International Arbitration: The Fundamentals

Arbitration is supposed to be a simple, user-friendly process. In fact, if an arbitration is well designed and competently handled, the process can indeed provide the benefits that its proponents claim for it: proceedings that are simpler, quicker and less costly than litigation; that are fair; and that produce final and enforceable decisions. There are pitfalls, however. Particularly in an international context, the rules and procedures that apply to a given arbitration may be complex. If these rules and procedures are not well understood, and if the arbitrations are not well designed, the process can be a difficult one.

This paper outlines the basic nuts and bolts of international arbitration, and the framework of laws, treaties and rules within which international arbitrations occur.

The Arbitration Process

Arbitration is often categorized as a kind of Alternative Dispute Resolution process. In a broad sense, it is just that -- an alternative to the resolution of disputes in the courts. There is a fundamental difference, however, between arbitration and other forms of ADR. ADR procedures such as mediation, mini-trials, neutral evaluation or fact-finding and the like are intended to facilitate negotiations between disputing parties. They are designed to settle disputes by bringing the parties into agreement, generally through the intermediation of a neutral.

Arbitration has a different function. Arbitration resolves disputes when the parties cannot agree. Like litigation, it is a tiebreaker, to be used if, and only if, the parties cannot settle their differences by agreement.

Arbitration is increasingly the dispute resolution mechanism of choice in international transactions. Parties to trans-border contracts choose arbitration in part because of the inherent advantages of the arbitration process, and in part because each party wishes to avoid the risk of having to litigate in the other party's courts. Most contracts drafted today to govern international transactions contain clauses providing for the arbitration of disputes in a neutral forum.

A regrettable, but perhaps unavoidable, consequence of this increased reliance on arbitration to resolve major international commercial disputes is an increasing "judicialization" of the process. The current trend is away from the original model of arbitration as an informal means for the resolution of merchants' disputes by merchants, and toward proceedings that adopt many aspects of court litigation. There are pleadings, discovery (but generally less of it than in litigation), written evidence, hearings (less formal than judicial hearings, and with relaxed rules of evidence), examination of witnesses (generally cross-examination as well), and, at the end, a written, reasoned award that looks much like a judicial opinion.

The product of an arbitration is intended to be a final, judicially enforceable decision. Generally speaking, arbitrations yield this result. An arbitral award is less susceptible to being overturned on judicial review than a court judgment, and is often more easily enforceable outside the country where it was rendered.

THE FRAMEWORK

International arbitration takes place within a six-part legal framework.

The Arbitration Agreement

Under most, if not all, relevant laws, the agreement to arbitrate must be in writing. Recognizing that the agreement of the parties to arbitrate is an essential element, and the first element, of any arbitration, whether local or international, we can state a first rule of arbitration:

Rule 1. All Arbitration Is Consensual.

The rule is so obvious that perhaps it doesn't need stating. Not so obvious, however -- but of fundamental importance to parties and their counsel who contemplate the design of dispute resolution procedures -- are two corollaries to the rule:

Corollary To Rule 1.

The parties and their counsel can, and very definitely should, design arbitration procedures that are expeditious and appropriate to the circumstances.

Arbitration, particularly international arbitration, is "designer justice." Care must be taken in the design. Arbitration procedures should be designed when the parties are making the contract that may prove later to be the subject of dispute, and should be incorporated in an arbitration clause in the contract. It is much more difficult after a dispute has arisen for parties to agree to arbitration and to the terms of an arbitration clause. At that point, one party or the other may find it tactically advantageous not to agree to participate in effective and efficient dispute resolution proceedings.

Second Corollary To Rule 1.

If the parties do not agree to arbitration, they have elected to leave the resolution of any disputes that arise (if they cannot settle them by agreement) to litigation.

The parties may, of course, agree that disputes that cannot be settled by agreement will be settled by...