Drafting International Arbitration Clauses

DRAFTING “INTERNATIONAL” ARBITRATION CLAUSES

Barry R. Fischer, Esq.

THE BARRY FISCHER LAW FIRM LLC

Arbitration of contractual disputes between parties from different countries has a significant advantage over litigating such disputes, regardless of which country’s courts would hear the dispute and regardless of whose laws and procedures would apply to the dispute.

Properly rendered arbitration awards are easily enforceable around the globe under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) of 1958. Judgments properly rendered by the courts of one country, however, are not easily enforceable in the courts of another country. There is not yet a treaty among nations on the recognition of judgments comparable to the New York Convention on the recognition of arbitration awards. Recognition of judgments is now a matter of comity and in the United States; it is determined under state law. Thus, counsel to parties to international contracts should strongly consider adding an “international” arbitration clause to any such agreement.

To create an effective mechanism for the resolution of contractual disputes between parties from different countries, the draftsperson of an “international” arbitration clause must address a number of issues that are more subtle and complex than the considerations attendant to the drafting of a “domestic” arbitration clause.

These issues include the following:

(1) Where is the arbitration to be held?

(2) Will institutional rules apply to the arbitration or will it be ad hoc?

(3) Whose laws will apply (a) to the conduct and procedure of the arbitration and (b) to the substantive questions raised in the arbitration?

(4) Is the country named to host the arbitration a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” of 1958)?

(5) Has the country named to host the arbitration adopted the UNCITRAL (“United Nations Commission on International Trade”) model arbitration law?

(6) The courts of what country will have jurisdiction to compel or enjoin the arbitration?

(7) What is the scope of the controversies subject to mandatory arbitration?

(8) Who resolves disputes as to whether all or part of a controversy is within that scope – the arbitrator(s) or the courts of the country where the arbitration is held?

(9) How many arbitrators will be needed and by what rules or procedures are they to be selected?

(10) Must the decision of a three-member arbitration panel be unanimous or just a simple majority?

(11) Are there needs for special provisions governing:

(a) mandatory pre-arbitration mediation;

(b) the type and scope of discovery;

(d) payment of attorneys’ fees;

(e) awarding of punitive damages;

(f) awarding of equitable relief;

(g) the need to designate the “prevailing party”;

(h) the need for a transcript of the arbitration proceedings;

(i) the need for a written arbitration award which explains the basis for the award;

(j) the language(s) in which the arbitration will be conducted and the language(s) in which the award will be written;

(12) Whose laws will apply to enforcement of any award, including:

(a) may the award be appealed to a court and, if so, to what court(s)?

(b) what is the scope of the review of any such court?

(13) In what countries and courts may the award be enforced;

(14) Will the New York Convention apply to enforcement of the award?

A brief discussion of some of these issues will illustrate why these are important considerations and why many are unique to the arbitration of “international” disputes and of relatively little importance in purely domestic arbitrations.

Where is the arbitration to be held?

It is axiomatic that each party to a bilateral contract will want the “home court” advantage and will strive to have the arbitration take place before an institutional body or ad hoc arbitrator in its home country. The obvious solution, present in most international contracts, is to pick a neutral site and body such as the International Court of Arbitration of the International Chamber of Commerce in Paris (“ICC”), the London Court of International Arbitration (the “LCIA”), or the American Arbitration Association (“AAA”) in New York or another US city, to name some of the most prominent. There are also regional institutions such as the Stockholm Chamber of Commerce, the Cairo Regional Centre for International Commercial Arbitration, the China International Economic and Trade Arbitration Commission, British Columbia International Commercial Arbitration Centre, Arbitral Centre of the Federal Economic Chambers, Vienna, International Centre for the Settlement of Investments Disputes, Regional Centre for Arbitration at Kuala Lumpur, Netherlands Arbitration Institutes and Zurich Chamber of Commerce.

In selecting the host country, one is almost invariably also selecting that country’s arbitration laws to govern the procedural aspects of the arbitration. The host country’s arbitration laws will also govern the judicial appeal or review process and questions related to finality.

At a minimum, the host country should be a signatory to the New York Convention and it should have adopted the UNCITRAL model arbitration law, the legal environment should not be unduly restrictive or meddlesome in the arbitration process, the location should not favor either party or inconvenience one more than the other, there should be a pool of available and experienced arbitrators of sufficient size so as to insure that acceptable neutrals will be found and if it is to be a long, paper intensive and complex arbitration, there should be facilities and services readily available for logistical support.

Will institutional rules apply to the arbitration or will it be ad hoc?

Each of the international arbitration institutions, such as the AAA, ICC or AAA has its own set of well-tested rules for the conduct of international arbitrations and there are substantial similarities among the group. These institutions charge fees to administer the arbitration and to host arbitration hearings at their facilities. These charges are in addition to the fees of the arbitrator(s). The administrative fees generally vary according to the amounts put in controversy by the claims or counterclaims.

The overriding advantage of using an institutional arbitration administrator is predictability. The rules are well-drafted and time-tested. The pool of arbitrators is usually deep and experienced and the facilities are generally first rate.

The disadvantages perceived by some include the high costs associated with institutional arbitration and the inability to customize the rules to fit the unique circumstances of the particular contract to which the arbitration clause is attached.

In ad hoc arbitration, the parties get to make up their own arbitration rules. They avoid the costs of the institutional administrator but if they cannot agree on procedures, there is trouble ahead. The need for procedures usually arises at the time of an actual dispute, when passions are running high and animosity between the parties is common – the worst possible time to negotiate procedures. Invariably one or both parties resort to their favorite local court or follow the mandates of a forum selection clause. In this scenario, the benefits of ad hoc arbitration are lost.

There is a third alternative, now gaining some popularity and that is partially ad hoc arbitration. Here the parties agree to choose an arbitrator ad hoc but without an institution and its attendant costs. They also agree to use the UNCITRAL rules, the CPR rules or another set of recognized rules to govern the course of the arbitration. In any form of ad hoc arbitration, it is best to state in the arbitration clause the name of the authority or institution that will appoint the arbitrators.

Whose laws will apply to the substance and procedure of the arbitration?

As a general rule, if left unstated, the arbitration laws of the host country will govern the conduct of the arbitration and the reviewability of any award in the courts of that country.

It could be dangerous, for obvious reasons, to specify that the arbitration laws one country would apply to an arbitration conducted in another country. There are benefits to clearly stating that the “arbitration laws of [host] country will apply exclusively to the conduct of the arbitration.”

Since October 2002, 132 countries have ratified the New York Convention. Among these countries are Brazil, Colombia, Egypt, Germany, Hong Kong, India, Mexico, Nigeria, Peru, Russia, Scotland, Singapore, Sri Lanka and the Ukraine. Thus there is great predictability as to procedure in agreeing that arbitrations be hosted in these countries.

Substantive law is another matter. It is essential to specify whose substantive law will govern the arbitrators in adjudicating the controversy. The substantive law need not be, and often is not, the law of the host or forum country. A shoe manufacturer in Brazil selling to an American chain headquartered in Providence, Rhode Island might well specify in their contracts that the AAA in either Boston or New York or ICC in Paris, or the AAA in London should be the host institution for any arbitration. It is likely, however, that they would pick the substantive law of either Brazil or Rhode Island to govern substantive legal questions arising in the course of the arbitration, as opposed to the substantive law of New York or of France or England.

What is the scope of the controversies subject to mandatory arbitration?

Most draftspersons are well aware as to how to make an arbitration clause inclusive and exclusive. “Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the ____ Rules, which Rules are deemed to be incorporated by reference into this clause.”

Experience has taught that the above standard language may not be enough. Who decides whether or not, in the very first instance, a particular dispute is subject to arbitration? In domestic arbitrations in the United States, the courts invariably decide whether to compel a reluctant party to arbitrate or to stop a party that has commenced arbitration from continuing. It is often not the same in the international arena.

It is very common in both Europe and the Middle East for the arbitrators and not the courts to determine whether or not a particular dispute is subject to arbitration as a part of the their overall adjudication of the arbitration claims. Foreign courts are very reluctant to interfere with arbitrators. A party who refuses to come to the arbitration table, even for the limited purpose of arguing that it does not belong there, does so at great peril, because the default award that will result is very enforceable under the New York Convention.

If the arbitration is to be held in a country where the courts defer arbitrability questions to the arbitrators on a regular basis, then, so as to remove any ambiguity, the draftsman might add the highlighted language to the standard clause, as follows: “Any dispute, including disputes as to the arbitrability of particular controversies, [or “excluding disputes as to the arbitrability of particular controversies,” if the intent is to specifically reserve such questions for the courts] and disputes arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the ____ Rules, which Rules are deemed to be incorporated by reference into this clause.”

Should the subject of discovery be addressed in the arbitration clause?

Today some domestic arbitration clauses address the subject of discovery. It is not uncommon to see language like: “…the arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, except that no pre-hearing discovery shall be permitted unless specifically authorized by the arbitration panel.” Is it wise to raise this subject in an international arbitration clause? It is best to check the rules under which the arbitration will be held, see what the discovery provisions provide and see if that is sufficient to meet the foreseeable needs of most dispute scenarios likely to arise under the particular contract. Furthermore, it is generally unwise to superimpose alien procedural rules upon the regular rules of an institutional administrator.

Should the arbitration award explain the basis for the award?

The trend in domestic arbitrations during the 80s and 90s was for arbitrators to make an award of a certain amount of money to a prevailing party and say nothing more. “John Smith is hereby awarded $76,351.12.” That’s it! The less said the better, was the reasoning. If a reviewing court, asked to confirm or enforce the award, has no idea how it was reached, it could be more difficult to set it aside. The exact opposite was the case in most international arbitrations where the norm was more lengthy, better-crafted opinions that reviewed both the evidence and the law and explained the reason for the decision. The trend in the United States has now changed a bit and short opinions, containing a review of the findings and law are becoming more common.