International Business Disputes: Should My Company Use International Arbitration?

Many companies sign contracts giving little thought to dispute resolution issues. That can be a big mistake, particularly in transactions with foreign parties.

Business people want to focus on deal-making not dispute resolution. Those who do think about the deal going bad often expect that their local court can resolve the dispute. But cross-border business transactions present unique challenges. Relying on your local court – or even worse a foreign court – can lead to many problems. International arbitration often provides a better solution.

Why do cross-border business contracts require special consideration? Unlike domestic contracts, cross-border contracts are always subject to the laws of multiple countries. A contract which involves foreign companies or manufacturing or distribution outside your country gives rise to complicated legal issues regarding the applicable law governing the contract, the country or countries with court jurisdiction to resolve the dispute, the law governing the resolution of the dispute and the enforceability of any court judgment.

Some of these issues can be efficiently resolved by careful drafting of the contract. Typically, all of these issues can be efficiently addressed if international arbitration procedures are selected for dispute resolution when the contract is drafted.

It is smart to include international arbitration provisions in an international contract at the time the deal is made. Even if international arbitration is afterthought to the contract, agreeing to international arbitration to resolve an existing international dispute increases the likelihood of efficient, reliable and cost effective dispute resolution.

Relying on a local court to protect your company in an international transaction can be futile. More often than not, there is no way to enforce a local court monetary judgment or injunction against a foreign party. Relying on a foreign court to protect your company is usually foolhardy. In a foreign court, you face the disadvantage of being subjected to foreign legal procedures, foreign customs, foreign language, prejudice and corruption. Turning to the courts, locally or abroad, means taking a risk with a judge (or a jury) probably unfamiliar with your business and almost certainly unfamiliar with the foreign law issues presented in your dispute.

International arbitration solves many of these problems. International arbitration offers a fair proceeding for both sides, with the expectation of doing so in a cost-efficient and effective manner. The parties can select the arbitrators, the hearing site and the governing procedures before the dispute arises. For example, the parties can agree on an arbitration held at a convenient location outside the U.S. to be governed by U.S. substantive law. The parties can decide who will resolve the dispute for them, ensuring that the arbitrators are fair and knowledgeable. Significantly, once the arbitrators’ decision on the dispute is made, that decision can be readily enforced. Thanks to existing international treaties, international arbitration awards are enforceable nearly world-wide.

International arbitration provides the parties with the ability to select a decision maker trained in a particular industry or technology. This streamlines the process on its own and may reduce the need for retaining costly expert witnesses. Also, arbitration allows for greater confidentiality protections than many U.S. or foreign courts provide. Confidentiality protections are often welcome in what would otherwise be high profile court cases and such protections are often critical when confidential business strategies are the focus of the dispute.

Another advantage of arbitration in the international business context is that the dispute can be resolved by a single tribunal. There is no multinational treaty for the enforcement of foreign court judgments and relying on the courts of various jurisdictions to enforce a foreign court judgment is an expensive process with great risk of ineffective or, worse, inconsistent outcomes. Although foreign arbitral awards, like foreign judgments, require judicial recognition by a court to be enforceable, an effective international treaty mechanism exists for enforcement of international arbitral awards. Moreover, arbitration allows multi-jurisdictional disputes to be resolved without requiring the courts of any number of countries to revisit the merits of the dispute.

International arbitration is different from domestic arbitration and other alternative dispute resolution (“ADR”) procedures. In deciding whether to include an international arbitration provision in a contract and in drafting the provision, considerable care must be given to the selection of the arbitration site and where enforcement might be sought. This is especially critical in transactions where the other side does not have assets located around the world making enforcement an issue.

Experienced international arbitration counsel can advise on whether particular contracts should include arbitration clauses, the best place for the arbitration to be held and the best arbitration rules to utilize based upon the type of transaction, the nationality and business operations of the parties, the law selected to govern the contract, the laws of the countries which are potential arbitration sites and the laws of the countries where the award may need to be enforced. Choosing the right arbitral institution to administer the arbitration, choosing the right arbitrator(s) and careful selection of the appropriate procedures for the arbitration can have a significant impact on the cost, timing and outcome of the arbitration.

Experienced drafters of arbitration clauses do not select a particular country as a hearing site just because it has convenient flight connections, good weather, nice golf courses or good shopping. Rather they look to sites that have favorable procedural laws and treaty protections.

Likewise experienced drafters of arbitration clauses know that the selection of the right arbitration rules can be critical. They know the reputation and quality of arbitration providers. Many countries have formed local arbitral institutions which often fail to provide fair hearings to foreign parties. Accordingly, arbitrarily agreeing to the wrong set of arbitration rules can lead to disaster.

Often much of the legal work required in an international arbitration is not done in the country selected as the hearing site. Rather, it is handled by international arbitration lawyers with knowledge of the law governing the contract, which is typically the law of the country where one of the parties is based or the law of a major trading nation. Most international arbitration lawyers practice globally and rely on local lawyers to handle any necessary related court proceedings for them.

It is important for companies doing international business to be guided by legal counsel knowledgeable on international business law and international dispute resolution issues. Given the specialized nature of the international dispute resolution practice, when a dispute arises on an international contract with an arbitration clause, a lawyer with international commercial arbitration experience should be consulted. Likewise, it is critical to select arbitrators who will be fair, understand your industry, and have a solid grasp of international arbitration practice and law.