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Providing for Dispute Settlement in International Business Transactions excerpted from information current as of mid '94
I. USE OF ARBITRATION IN INTERNATIONAL DISPUTES
A. Advantages of Arbitration over Litigation
1. Enforceability of Arbitral Awards
a. More than 70 countries recognize and enforce foreign awards as parties to New York Convention (see Sec. V).
b. Awards can be attacked only under very limited circumstances.
2. Impartiality of Decision Maker. Neither party may be able to find neutral tribunal in other country.
3. Confidentiality. Arbitrations and awards are normally private; court proceedings and judgments are public.
4. Technical Expertise. Parties may choose arbitrators with technical backgrounds.
5. Discovery. Limited discovery in arbitration, so less burdensome.
6. Expense. Usually less expensive than litigation.
7. Expeditious Resolution.
8. Familiarity. Party is often unfamiliar with foreign legal system.
B. Kinds of Disputes Subject to Arbitration
1. Commercial disputes between private parties of different countries.
2. Investor disputes with host government
a. Because of uncertainty of adequate relief in foreign courts, agreement to arbitrate in a forum where enforcement of award is assured may be essential.
b. Contracts between investors and foreign states can be "internationalized" by agreement to arbitrate and be bound by contract provisions. "Internationalization" implies that rights and duties of parties cannot be legally affected by unilateral action of host state.
II. MECHANISMS FOR ARBITRATION
A. Ad hoc Arbitration
1. Parties specify in agreement all aspects of arbitration, including applicable law, rules under which arbitration will be carried out, method for selecting arbitrator, language, place of arbitration and arbitrable issues.
2. Rules of arbitration institution may be used without submitting to administration by that institution.
3. Parties may select ad hoc arbitration to reduce costs, to accelerate arbitration and to structure proceedings to suit needs.
B. Institutional Arbitration
1. Parties specify in agreement an arbitration institution to administer the arbitration from time of demand for arbitration through award.
2. Institution chosen may administer arbitration according to its own rules or rules of another institution.
a. Availability of pre-established rules;
b. Administrative assistance if institution has secretariat or court of arbitration;
c. Appointment of arbitrators;
d. Physical facilities for arbitrations and support services;
e. Review of final award to assure it meets basic requirements for enforcement; and
f. Assistance in encouraging reluctant parties to proceed with arbitration.
4. Primary disadvantages are costs (in addition to legal fees) and delays:
a. Administrative fees for services and facilities of institution and arbitrator's services;
b. Expenses may be high in disputes over large amounts, especially if fees are related to amount in dispute;
c. Institution's bureaucracy may promote delays costs; and d. Responses by parties may be required in very short time period.
C. Selection of Rules to Be Applied
1. Options. Unless an arbitral institution is selected to administer the arbitration under its rules, parties must develop their own rules or select rules of specific arbitral institution; such as:
a. Arbitration Rules of the United Nations Commission on international trade Law (UNCITRAL) (1976), which are widely accepted, "off the shelf" rules designed to be used in ad hoc arbitrations; they are not related to an arbitral institution;
b. International Center for Settlement of Investment Disputes (ICSID) Rules cover only state/investor disputes (see Sec. IV);
c. Rules of International Chamber of Commerce (ICC);
d. Rules of American Arbitration Association (AAA).
e. Rules of Inter-American Commercial Arbitration Commission (IACAC) (adapted from the UNCITRAL Rules); and
2. Factors to Consider in Selection of Rules
a. Selection of arbitral site if not specified;
b. Costs including allocation;
c. Selection of arbitrators;
d. Powers of arbitrator;
e. Language of proceeding;
f. Substantive law to be applied;
g. Use of experts;
h. Time allowed to arbitrators to make awards;
i. Power of administering authority over awards; and
j. Availability of provisional relief.
II. ARBITRATION INSTITUTIONS
A. The International Chamber of Commerce (ICC) Court of Arbitration
1. Does not settle the dispute; supervises system of separately constituted tribunals comprised of 1 or 3 arbitrators selected by parties or ICC.
2. Acts as clearinghouse for filing of all pleadings; fixes costs and fees; decides challenges to appointment of arbitrators; approves draft arbitral awards.
3. Will not administer arbitration except under its own rules.
B. International Center for Settlement of Investment Disputes (ICSID) (See Sect. IV)
C. American Arbitration Association (AAA) performs arbitration services for international disputes under any rules chosen by the parties, in particular under AAA's Supplementary Procedures for International Disputes, AAA's International Arbitration Rules or UNCITRAL Rules.
D. The Inter-American Commercial Arbitration Commission (IACAC)
1. Except for designating "appointing authority" for arbitrators, IACAC Rules of Proc. are virtually identical to UNCITRAL Rules.
2. Award binds parties only to extent that they have agreed to be bound by the private contract that commits them to arbitration.
E. The Arbitration Institute of the Stockholm Chamber of Commerce has functioned as an international arbitration institution since 1976, particularly in contracts dealing with East-West trade.
F. The London Court of International Arbitration
1. Jointly controlled by City of London, London Chamber of
Commerce and Industry, and Chartered Institute of Arbitrators.
2. Oldest and growing center for international arbitration.
3. Fees are modest.
4. 1985 revised rules enhance party autonomy and reflect changes
in English law to promote non-interference in arbitration
proceeding by the courts.
III. DRAFTING THE ARBITRATION AGREEMENT
A. Importance. May be best way to ensure successful arbitration as it provides opportunity for parties to design mechanism to meet their needs, and to express their intent.
B. Elements of Arbitration Agreement
1. Scope of Arbitration
a. Arbitration clause should be as broad as possible, but it
cannot cover matters not capable of being submitted to
b. Jurisdiction in international arbitration is based
exclusively upon consent of parties (unlike personal and
subject matter jurisdiction required in U.S. courts).
2. Choice of Arbitrator
a. If institutional rules are used that provide for selection of
arbitrators, no further reference to selection is necessary,
except in compelling circumstances. Without such rules,
agreement must be clear on selection method.
b. Panel of 3 arbitrators is standard for international
commercial arbitrations; each party appoints one and parties
or arbitrators select a third, with an appointing authority
designating missing member.
c. Sole arbitrator may be preferable where large amount of money
is not involved and parties have long-standing relationship.
d. Must specify selection process, or statutes and rules will
fill gap if parties do not act or cannot agree.
e. If arbitrator must have a special skill, it should be
specified in arbitration agreement.
3. Choice of Law
a. Parties should designate a substantive law.
b. Primary question is whether and to what extent any national
arbitration law should be applied. Generally, neither party
will find law of other totally acceptable.
c. Another question is whether parties should also select a
procedural law. If they do not, law of the forum will apply.
d. Parties should specifically authorize arbitrator to decide
disputes in accordance with general principles of international
law relating to international trade or investment or customary
rules of equity and commerce.
e. Absent express choice of applicable law, place for arbitration
4. Choice of Location
a. Choice of place of arbitration is related to selection of
arbitration institution. Major arbitration institutions (ICC, AAA, London Court, Stockholm Chamber) have established their rules within procedural framework of country in which have their headquarters.
b. Country selected should be signatory to international arbitration convention.
c. Absent express choice by the parties, place of arbitration
determines the procedural law of the arbitration.
d. There may be mandatory legal requirements governing
arbitration that cannot be waived, or limits on types of matters capable
of being arbitrated or powers of arbitrator.
e. Determines extent of potential interference by local courts
during arbitral proceeding; may affect enforcement of award.
f. Aside from legal aspects involved in choice of place, must
consider practical features, such as facilities, communications and
transportation systems, freedom of movement of persons, documents and
currency, and support services.
g. Absent agreement by parties, place under UNCITRAL Rules will
be fixed by arbitral tribunal, and under ICC by Court of Arbitration;
ICSID usually holds arbitrations in Washington, D.C.
h. Should include name of both city and country.
5. Choice of Language. Parties may designate one language as the official language and allow option of simultaneous interpretation of other language.
6. Choice of Rules. Must either refer to specific institutional
rules or include the following in ad hoc rules:
a. Procedure to initiate arbitral proceedings;
b. Means for dealing with refusal of one party to proceed after other has invoked arbitration procedure;
c. Scope and limitation of discovery;
d. Outline of hearing procedures including notice and form of award (whether must be written with reasons); and
e. Procedures for enforcement of award.
7. Costs. Provision for allocation.
8. Award of Tribunal
a. Specify in agreement that majority of arbitrators must agree on award; it must be based on applicable law, be final and binding. Currency of payment of award should also be specified.
b. If award is to be recognized and enforced internationally, it should state reasons with legal basis, including reference to process by which that legal basis was selected.
9. Award Enforcement Provision
C. Use of Model Clauses 1. A model clause may be used in highly standardized contracts; but, in complex international transactions, arbitral provision should be tailored to contract.
2. Where a State is a party, arbitration should include a
commitment by the State to resolve disputes through arbitration and
agreement that arbitration clause is an explicit waiver of immunity
against enforcement and execution of the award or any judgment thereon
and that the award or judgment, if unsatisfied, is enforceable against
the State in courts of any nation in accordance with its laws.
a. This clause prevents a State party from trying to block enforcement of an award by invoking sovereign immunity. (If ICSID is arbitral forum, this clause is unnecessary.)
b. Arbitration clause should be sufficiently broad and clear to include issues of nationalization, expropriation and unilateral abrogation of "stabilization clauses" (tax rates, customs exemptions, currency convertibility, remittances and repatriation of capital).
3. UNCITRAL Arbitration Rules model arbitral clause:
"Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force.
Note -- Parties may wish to consider adding: (a) The appointing authority shall be . . . (name of institution or person); (b) The number of arbitrators shall be . . . (one or three); (c) The place of arbitration shall be . . . (town or country); (d) The language(s) to be used in the arbitral proceedings shall be . . . ."
4. ICC Arbitration Rules model arbitral clause:
"All disputes arising in connection with the present contract shall be finally settled under the Rules of [Conciliation and] Arbitration at the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules." Parties should also designate the place of arbitration in the clause, otherwise, the ICC will choose.
IV. ENFORCEMENT OF ARBITRAL AWARDS
A. Significance of Enforcement Issue. Effectiveness of arbitration in providing final and binding resolution of international commercial disputes depends upon legal framework for court enforcement if a party defaults.
B. Conventions for Enforcement of Arbitral Awards
1. United Nations Convention on the Recognition and Enforcement of
Foreign Arbitral Awards (New York Convention), June 10, 1958, entered
into force in U.S. in 1970. See Federal Arbitration Act, 9 U.S.C.
a. Convention provides legal basis for most international
arbitration today; 89 signatories.
b. Convention covers awards "foreign" or "non- domestic".
"Foreign awards" are those rendered outside enforcement forum. "Non-
domestic awards" may be rendered locally, but are covered by the
Convention because they involve foreign transactions and/or parties.
c. When U.S. ratified Convention, it incorporated two optional
reservations: it limits Convention to matters considered commercial under
U.S. law; and it will apply Convention on basis of reciprocity, which it
determines by reference to sitE of arbitration, not nationality of parties.
d. Convention treats as foreign awards (in addition to those made
in other states) results of proceedings governed by a procedural law
different from the law of the State requested to recognize award.
2. Inter-American Convention on International Commercial Arbitration
(Panama Convention), Jan. 30, 1976 (ratified by U.S. on Sept. 27, 1990).
C. Numerous bilateral treaties of Friendship, Commerce and Navigation
(FCN Treaties) contain clauses permitting enforcement of arbitrations
conducted abroad (which may be used if a country is not party to a
1. Represented first attempt by U.S. to govern international arbitration.
2. Limited use for parties in U.S. because there is no specific implementing law that confers jurisdiction independent of the contract itself.
D. ICC and UNCITRAL do not have own enforcement mechanisms, but an award rendered under those regimes in any State that's party to the New York Convention may be enforced in the municipal courts of any other State that is a party to the Convention.
E. ICSID Convention has own enforcement mechanism. An administrative "appeal" may be made to ICSID Secretary- General for an annulment of award on any of 5 grounds. Awards cannot be challenged outside of ICSID.
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