To most people (including most lawyers), the world of international arbitration is shrouded in a veil of mystery. The widely-held perception of our practice is the stuff that movies are made of — lawyers traveling around the world to exotic countries, meeting with officials from foreign governments and multi-national corporations, and representing them before international tribunals in high-stakes cases. In reality, our practice is much more sobering.

Instead, the real mystery surrounding international arbitration is more elementary: what is it? In generic terms, international arbitration is a method for resolving disputes arising from international commercial agreements and other international relationships. Like all arbitration, international arbitration is a creature of contract. It arises from an agreement between parties from different countries to submit their disputes to binding resolution by one or more arbitrators selected by or on behalf of the parties. That agreement is usually struck in a dispute resolution clause in an international contract or treaty in which the parties agree to arbitrate future disputes.

Parties agree to resolve their disputes through international arbitration for a number of reasons. They include:

  • Neutrality. International arbitration provides the parties a way to resolve their disputes without having to litigate in their counter-party’s domestic courts, which may be viewed as less than neutral (and in extreme cases xenophobic), may take too long, and may require unnecessary formalities.
  • Confidentiality. Unlike domestic litigation in many countries, international arbitration is — with limited exceptions — a confidential process in which trade secrets and other sensitive information can be shielded from the public and other interested third parties.
  • Specialist Decision-Makers. International arbitration allows parties to hand-pick their decision makers, which is particularly important where the dispute involves technical issues that domestic courts are ill-equipped to handle.
  • Finality. International arbitral awards generally cannot be appealed; in most circumstances, a losing party’s only recourse is to seek vacatur (an order of a Court vacating or annulling) of the arbitral award based on a limited number of grounds in a court located in the place (seat) of the arbitration.
  • Enforceability. International arbitral awards are, as a general rule, readily enforceable under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the “New York Convention.”

This last point bears particular emphasis. Adopted by over 146 nations, the New York Convention requires signatory nations to give effect to international arbitration agreements and awards. This mechanism allows the prevailing party to take an international arbitral award to the jurisdiction where the counter-party has assets and to convert the award into a local court judgment. The court judgment can then be taken to the sheriff (or the local equivalent) to seize the assets of the counterparty, liquidate them, and use the proceeds to satisfy the underlying arbitral award judgment.

Importantly, however, there is no comparable multilateral treaty requiring recognition and enforcement of foreign court judgments, (there are exceptions, such as court judgments obtained and enforced within the European Union). Thus, whereas courts are required to recognize and enforce foreign arbitral awards under the New York Convention, they are generally not required to recognize foreign court judgments. For that reason, international arbitral awards “travel” better than court judgments.”

For all of these reasons, international arbitration is becoming the principal way for commercial parties to resolve their cross-border disputes. And as a consequence, it is becoming increasingly important for counsel advising international business clients to be familiar with international arbitration.

There are two main types of international arbitration today: commercial international arbitration, on the one hand, and investment treaty arbitration, on the other hand. The following sections provide a brief overview of both.

Commercial International Arbitration

Commercial international arbitration clauses are found in contracts between parties from different countries. The general rule of thumb is to keep such clauses simple, leaving to the parties the flexibility to custom-build a proceeding to meet the demands of a future dispute, whatever that may be. Precisely because counsel does not know which disputes will later arise, it is generally not advisable to graft onto the clause “bells” and “whistles” that may not suit the particular dispute that later arises.

This issue highlights another advantage of international arbitration over domestic litigation: international arbitration presents the parties with a clean slate on which to write their process. Many lawyers seem to believe that there is only one procedure that should be followed in international arbitration (which, invariably, is the procedure they have used in the past). Most international arbitration rules, however, leave tremendous flexibility to the parties to determine the procedure of the arbitration. If the dispute resolution clause is drafted broadly, then the parties can look at each case anew and ask themselves: How much process do we really need to resolve this dispute?

Consistent with these principles, an international arbitration clause generally should contain the following items—but not much more:

  • The arbitration institution that will administer the arbitration and/or the rules that will govern the arbitration;
  • The seat (place) of the arbitration;
  • The number of arbitrators;
  • The language of the arbitration;
  • The governing substantive law (if not specified elsewhere in the agreement); and
  • Certain optional provisions, such as clauses concerning discovery, confidentiality, and interim relief.

Looking at the first four of these points in a little more detail. Each is briefly summarized below:

  1. An international arbitration clause should specify the arbitration institution that will administer the arbitration and/or the arbitration rules that will govern it. The leading institution for international commercial arbitration is the Court of Arbitration of the International Chamber of Commerce (“ICC”). Created in 1923 in Paris, the Court of Arbitration is not a “court” in the traditional sense but, rather, an arbitral institution that administers arbitrations under the ICC Arbitration Rules. Although based in Paris, the ICC has offices around the world (including New York). ICC arbitrations are often “seated” in jurisdictions other than Paris.

In addition to the ICC, there are numerous other commonly-used institutions that administer international commercial arbitration, including: the International Centre for Dispute Resolution (“ICDR”), which is the international arm of the American Arbitration Association (“AAA”); the London Court of International Arbitration (“LCIA”); the Stockholm Chamber of Commerce (“SCC”); the Vienna International Arbitration Centre (“VIAC”); the China International Economic and Trade Arbitration Commission (“CIETAC”); and the Hong Kong International Arbitration Centre (“HKIAC”).

Alternatively, parties can agree to conduct their arbitrations under a set of arbitration rules but not under the purview of an institution or administering body. These are referred to as “ad hoc” arbitrations. The arbitration rules of the United Nations Commission on International Trade (“UNCITRAL”) are the most common rules used in ad hoc international arbitration.

  1. The parties should specify in their international arbitration clause the place (seat) of the arbitration. The place of the arbitration is the legal system to which the parties subject the arbitration. Although international arbitration is largely independent of local courts, if recourse is needed to a court regarding the conduct of the arbitration or the award, such recourse generally can be only obtained in a court in the place of the arbitration and according to its local arbitration law.

The place of arbitration should be a jurisdiction with a predictable, neutral legal system that favors arbitration, as this is where the losing party can seek to vacate the award. Counsel should avoid the situation where, after years of fighting for an award, the losing party can seek vacatur in a court system where there is no predictable arbitration law and the court may vacate the award simply because it disagrees with the merits of the decision. The key in selecting a place of arbitration is the predictability that the local courts will uphold any arbitral award. For that reason, New York, London, Paris, The Hague, Stockholm, and Geneva are the most commonly-selected places of international arbitration.

  1. Parties should consider specifying the number of arbitrators in their arbitration clause. It should be one or three, depending on the expected value of the dispute. In the alternative, the parties can remain silent on the number if the arbitral rules specified in the dispute resolution clause provide a default rule.
  2. The parties should specify the language of the arbitration. English is the most common.

For most other matters, the arbitral rules that you select will fill in the gaps. Where the arbitral rules are silent on an issue of procedure, the issue is largely left to the discretion of the arbitral tribunal. Discovery (or disclosure) is one such example. Most international arbitral rules do not contain specific rules on discovery. Tribunals therefore often look to the convention in international arbitration concerning discovery, which are generally reflected in the International Bar Association’s Rules on the Taking of Evidence in International Arbitration (the “IBA Rules”). The IBA Rules — which can be expressly adopted by the parties in their international arbitration clause or after the disputes arises — recognize that expansive documentary discovery is generally inappropriate in international arbitration and impose basic requirements concerning document requests (they do not expressly contemplate depositions).

Investment Treaty Arbitration

Investment treaty arbitration clauses are found in treaties between two countries (“Bilateral Investment Treaties” or “BITs”) or investment treaties between more than two countries (“Multi- Lateral Investment Treaties”). The purpose of investment treaties is to encourage and protect foreign investment by creating mutually favorable conditions for investments by nationals of each signatory State in the territory of the other signatory State. The theory behind these treaties is that, by creating mutually favorable conditions for foreign investment, the signatory States will stimulate business initiatives and foster their economic development while, at the same time, securing protection for their own investors’ foreign investments.

Investment treaties seek to encourage and protect foreign investment by according foreign investors two categories of rights. First, they grant foreign investors rights based on two “contingent” (or relative) standards: (i) national treatment, which assures non-discrimination or no-less-favorable treatment than the citizens or companies of the host State; and (ii) most-favored nation (“MFN”) treatment, which assures treatment no-less-favorable than the treatment of aliens or companies from other States.

Second, investment treaties accord foreign investors “non-contingent” (or non-relative) rights, based on what are called “absolute” standards because their meaning is not dependent on differential treatment. Non-contingent (absolute) standards are intended to protect the rights of foreign nationals regardless of whether the host State provides the same rights to its own or a third State’s nationals. States to investment treaties typically undertake to provide the following non-contingent protections to investors of the other signatory State:

  1. Fair and equitable treatment;
  2. Full protection and security;
  3. Non-impairment by discriminatory measures; and
  4. Protection against unlawful expropriation without compensation.

In the dispute resolution clauses of these treaties, the contracting States often agree that, if the host State fails to provide one or more of these protections to a foreign investment protected under the treaty, the protected investor of the other State can initiate an international arbitration against the host State. Once seized of the matter, the arbitral tribunal will determine if the host State violated the investment treaty and, if so, can order the host State to pay damages to the investor. In this way, the signatory States make a standing offer to arbitrate disputes with an investor, and the investor “accepts” that standing offer by initiating arbitration. Thus, investment treaty arbitration, like all arbitration, is based on the consent of the parties.

Many investment treaties give the investor the option of choosing one of several types of international arbitration. The three most common are (i) arbitration administered by the International Centre for Settlement of Investment Disputes (“ICSID”) in Washington D.C., which is a division of the World Bank and specializes in investment disputes involving respondent States, (ii) arbitration administered under the UNCITRAL Arbitration Rules, and (iii) arbitration administered by the SCC Arbitration Rules. The Energy Charter Treaty, for example, gives qualifying investors all three options.

This article has aimed to provide a brief overview of modern international arbitration.