The advantages of arbitration over national court litigation for resolving disputes under international agreements are well known. These are worth revisiting at a time when there has been increasing criticism of international arbitration as being too slow and too costly, in order to remind ourselves that international arbitration is still the best way to resolve international disputes. There is, however, an even better way to resolve such disputes: an amicable settlement. Drafting a carefully worded escalation clause in the underlying arbitration agreement can help maximise the chances of such a settlement.

Advantages of International Arbitration

The first advantage of international arbitration is that it is a nationality-neutral process. When a Korean company wishes to enter into an agreement with a French company, it is no more likely that the Korean company will agree to submit its disputes to the French courts than the French company will agree to submit its disputes to the Korean courts. This has nothing to do with the quality of those courts. It is simply a desire of both parties to engage on a neutral playing field. International arbitration offers this by providing for both the possibility of a neutral venue for the parties’ dispute (e.g., Switzerland in the case of a Korean-French dispute) and the possibility of a nationality-neutral decision-maker (e.g., in the case of a Korean- French dispute, the sole arbitrator or chairman of the three-member arbitral tribunal deciding the dispute will be of Swiss or another neutral nationality).

A second advantage is the quality of the decision-making. Obviously, there are many national judges who are excellent decision-makers, but not all are, especially when it comes to applying foreign laws or understanding the cultural differences that are sometimes key to the fair resolution of an international dispute. In comparison, there is an excellent cadre of sophisticated international arbitrators who decide international disputes full time. These international arbitrators have both substantial experience in resolving international disputes and substantial reputations to uphold by applying justice in an even-handed manner.

Third, international arbitration is a more private and confidential process than national court litigation. Depending on the terms of the arbitration agreement, the place of arbitration and the arbitral organisation selected, the general rule remains that parties must respect the confidentiality of the arbitrations in which they participate. In addition, arbitral institutions and tribunals will not themselves disclose to third parties any of the details concerning the arbitrations they handle, nor any of the documentation or other information exchanged in the course of an arbitration.

Fourth, international awards are final: they cannot be appealed or challenged except in very few and limited circumstances. This contrasts with national court litigation, where a first-instance judgment may turn out to be only the first course in a long banquet of litigation.

Finally, and perhaps most importantly, arbitral awards are in general much easier to enforce around the world than national court judgments. With the exception of the EU Judgments Regulation, which applies only to the enforcement of the judgments of one EU Member State in another Member State, there are few multinational treaties requiring the enforcement of court judgments. The 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), by contrast, allows for the enforcement of arbitral awards in no fewer than 147 countries, subject to only limited grounds for opposing enforcement.

The Importance of Including a Well-Drafted Escalation Clause

There have been numerous recent efforts to control the time and cost of arbitration by cutting down on delays by arbitral institutions, arbitrators and the parties themselves. Thus, for example, the new 2012 rules of the International Chamber of Commerce (ICC) require ICC arbitral tribunals to take a more proactive role in case management, and to inform not only the ICC, but also the parties, of the date they expect to submit their draft award to the ICC. In addition, it is now stated clearly in the ICC Rules that parties may be sanctioned in costs for failure to act “in an expeditious and cost-effective manner”.

Such streamlining of the arbitral process is to be commended, and should help to restore confidence in international arbitration. It does not change the fact, however, that the quickest way to resolve an international dispute is still to settle it amicably. Doing so allows the parties to avoid incurring legal costs and to devote management time to more productive endeavours. A settlement also, significantly, often results in the parties re-establishing vital commercial relations.

One effective way to increase the chances of settlement is to include in the underlying contract an “escalation clause”, i.e., a clause that requires the parties to go through some form of negotiation process before embarking on arbitration. Such a clause can be tailor-made to suit the circumstances, in some cases including negotiations between various levels of corporate officers and/ or non-binding mediation before a neutral third party before arbitration proceedings can be commenced. An example of such an escalation clause is the following:

The parties shall attempt to resolve any dispute arising out of or in connection with this Agreement (a “Dispute”) pursuant to the procedures specified below:

  1. Negotiation

When a Dispute arises, either party may give the other party written notice of the Dispute (a “Dispute Notice”). Within seven days after delivery of a Dispute Notice, the receiving party shall submit a written response. Thereafter, the executives who have authority to settle the controversy shall promptly confer in person or by telephone to attempt to resolve the Dispute.

  1. Mediation

If the Dispute has not been resolved by negotiation within 30 days of the delivery of the Dispute Notice, for whatever reason, the parties shall submit the Dispute to non-binding mediation under the [insert mediation rules] in effect on the date of this Agreement. The place of mediation shall be [city, country]. All negotiations and proceedings pursuant to paragraphs 1 and 2 shall be confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence and any additional confidentiality protections provided by applicable law.

  1. Arbitration

If the Dispute has not been resolved by mediation as provided herein within 60 days of the delivery of the Dispute Notice, for whatever reason, such Dispute shall be finally settled by arbitration under the Rules of Arbitration of [insert rest of arbitration clause].

The principal benefit of such an escalation clause is that it removes the firstmover reticence that can sometimes be an obstacle to entering into negotiations. Obviously, in some cases such pre-arbitral negotiations will lead nowhere, as the dispute may not yet be ripe for settlement. However, it can do little harm, and involve relatively limited costs, to hold such negotiations, which may result in an arbitration being averted altogether.

Importantly, such clauses need to make clear, as in the example given above, what event triggers the obligation to negotiate, exactly what obligations each party then has and—most importantly—exactly when the parties become free to commence arbitration proceedings if they cannot reach a settlement. Failure to include such specifics in the escalation clause can lead to lengthy correspondence about whether the obligation to negotiate has been complied with properly, and provide a contract-breaker with a way of delaying the enforcement of the contract.