1. Preface

There are three major methods of international dispute resolution; namely international arbitration, international commercial litigation, and alternative dispute resolution (ADR). Among these, arbitration is the most popular way of resolving cross-border disputes between states, companies, and individuals. Queen Mary University of London (QMUL) and White & Case LLP conducted a global survey of nearly 1,000 corporate lawyers, practicing attorneys and legal professionals. Published in The 2018 Arbitration Survey, the survey results show that 97% of respondents believe that arbitration is the preferred method of international dispute resolution, and 99% of respondents indicate a willingness to resolve future disputes through arbitration.

At present, against the backdrop of the Belt and Road Initiative, Chinese companies are increasingly “going global.” Trade and investment activities between Chinese parties and foreign states or enterprises are becoming more frequent. In the face of ongoing and possible future cross-border disputes, many Chinese companies have already agreed with their counterparties to resolve disagreements and differences through international arbitration.

However, international arbitration is markedly different from PRC domestic arbitration in terms of applicable laws and procedures; it is possible to regard them as two different systems. In general, Chinese parties and Chinese lawyers do not have a lot of experience in the area of international arbitration. In the past, a lack of understanding of international arbitration procedures and rules has led to disappointing results for many Chinese parties, even in cases with good prospects of success. In light of this, we have launched KWM International Arbitration Fundamentals. Featuring a short article every Monday, we hope to help participants of international arbitration by sharing basic knowledge and practical insights on international arbitration.

As we are kicking-start KWM International Arbitration Fundamentals, this article will introduce international arbitration, international litigation and alternative dispute resolution as three methods of civil and commercial dispute resolution mechanisms. It will also discuss the advantages and disadvantages of international arbitration.

2. Introduction to International Dispute Resolution Mechanism

International civil and commercial dispute resolution mechanism mainly includes arbitration, litigation and other alternative dispute resolution methods, which differ greatly in terms of their application basis and legal effect of the resolution.

(1) International Arbitration

Arbitration is a form of dispute resolution in which both parties agree to submit the dispute to an impartial third party, either an arbitral tribunal or a sole arbitrator, where both parties trust that the arbitral tribunal or the sole arbitrator will render a fair award and agree to abide by that award. Originally, arbitration was a simple and relatively informal procedure, where, for example, when two merchants disagreed on the price or quality of goods to be delivered, they would refer to a trusted third person to decide, promising to abide by the decision made by that third person. As a dispute resolution method, arbitration maximizes party autonomy and has the following key features.

a. Consensual Means to Settle Disagreements

In order to settle disputes through arbitration, parties must first jointly select arbitration as the dispute resolution method by means of a valid arbitration agreement, either before or after the dispute arises.

b. Non-governmental Decision-Maker Selected by and for the Parties

The arbitral tribunal/sole arbitrator has no public authority, and is selected by agreement of the parties, or appointed by an arbitral institution for the parties, for the sole purpose of resolving the dispute between the parties.

c. Final and Binding Decision

Unless the arbitration rules specifically allow for appellate review (e.g. Shenzhen Court of International Arbitration’s SCIA Arbitration Rules[1]), the award is final, and the parties agree that it is binding and legally enforceable. An arbitration award is not subject to judicial appeal and may only be set aside by a court in limited circumstances.

d. Use of Adjudicatory Procedures

Parties have fair opportunity to present their arguments and defenses in arbitral proceedings, as opposed to other forms of dispute resolution (e.g. neutral evaluation) where argument of the parties are not heard and the decision is based on independent investigation.

Based on the international or domestic nature of the dispute, the nationality of the parties, and the place of arbitration, the arbitral institution and the arbitration rules, arbitration can be further categorized into “International arbitration” and “domestic arbitration.” There is no uniform international standard for defining “international arbitration” and each country has its own criteria for determining whether an arbitration is “international” or “domestic.”

Article 1(3) of UNCITRAL Model Law on International Commercial Arbitration defines “international arbitration” as follows:

An arbitration is international if:

(a) the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different States; or

(b) one of the following places is situated outside the State in which the parties have their places of business:

(i) the place of arbitration if determined in, or pursuant to, the arbitration agreement;

(ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject-matter of the dispute is most closely connected; or

(c) the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.

In practice, arbitration is generally considered to be “international” if it involves parties of different nationalities, if the place of arbitration is in a country or territory other than that of the parties, or if it involves an international dispute.

Parties to an international arbitration usually choose a neutral country or territory, with which neither party has any connection, as the seat of arbitration. For example, a French company and a Chinese company may enter into a contract for the construction of a power plant in Indonesia, which provides that any dispute shall be settled in London by way of arbitration. Globally, popular venues for arbitration include London, New York, Paris, Stockholm, and Hague. Specifically, in Asia, Singapore and Hong Kong Special Administrative Region of China are the most popular places for arbitration.

In addition to International Commercial Arbitration, Investment Treaty Arbitration is another form of international arbitration. There are many differences between the two. International Commercial Arbitration settles disputes between private parties of equal status, usually of different nationalities. However, the scope of the arbitration mainly deals with commercial disputes such as foreign economic disputes, trade disputes, transportation contract disputes and maritime disputes. Investment Treaty Arbitration, on the other hand, settles foreign investment-related disputes between a foreign investor and the host country. In subsequent articles, we will talk about International Commercial Arbitration and Investment Treaty Arbitration in detail.

(2) International Commercial Litigation

As a form of remedy endorsed by public authority, civil and commercial litigation enjoys the protection from the state’s coercive power. No other form of dispute resolution is subject to the same level of coerciveness, which manifests in three aspects. Firstly, for the commencement of proceedings, the consent of the disputing parties is not required for a civil or commercial action. Either party can bring a claim in the court and the lawsuit will start if the court accepts jurisdiction over it. Secondly, the judgment of the court is imposed on the parties without their consent; and finally, the enforcement of judgment is also mandatory, and in the event that a party fails to comply with the orders of the court it may compel a party to cooperate by the authority of the state.

However, there are problems with the extraterritorial recognition and enforcement of judgements of international civil and commercial litigation. At present, much of the mutual recognition of court decisions has been achieved within a small number of countries by way of signing and ratifying regional multilateral agreements, such as Hague Convention on Choice of Court Agreements and Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters These treaties seek to achieve “global circulation” of civil and commercial court judgments, but only exist within certain jurisdictions, and far from being widely recognized by the international community. China relies mainly on the principle of reciprocity in judicial practices as the basis for the recognition and enforcement of foreign courts’ judgments, further restricting the enforceability of foreign judgements in China.

(3) Alternative Dispute Resolution (ADR)

In addition to litigation and arbitration, various forms of alternative dispute resolution, such as Mediation and Conciliation, Expert Determination, Mini-Trials / Neutral Evaluation, have provided further options for parties to resolve an international dispute.

In the mediation process, the mediator only assists the parties, to the extent possible, in reaching a voluntary settlement agreement by participating in discussions and negotiations. Mediation does not aim to reach a legally binding decision, and the mediator has no power to compel the parties to accept a settlement.

As a form of dispute resolution, expert determination is often employed to resolve technically complex commercial disputes, such as accounting calculations, the assessment of the quality of industrial projects, and the estimation of oil or gas reserves. The most important difference between expert determination and arbitration is that the former does not necessarily require the use of adjudicative procedures, which is a defining feature of arbitration, but rather entails only the decision-maker’s own investigations and use of existing expertise.

A mini-trial/ neutral evaluation is similar to a moot court where the parties briefly present their claims, evidence and arguments to an adjudicator, who gives his or her own analysis on the strengths and weaknesses of each party’s case before offering an advisory decision. The adjudicator may also encourage the parties to settle, depending on the merits of the case. Similar to mediation, the result of a mini-trial/ neutral evaluation is not legally binding.

While these forms of ADR generally do not result in a legally binding and enforceable decision, they do provide a means for the parties to resolve their dispute in a relatively amicable atmosphere. In September 2020, The United Nations Convention on International Settlement Agreements Resulting from Mediation (Singapore Convention) will enter into force between three signatories; Singapore, Fiji and Qatar. In the future, with increasing number of jurisdictions signing and ratifying the Singapore Convention, international commercial settlement agreements will also have the possibility of cross-border enforcement. It appears that ADR is gradually making up for its lack of enforceability.

3. Advantages and Disadvantages of International Arbitration

(1) Advantages of International Arbitration

Arbitration has been widely praised by participants in international dispute resolution and its advantages include the following.

a. High Cross-Jurisdictional Enforceability of Awards

Arbitration’s greatest advantage over other forms of international civil and commercial dispute resolution methods lies in its broad cross-border enforceability. It is also the most important reason that international arbitration is the most popular mechanism for resolving international commercial disputes. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) is the current regime on the recognition and enforcement of foreign arbitral awards. Currently, the New York Convention is in force in 163 states and territories, and its rules have been adopted worldwide. Near-universal application of the New York Convention has ensured the enforcement of international arbitration agreements and awards, and has promoted the development of international commercial arbitration in international trade and investment.

Relatively speaking, the New York Convention is more applicable in the international community than the mutual recognition of judicial decisions pursuant to a bilateral treaty or reciprocal relationship between two states. For example, there is no bilateral agreement between China and the United Kingdom on the mutual recognition and enforcement of court judgments, but both countries have signed and recognize the New York Convention.

b. Neutrality

The parties to an international dispute often come from different countries or regions, and if the dispute is resolved by litigation, at least one party will have to participate in the proceedings in a foreign court. During proceedings, parties need to engage foreign lawyers from other jurisdictions who are very different from the lawyers in their home jurisdiction, and carry out work such as notarization of documents, translation of litigation papers, and preparation of documentary evidence subject to foreign laws and procedures. In addition to this inconvenience, parties to international commercial disputes often have doubts about the neutrality of the courts in the other party’s home country. As a result, parties tend to be more comfortable with arbitration as a means of resolving disputes in third-party country or territory.

The parties to an international arbitration may choose the applicable law, the place of arbitration, the arbitrators, the arbitration rules and the language of the arbitration as they see fit. Parties usually reach agreements on a third-party jurisdiction and applicable law that meets their commercial interests, fits the character of the transaction, and is “pro-arbitration” Stance. By selecting a popular, neutral seat of arbitration, and applicable law from a jurisdiction that both parties find acceptable, parties can avoid distrust and uncertainty and find it easier to reach an arbitration agreement. It also lowers the cost of engaging local lawyers and participating in the proceedings locally.

c. Flexibility

Arbitration proceedings are more flexible in terms of time and procedure than other dispute resolution mechanisms. The parties can tailor the arbitration agreement to meet their commercial needs, with respect to the arbitration procedure, the composition of the arbitral tribunal, the arbitration rules, the language of the arbitration and the procedures for the arbitration. This reduces the time and financial costs of the process and allow for a better fit between the parties in terms of their practical commercial needs. In case of emergency, parties may also seek emergency relief or interim/ interlocutory measures through the emergency arbitrator procedure.

d. Confidentiality

Subject to limited exceptions, arbitration proceedings are confidential and hearings are closed to the public. For the parties, the confidentiality of the arbitration may be essential for the protection of their business interests. Particularly in today’s world of rapid information transmission, once news is distributed that a company is involved in a massive dispute, there may be immediate negative impact on the company’s good will and business strategy. The confidentiality of arbitration can shield the dispute from the public and competitor scrutiny, allowing parties to resolve the dispute in a private and secure environment, reducing secondary risks.

It is worth noting that the confidentiality of arbitration is determined by the parties’ arbitration agreement and the rules of the arbitral institution, not presupposed as the default setting of any arbitration. However, since the vast majority of arbitral institutions impose confidentiality requirements in their arbitration rules, confidentiality has become a de facto advantage enjoyed by arbitration participants.

e. Expertise

Through decades of development, the international arbitration community has formed a common understanding regarding the arbitration system, a familiarity with the arbitral process, and an acute business sense of arbitration’s benefits. This well-established group of professionals are available for parties when selecting arbitrators, lawyers and experts. For example, as opposed to the judge appointed by the court in the litigation proceeding, parties can select arbitrators by agreement from a wide range of backgrounds. Arbitrators, who may be from any country, can be members of the legal profession, or experts in other various professional fields. Parties have many options to choose whom they believe are best suited to resolve their case.

Representation in arbitral proceedings is also not limited to lawyers, qualified to practice in a particular jurisdiction; parties may choose whoever they deem appropriate as their representative. Thus, in international arbitration proceedings, it is common to see parties engaging the services of lawyers who are from their home jurisdiction but familiar with international arbitration proceedings and have considerable experience in international arbitration practices. Although the lawyer may not be qualified to practice in the place of arbitration, they are familiar with international arbitration procedures and can easily communicate with their clients who are from the same cultural background. If the substantive and procedural law of the case is governed by the laws of different states, particularly those of different legal traditions, the party’s legal team often features counsel from several states, with lead counsel (usually a lawyer from the party’s home country with extensive experience in international arbitration) responsible for developing arbitration strategies for clients and coordinating the work of a team of international attorneys.

(2) Disadvantages of International Arbitration

a. Relatively High Cost

Cost savings used to be one of the advantages of international arbitration, but today, international arbitration is often expensive. Parties are required to bear the fees of arbitrators, the administrative costs of the arbitration institution and the costs for venue. Further, attorney’s fees and expert witness fees are very expensive. In some high-profile arbitration cases, these costs can total at millions or even tens of millions of US dollars. Therefore, the cost of arbitration can sometimes be even higher than that of litigation.

b. Delays

Delays often occur at the beginning and towards the end of the arbitration. Usually, the time taken to convene the arbitral tribunal and to render the award is lengthy, and in the face of the party’s delaying tactics, the arbitral tribunal often lacks the effective sanctions available to courts.

Many leading arbitral institutions are aware of this problem and have provided enhanced provisions in their arbitration rules regarding the length of proceedings and the arbitral tribunal’s power to take measures in order to improve the efficiency of the process.

c. Lack of Deterrence on Third Party

As the legitimacy and initiation of an arbitration procedure relies on the agreement between the parties, for international commercial transactions with multiple participants and complex legal relations, it is difficult for arbitration to include third parties who are relevant to the issue but not bound by the arbitration agreement.

d. Uncertainty Arising from Ambiguous Arbitration Agreements

When parties enter into commercial contracts, they sometimes do not pay careful attention to the drafting of dispute resolution clauses, and simply “copy-paste” the same provisions from past contracts. The validity of arbitration agreement is subject to the review of the court in the arbitration seat in accordance to national law. As such, if the parties have not carefully considered the formulation of the arbitration agreement, and the meaning of the arbitration agreement is not clear, the ambiguity may have adverse consequences, including, further disputes over jurisdiction, an award being annulled, or the inability to obtain recognition and enforcement of the award.