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The following article discusses session one in the IR Global Virtual Series on 'Staying Ahead of the Curve – Implementing Effective Arbitration Agreements'.
Arizona – (MH) The three main areas I initially look at when it comes to arbitration and arbitration clauses or even whether or not to include an arbitration clause in a contract are:
- What does the actual dispute involve, and what is the monetary amount?
- What is the area of law that needs to be addressed?
- Where are the parties based, that are involved with this arbitration issue or potential contract?
When it comes to the value of a dispute, my main focus is to examine whether or not the cost-benefit is present to use arbitration, in whatever forum or form it may be in. I've found through practical experience that we want to avoid arbitration for those types of disputes that simply don't have the right cost benefit.
I find arbitration is usually best for disputes of a higher monetary value. I will examine what is the financial exposure of the dispute and also, I look at the law that will be involved.
When it involves a simple contract dispute between two parties and the dispute doesn't really involve a lot of nuanced legal or factual issues, I'm less likely to advocate for an arbitration clause or the arbitration process. I think arbitration is better used in a situation when it involves legal or factual issues that have distinct and unique values associated with them. I see these as issues that a local court would not be able to effectively adjudicate.
For example, when I represent disputes and issues involving surety, I find that local courts often don't possess experience in this area of law. In fact, a specific judicial officer might be assigned a surety case just three or four times in his or her entire career. Those speciality areas of the law, such as a surety or intellectual property issues, are very unique areas that local courts will not really review on a regular basis.
In those circumstances, an attorney can often spend as much time, effort, and resources educating a court to get up to speed on a speciality matter, as would be saved if the parties could find an arbitrator who already possessed expertise in the required field.
The ability to utilise an arbitration system and find arbitrators such as judges, attorneys or other professionals that have encountered and addressed these issues on a consistent basis, is invaluable. It usually leads to a more effective arbitration and a more effective outcome for a client.
Arbitration is significantly more effective when you have parties spread across the country or across international border lines. it is in situations such as this where I think that an arbitration clause becomes the most effective tool for a client to utilise.
When a dispute involves either small clients or an issue that is not expensive, the ultimate goal is to consider what the arbitration clause in any written agreement says.
For smaller clients or smaller disputes, I usually advocate that the cost-benefit of an arbitration clause is not present. The client would often be spending more money, resources, and attorney fees on arbitration than they would have by adjudicating the dispute to a local court.
In these lower-value cases, I usually recommend a mediation clause, obligating the parties to conduct mandatory mediation prior to litigation. If there is an arbitration clause present in a contract that has been presented to a client, it can be valuable to communicate with the opposing side to see if the arbitration clause can be replaced with mandatory mediation instead.
Argentina – (AR) I would like to share with you my experience not only from an Argentine standpoint but also across Latin America.
As Matt has mentioned, the number one issue to be analysed is the nature of the dispute and the cost involved, because arbitration only makes sense under certain circumstances, particularly when you are going to be disputing complex issues of sizable value.
It is also useful when you are involved in international transactions because when you are negotiating a contract with somebody who is not residing in the country where your client is, they are often hesitant to submit jurisdiction to the courts of the place where your client is. If this is the case, a reasonable solution is to agree upon an alternative dispute resolution mechanism.
Arbitration is ideal in these instances because it offers the possibility of selecting a venue which is neutral to the parties and also permits guarantees of neutrality and independence in rendering the award.
Ordinarily, in domestic transactions, high-value disputes will resort to arbitration, because, to file a judicial litigation claim in Argentina, you need to pay a court fee. This is determined as a percentage of the amount of the claim, generally, at the rate of 3 per cent. If the claim is going to be sizable, the high cost may become a material difficulty or inconvenience for the plaintiff to invest a sizeable amount of money in order to start litigation.
Arbitration may resolve this issue, particularly because there are certain institutions in Argentina that have permanent panels, with relatively low administration costs, such as the Buenos Aires Stock Exchange Permanent Panel of Arbitrators. This is composed of attorneys with high reputation, (most of them) being retired judges, making arbitration much more palatable for the parties.
The other consideration to be taken into account is whether technical issues are going to be disputed. In the case of construction contracts, judges are not always well prepared to judge and resolve disputes involving very highly sophisticated technical issues, even though the court would select expert witnesses to assist them.
As far as smaller clients are concerned, if the parties involved do not have relatively sizable amounts of money in dispute, it really doesn't make sense to go into the details and expense of selecting and putting in place an arbitration procedure.
One of the particularities of Latin America is a common culture and language across the whole continent that permits the selection of venues in other countries, as well as recognised arbitrators that have sufficient legal background. This is because all the countries in Latin America have their legal systems sourced in the civil law system, which offers counterparts the benefit of a broad spectrum of potential arbitrators with sufficient legal background to understand conflicts.
The applicable law has most of the same common basic principles, with the advantage being that arbitrators who do not practice in the jurisdictions where the parties in conflict reside or operate, provide a higher percentage of neutrality. The parties also feel comfortable that the culture under which the issue at stake will be resolved is acceptable and understandable.
On July 26, 2018, Argentina passed its General International Commercial Arbitration Law, mostly inspired by the UNCITRAL model law, making Argentina an attractive venue for international arbitration. Argentina is also a member to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 1958 (New York Convention) which ensures such awards are recognised, and generally capable, of enforcement in the jurisdictions of those member countries in the same way as domestic awards.
Turks and Caicos Islands – (SW) The Arbitration Ordinance of the Turks and Caicos Islands is about as sparse in its provisions as the Arbitration Act 1889 in England & Wales. We are not even a signatory to the New York Convention. So, as things currently stand, I would not be recommending that any client make the Turks and Caicos Islands the seat of arbitration.
That is not to say that we don't have arbitrations in the Turks and Caicos Islands. I've been involved in a number of domestic arbitrations in the Turks and Caicos Islands as well as international arbitrations elsewhere. My firm is the largest and oldest firm in the Bahamas. I've appeared in a number of international arbitrations in the Bahamas.
One of the most recent cases that I've been dealing with raises all the issues that the other gentlemen have raised. Last year, the Turks and Caicos Islands, in common with a large part of the Caribbean, was hit by two major hurricanes, one of which was the strongest Atlantic hurricane on record. There have been a number of insurance claims as a result of this and a client of mine recently came to me with an insurance claim arising out of a very poorly drafted insurance policy, which contained an arbitration clause.
There are very few trained arbitrators practising in the Turks and Caicos Islands and finding any that are neutral is almost impossible, because they're all generally lawyers attached to firms who are acting for the respective parties. Although the arbitration agreement in this particular case provided for party-appointed arbitrators, there was still a need to get a neutral umpire.
The costs of bringing people in from overseas and housing them in one of the most expensive jurisdictions for hotel accommodation was such that when compared with the costs of litigating the matter, the cost-benefit analysis pointed towards the court. Unbelievably, the insurance company agreed to waive the arbitration clause and to deal with the matter by litigation instead, even though the amount at stake was up to five million dollars.
As part of the cost-benefit analysis, we had to seriously consider whether our Chief Justice (who hears the majority of civil and commercial claims) is somebody we felt confident was able to deal with a case that was going to involve construction and insurance issues. We decided that she was. As others have said, arbitration can have major advantages in disputes involving complicated or technical specialist issues. If the cost-benefit analysis had been slightly different, the preference would have been to use qualified and experienced construction and insurance arbitrators from overseas.
The Dominican Republic – (PGT) We don’t have many options in the Dominican Republic, but we did pass a law in 2008 adopting commercial arbitration.
We always usually go to institutional arbitration using Chamber of Commerce Arbitration Forums. In the Dominican Republic, every province has a chamber of commerce but only a few have established an alternative dispute resolution centre with significant powers of alternate dispute resolution. The centres can administer arbitration and enforce awards.
We only have five centres in the Dominican Republic operating right now. The capital city of Santo Domingo is where most business is done and is the centre that receives the most arbitration throughout the year. After Santo Domingo, I would say that the next most elected arbitration centre would be Santiago, while the remaining three would be selected on a very limited basis.
The centres charge a percentage of the amount in dispute, and the percentage can go from almost 1 per cent of the amount to 0.01 per cent, depending on the size of the dispute. If there is no amount involved, then the board of the centre will establish the arbitration fees and administrative costs.
We've been pushing for the centres to expedite cases, in terms of rendering awards, because that's what takes the most time. Once the award is rendered, the centre reviews it and takes time to make sure that the award conforms with the legislation and rules of the Dominican courts, to avoid challenges to the awards.
The centre sends both parties a list of arbitrators, and if you don't agree on the arbitrator, they pick the arbitrators for you. Once the arbitrator is appointed, a meeting with the parties is arranged for them to discuss the scope of the arbitration and the issues that will be decided within the Mission Act. Once the Mission Act is decided, they don't allow you to include anything outside its scope, unless both parties agree.
Austria – (KO) Very often, you do not get to choose the forum because there is usually one party commanding the provisions. If the dispute is more equal and balanced between the parties, there can be a real negotiation about the forum. Typically, in such a case, both parties agree that it should be on neutral ground.
It's important to consider the possible legal consequences of choosing the place of arbitration. The main issue is to consider the procedural laws applicable at the seat of the arbitration. Typically, they are incorporated in the respective civil procedural code.
There are usually various sections on arbitration proceedings, and some jurisdictions have separate laws, dealing only with the procedural aspects of arbitration. That's very important to distinguish.
There is the applicable statutory law on one hand and also the procedural ramifications around how to carry out the arbitration proceedings, which must be distinguished from the applicable institutional rules.
Most major arbitrations are administrated by institutions, such as International Chamber of Commerce (ICC), American Arbitration Association (AAA), London Court of International Arbitration (LCIA), Vienna International Arbitration Centre (VIAC) etc. The combination of procedural law at the place of arbitration and the applicable institutional rules, constitute the regulations to which the parties have to adhere.
When it comes to choosing the Forum, I tend to look into the local arbitration law (lex arbitri) first, to check whether or not the UNCITRAL model law as adopted by the UN commission in the 1980s is incorporated. Many countries now use that template to be the basis for their arbitration procedural rules.
It's not binding, so the individual states need to adopt this model law, and many jurisdictions have done so. This gives some security to international counsel, since issues such as the choice of arbitrators, what constitutes a tribunal, or even how to draft the award and what needs to be the minimum content of the award are governed by UNCITRAL model law.
Enforcement of awards is a different story though because here you look into the particular civil procedural and enforcement laws of the place you are going to enforce the award in. The place of arbitration has no impact on whether or not the award can be enforced – with one exception.
If the award itself goes against the rules of arbitration law in the place of arbitration, then you can raise that at the enforcement level as well.
In summary, you should diligently look into the procedural rules at the place of arbitration, because it might influence a range of decisions, such as selection of arbitrators, the content of the award, or document production, i.e. whether or not counsel get to prepare the witness or are prohibited to do so.
Germany – (FW) I have one point to add to that summary from Klaus, concerning his point that the seat of arbitration has no consequence for enforcement.
One aspect to consider is the New York Convention. It could be helpful to seek a seat of arbitration in a country which is a member of the New York convention because it is then much easier to get an award enforced in another member state. In most cases, this is a given because a majority of relevant states are part of the New York Convention, but it could be a consideration.
U.S., Florida – Gary Davidson (GD) Arbitration is a creature of contract and typically arises based upon contractual arrangements between parties. The parties to a dispute are always free post-contract (if no clause is present) to agree to arbitration, but generally speaking, 99.9 per cent of the time, arbitration clauses emerge from an existing contract.
In the international community, arbitration is typically the preferred method of alternative dispute resolution (ADR) and there are a number of different factors that go into that.
The clients typically drive the selection of the forum. This is influenced by where they are based, what ADR they have experienced in the past, and whether they have a particular preference for arbitration or litigation.
The first thing is to get both parties to agree to arbitration. Once that is done, the question among the lawyers becomes where and under what jurisdiction.
It’s important to arbitrate in a country that is a member of the New York Convention, for purposes of enforcement. You also want to be in a forum where the rules are neutral and do not favour the other side.
Another consideration is where you are most likely to draw arbitrators from and how willing they are to travel to the country chosen. Let’s say you have a contract between a European entity and an Asian one. A few Asian countries are known for unstable courts, political unrest, violence and security issues. That’s a red flag for arbitrators with concerns about personal safety and a different setting might be considered.
The other part of the equation is that the law of the country chosen is going to drive the rules of procedure for arbitration (with some exceptions). For example, if you came to Florida, you could proceed in two different ways. You could agree that US federal law will apply to procedural issues, but Florida also has its own act that regulates international arbitration, so you have the option to use state law rather than federal law, under appropriate circumstances.
With regard to which institution to arbitrate with, the cost is always part of the discussion. The International Chamber of Commerce’s Court of Arbitration (ICC) is a favourite of international clients but is extraordinarily expensive compared to other entities. The process of choosing arbitrators needs to be built into the contract and addressed with the clients when they sign the contract, otherwise, it will default to the procedures of the arbitral institution.
One thing to say is that transactional lawyers often do a poor job of educating their clients on the importance of the arbitration clause, specific to a particular transaction. There is no cookie cutter that fits all situations and you shouldn’t borrow language from a previous deal. Transactional lawyers often see ADR as the last thing to be decided upon by the parties. This is they should be turning to their ADR colleagues inside or outside their firm for a consultation.
Switzerland – (PR) The selection by the parties of the place in which their international commercial arbitration is to take place will have a fundamental impact on the determination of those rights. The place of the arbitration is the legal location of the proceeding, which determines the legal setting, and the legislative and judicial framework, for the arbitration.
I highly value the ability to be able to choose the arbitrator over having a judge imposed by the court. I also prefer to conduct the proceedings myself; in case of any issues, I appreciate if there is a supervising authority to get the procedure done or moved forward.
The parties’ choice of forum for the arbitration may also inform the determination of the substantive law, sometimes called the ‘proper law’, that governs the contract.
Hong Kong – (EW) The following factors would influence my choice of arbitration forum.
Firstly, whether the arbitral awards made in that arbitration forum can be recognised and enforced in other countries (in particular, New York Convention countries), secondly, the convenience with which the parties can arbitrate in that forum.
Then there is also the availability of professional arbitrators in that arbitration forum to consider and also whether the courts of that arbitration forum offer protective or interim measures in aid of arbitration proceedings.
Italy – (RRS) Arbitration is the expression of agreement amongst parties. Counsel shall involve the parties in making the decision whether to choose state courts, use an arbitration clause or opt for other alternative dispute resolution mechanisms.
When it comes to arbitration there is no one sole solution. Ad-hoc arbitration versus administered arbitration, or different arbitral institutions with very different rules and solutions regarding rendering awards, cost of the proceedings, taking evidence, administrative support, confidentiality and so on.
While domestic disputes are subject to specific requirements and needs, depending on local provisions (for instance the length of court proceedings), international disputes are approached differently. The main focus is to obtain a neutral tribunal. Often the parties have the fear that a state judge may be inclined to help the local party; which in many jurisdictions, Italy included, may indeed happen. This is particularly true when it comes to Italian public or important private entities.
In the event of arbitration, state courts play a role in support of arbitration (depending on the seat of arbitration and therefore the related jurisdiction). Judges may be invited to compel witnesses, order interlocutory injunctions, appoint/dismiss arbitrators, order document production and so on.
This is even more relevant when it comes to challenging an award. In certain countries, it is possible to provide for appellate arbitral proceedings, as it is in the European Court of Arbitration www.cour-europe-arbitrage.org. At the same time, it is important to understand the scope of the challenge of the award for nullity before state courts.
In arbitrations with their seat in Italy, it is essential to add in the arbitration agreement that the award be subject to a review for breach of rules of law in order not to be prevented afterwards.
The choice of the seat is therefore very important and requires understanding and deep experience of arbitration law.
In my experience, the value at stake is a driver to enable parties to choose the correct institution. There are fast tracks arbitrations (AAA), expedited rules (ICC), or costs and time effective administered proceeding (European Court of Arbitration).
What counts in our view is that the parties be aware of the different options available and give the right importance to such a choice.
The dispute resolution clause should not be a last-minute choice (not by chance often called midnight clause). A wrong choice of dispute resolution mechanism may lead to denial of justice (for instance the choice of an institution that requires significant advance payment, that the submitting party cannot afford) or to very expensive proceedings that the parties would have never chosen, if aware from the beginning.
If the party leaves it to counsel to make such a decision, the latter must have experience in the field and must know the needs and expectations of the client.
CONTRIBUTORS
Ruggero Rubino Sammartano (RRS) LawFed BRSA – Italy www.irglobal.com/advisor/ruggero-rubino-sammartano
Stephen Wilson, QC (SW) Graham Thompson – Turks & Caicos Islands www.irglobal.com/advisor/stephen-wilson-qc
Dr. Klaus Oblin (KO) OBLIN Rechtsanwälte GmbH – Austria www.irglobal.com/advisor/dr-klaus-oblin
Gary E Davidson (GD) Diaz Reus – U.S. – Florida www.irglobal.com/advisor/gary-e-davidson
Peter Ruggle (PR) Ruggle Partner – Switzerland www.irglobal.com/advisor/peter-ruggle-switzerland
Matthew Harrison (MH) Harrison Law, PLLC – U.S. – Arizona www.irglobal.com/advisor/matthew-harrison
Eric Woo (EW) ONC Lawyers – Hong Kong www.onc.hk/en_US/eric-woo
Dr. Alfredo L. Rovira (AR) Estudio ROVIRA – Argentina www.irglobal.com/advisor/dr-alfredo-l-rovira
Pablo González Tapia (PGT) González Tapia Abogados– Dominican Republic www.irglobal.com/advisor/pablo-gonzalez-tapia
Florian Wettner (FW) METIS Rechtsanwälte LLP – Germany www.irglobal.com/advisor/florian-wettner