction of United States courts, and even if it is, enforcing a judgment may be difficult or impossible. Traditional litigation is not an attractive option.
Most companies have addressed this problem by incorporating arbitration provisions into any contract with an international counterparty. Unlike judicial judgments, arbitration awards are enforceable in any country that is a party to the New York Convention. As of January 2013, 148 countries were parties, including nearly all countries with significant commercial interaction with the United States. Increasingly, companies view arbitration as a much more realistic method of resolving a dispute with a foreign party.
But like most things, the devil is in the details. Often, parties are understandably focused on their deal terms, and simply accept a boilerplate arbitration provision proposed by the other side. These provisions may not allow the parties to take full advantage of the benefits of arbitration, and may even jeopardize the enforceability of any resulting arbitral award. Once the dispute arises, it is usually too late, and the parties too entrenched, to fix these problems. In this article, we list some of the key issues that contracting parties should consider up front.
Decide Where to Arbitrate.
First, decide where the arbitration hearing will be held, or “seated” in arbitration parlance. In general, the conduct of the arbitration and any challenge to the award is governed by the law of the arbitral seat. See 9 U.S.C. § 7 (Federal Arbitration Act, which incorporates the New York Convention at Article V(1)(e)). This has important consequences.
For example, if the local courts in the country where the arbitration is to be held are not reliable, then the arbitral award will be vulnerable. See Termorio S.A. v. Electranta, 487 F.3d 928 (D.C. Cir. 2007) ($60 Million arbitration award against Columbian public utility vacated by Columbian courts on dubious ground); Baker Marine Ltd. v. Chevron Ltd., 191 F.3d 194 (2d Cir. 1999) (award similarly vacated by Nigerian court). To avoid these kinds of results, choose a jurisdiction where the rule of law is respected, and that has a track record of honoring arbitral awards. New York, London, and Hong Kong are often chosen for these reasons.
The parties’ ideal advocate and arbitrator should also influence their choice of an arbitral seat. What type of person does the company want to represent it in the proceeding? What kind of arbitrator does it prefer? Attorneys and arbitrators from a civil law background, for instance, bring very different perspectives from those who are accustomed to the United States common law approach.
Decide Which Arbitral Provider to Use.
Although there are many, perhaps hundreds, of organizations that administer arbitrations, companies can narrow their choices considerably by choosing whether to use a “non-administered” or “administered” service. A non-administered service will provide a set of rules and help the parties select an arbitral panel, but then essentially will exit the process. The most prominent non-administered provider is the International Institute for Conflict Prevention and Resolution, known as CPR. See www.cpradr.org.
Administered arbitrations, in which the provider remains involved throughout the arbitration process, are far more prevalent. The Paris-based International Chamber of Commerce, or ICC, has been the predominant provider of international arbitration for many years. See www.iccwbo.org. The ICC Rules of Arbitration are heavily influenced by the civil law, European style of dispute resolution, which involves limited discovery and is less focused on aggressive oral advocacy.
The international branch of the American Arbitration Association, known as the International Centre for Dispute Resolution, or ICDR, is also gaining prominence. See www.adr.org/icdr. The ICDR procedural rules contemplate a more “U.S. style” advocacy process, which typically permits more discovery. See ICDR Arbitration Rules, Article 19 (permitting arbitrators to order the exchange of documents and other materials).
Companies may also incorporate into their arbitration provisions specific evidentiary rules, such as the International Bar Association’s Rules on the Taking of Evidence in International Commercial Arbitration. Through these or other similar rules, companies can agree in advance how they will conduct discovery during the arbitration, including the extent to which expensive items, such as electronic discovery or depositions, will be available.
Additional Key Issues.
Language, currency, and other specific issues regarding the conduct of the hearing. | Selection of the arbitral seat and provider will largely dictate the arbitration provision, which will incorporate the procedural rules of the provider. The provider’s rules do not, however, address every situation. For instance, we have found that the following issues should be addressed specifically in the arbitration provision: (1) the language in which the hearing is to be conducted; (2) the currency in which the award is to be made; and (3) the number of arbitrators who will preside. And in some settings (where trade secrets may be an issue, for example), companies should consider the need for interim or emergency relief. Although many arbitral provider rules provide for such relief (see, e.g., ICC Rules of Arbitration, Article 28), arbitrators rarely grant such relief in our experience. Accordingly, contracting parties should consider whether interim or emergency relief should be carved out of the arbitration clause.
Ethical expectations of the parties and their counsel. | One additional emerging issue to consider is the ethical expectations applicable to counsel and the arbitrators. This issue typically is not addressed in the provider’s procedural rules and was not a problem historically, when the international arbitration “bar” was a relatively small and closed circle.
As the economy is increasingly globalized, however, it is quite common in our experience to encounter counsel and arbitrators whose ethical and advocacy practices vary significantly, depending on their legal and geographical background. The ICC Rules, for example, do not require even that the parties be represented by attorneys. See ICC Rules of Arbitration, Article 21(4) (allowing parties to appear through “authorized representatives”). In response to this issue, several organizations have begun to draft model rules to bridge the disconnect. See International Council for Commercial Arbitration, Hague Principles on Ethical Standards for Counsel Appearing before International Courts and Tribunals; International Bar Association, Code of Ethics and Conduct for Counsel. These standards may be incorporated into an arbitration provision at the outset to provide clear guidance in the event of a dispute arising from the participants’ divergent ethical or practical norms.
Counsel with experience in international arbitration. | Finally, when a dispute arises, we recommend including counsel who has experience in the arbitral environment and, if possible, in the international arbitration arena. Effective advocacy before arbitrators of varying global backgrounds is a very different proposition from effective advocacy before a jury or a United States judge.
Article originally appeared in the Business Lawyer - Published by the Corporate Counsel Section of the North Carolina Bar Association • Section Vol. 25, No. 2 • May 2013