Leverage Points in International Arbitration
Author: James W. Morando and Nan E. Joesten
May 01, 2005
Published in IP Litigator
May/June 2005; Vol. 11, No. 3
The general advantages and trade-offs of selecting arbitration rather than litigation as the vehicle for dispute resolution are fairly well known. The benefits most clients find in arbitration are that it can provide a more expedient, cost-effective, definitive, binding and simplified approach for dispute resolution. The fact that the grounds for appealing arbitration decisions are limited means that final resolution of the dispute generally comes much quicker, albeit at the risk of receiving a potentially erroneous decision with limited options for review on appeal.
Arbitration awards are not subject to meaningful judicial review for errors of law. Aside from the most exceptional circumstances involving corruption or other gross misconduct, courts generally must confirm awards by arbitrators even when the law is misinterpreted. "It is not even enough," said the Ninth Circuit, “that the arbitrator may have failed to understand or apply the law. An arbitrator's decision must be upheld unless it is completely irrational or it constitutes a manifest disregard of the law."1
The decision of whether to select arbitration rather than litigation as a dispute resolution mechanism in international transactions and dealings raises certain additional considerations which are not as relevant in the domestic context. Many believe that arbitration is particularly advantageous in the international setting. Indeed, in Scherk v. Alberto-Culver Co.,2 the U.S. Supreme Court commented on the value of international arbitration:
“A contractual provision specifying in advance the forum in which disputes shall be litigated and the law to be applied is, therefore, an almost indispensable precondition to achievement of the orderliness and predictability essential to any international business transaction. Furthermore, such a provision obviates the danger that a dispute under the agreement might be submitted to a forum hostile to the interests of one of the parties or unfamiliar with the problem area involved.”
Arbitration's Advantages in the International Realm
Tailoring The Process To Suit
When disputes arise from international business transactions, the diverse cultures, practices and modes of communication typically enhance the complexity of the dispute and make resolution more difficult. If relying solely on the litigation process provided in the courts of various countries, business professionals are naturally worried that a party from a distant country can drag them into a foreign jurisdiction where procedures are alien and impartiality may be uncertain, especially for outsiders. A party may also be confronted with multiple proceedings under different laws, which can lead to conflicting results. International arbitration has the potential to alleviate these concerns by allowing the parties to tailor the proceeding to their specific goals and needs.
National court rules applied in a litigation setting are clearly not as flexible as procedures in arbitration or the procedures that may be contractually specified in arbitration clauses. Contracting for arbitration as the dispute resolution mechanism therefore permits greater liberty for a company to tailor the procedure to suit its anticipated disputes, goals and needs. As only one example, a party might contractually opt for an arbitration without any pleadings, an arbitration on documents alone without a hearing, or an arbitration process that has alternative evidentiary and examination rules. Overall, the range of available procedures in arbitration is very extensive and is only typically constrained by basic considerations of due process.
Considerations of Expediency
Jurisdiction
One of the primary advantages of agreeing to arbitration of international disputes lies in gaining certainty of jurisdiction. Because all national courts have limited jurisdiction, the rules of jurisdiction determine whether it is possible to institute an action in a particular court. Thus, a party wishing to litigate an international commercial dispute must first determine whether the national court has power under its own rules to hear the case. By contrast, where the parties have bargained for an arbitration provision in their initial agreement, they have already agreed to submit voluntarily to jurisdiction in the arbitration forum, and the jurisdictional uncertainty possible with litigation is removed.
Service of Process
Arbitration can eliminate the need for service of process in a conventional litigation. Serving a foreign corporation is sometimes an expensive and difficult procedure, and turning to international arbitration can positively affect the speed and cost of resolving the dispute. As an example, selecting an arbitration forum such as the International Chamber of Commerce ("ICC") would alleviate some of the cost and delay relating to service of process in litigation. Under the ICC process, the ICC Secretariat is responsible for notifying the respondent of any request for arbitration filed with the ICC. This is particularly cost-effective and efficient when a dispute involves multiple, multi-national parties.
Enforceability of a Judgment
Assuming that a national court has personal jurisdiction over the parties and the dispute, and that a favorable judgment is obtained, the next question is whether the judgment is enforceable internationally. The judgment will, of course, always be enforceable in the territory of the national court. However, if the opposing party is a foreigner, and has no assets within that territory, the judgment may have little or no value. Furthermore, the enforcement of a national court judgment in a foreign country will depend on whether the rules of private international law in that foreign country permit enforcement of the judgment. In cases involving multiple parties of different nationalities, this may result in some foreign judgments being enforceable, while others are not.
In contrast, international arbitration awards are more widely-recognized and enforced in foreign jurisdictions than are national court judgments, in part because of wide adherence to an international arbitration convention. To date, approximately 130 countries are now parties to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the “New York Convention”). The number of signatories to the New York Convention thus empowers international arbitral tribunals with jurisdiction over a wide range of parties and disputes. Significantly, the New York Convention requires the court of a contracting state to refrain from hearing a dispute which is subject to an arbitration agreement. As a result of these provisions of the New York Convention and its wide acceptance, international arbitral awards enjoy much greater international recognition, and thus international enforceability, than judgments in national courts.
In determining whether arbitration is preferable to litigation in resolving international commercial disputes, a company should first contemplate the specific needs and goals the company seeks to accomplish in any particular transaction and whether and how an arbitration proceeding can be tailored to serve those objectives. A basic consideration in evaluating litigation versus arbitration is whether or where jurisdiction can be had in a national court, and how difficult it may be to achieve service of process over the target defendant(s). In addition, parties should consider whether an award from an arbitration tribunal will be enforced more effectively than a judgment from a national court.
Selecting the Structure of an International Arbitration
If arbitration is chosen as the preferred means of dispute resolution with respect to a particular international business transaction, parties must decide whether to specify that the arbitration should be administered by a particular arbitration institution or handled on an ad hoc basis once a dispute later arises. Generally speaking, arbitration institutions offer a number of advantages. First, a published set of well-understood and widely recognized rules is already established which provides some predictability and relieves the parties of the need to custom design a procedure. The parties, however, have the ability to vary the rules by agreement. Second, full-time staff is also available to administer and manage complaints and arbitration proceedings. Program administrators are expected to have experience in the field, which can facilitate and expedite the process. Third, the institution may provide panels or lists of international arbitrators.
There are, however, two primary disadvantages to administered procedures. Administered programs can be expensive if the fee is calculated as a function of the amount in controversy. In complex intellectual property disputes involving multiple parties, this may be a significant concern, though it can be addressed by fee and cost shifting provisions in the contract. Also, administered programs can also take longer than ad hoc arbitration proceedings due to potential delays associated with the institution’s procedures or with the selection of arbitrators. On the whole, however, the benefits of administrative programs generally outweigh the potential drawbacks. Although some inconsistency may be unavoidable, administered proceedings have been found to yield more reliable and predictable procedures.
Using An Administered Arbitration Program
International Chamber of Commerce Court
When selecting an administered international arbitration program, evaluate the rules and competencies of particular programs in light of specific business objectives. The Paris-based International Chamber of Commerce Court of Arbitration ("ICC Court") is the oldest institution devoted to administering international disputes without ties to any one nation. Composed of seventy-seven member nations, the ICC Court organizes and supervises arbitrations held under the ICC Arbitration Rules ("ICC Rules"). Not surprisingly, the ICC Rules are incorporated into many international commercial contracts. Moreover, selecting an established and relatively well-known institution such as the ICC may enhance the likelihood that an award can be enforced or will be complied with voluntarily.
The ICC Rules provide a relatively high level of institutional involvement throughout the process. For example, the Secretariat for the ICC handles pleadings and other written communications among the parties and arbitrators, has the authority to grant extensions of time for certain filings, and manages the payment of administrative fees and expenses. ICC arbitrations require the parties and arbitrator to prepare a written "Terms of Reference," which is used to bring the arbitrators and parties together at an early stage, to identify and define the issues that will be arbitrated, and to clarify the procedural issues for the proceeding.3 At this stage, the parties can also reach an agreement on outstanding issues such as governing law or the language or place of the arbitration.
The ICC Court is authorized to make initial determinations regarding the existence of an arbitration agreement, to fix the place of the arbitration in the absence of an agreement by the parties, to improve the Terms of Reference where a party refuses to sign them, to consider various extensions of time for procedures, and to scrutinize and approve the final award by the arbitrational tribunal. The ICC Rules also provide the ICC Court with the authority to appoint arbitrators where the parties’ agreed selection method fails, and include a mechanism for arbitrator disclosure of potential conflicts of interest and administrative determination of any challenges to arbitrator appointments.
If an administrator such as the ICC is used, the rules of the administering agency will typically control, or at least predominate, unless otherwise agreed in the contractual arbitration provision. As such, companies contemplating administered procedures should work with counsel to carefully consult the rules in advance, and to determine if they are acceptable or if there are any changes that should be suggested before agreeing on an administrator.
International Center for Dispute Resolution
Another alternative for an international arbitration forum is the International Center for Dispute Resolution ("ICDR"), which is the international division of the American Arbitration Association ("AAA") responsible for administering the AAA’s international matters. The ICDR provides many of the same administrative advantages of ICC arbitration including flexibility in designation of arbitrators and in the general arbitration process regarding the language, choice of law, and locale of the arbitration. In addition, the ICDR, like the ICC, abides by a set of administrative rules that are intended to provide effective and economical services to the international business community.
Distinctions between ICC and ICDR
There are some significant differences between the two specific processes that may make one more appropriate than the other for achieving specific business objectives. First, under the ICDR rules, the tribunal may, at the request of any party, take whatever interim measures it deems necessary, including injunctive relief and measures for the protection or conservation of property. This may be particularly notable in intellectual property disputes where a temporary injunction can have a determinative impact. In contrast, the ICC rules do not expressly provide the arbitral tribunal with the authority to order interim injunctive relief. Second, while the ICDR does not have a list of arbitrators who specialize in intellectual property issues, an ICDR tribunal may appoint independent experts to report to it on specific issues designated by the tribunal and communicated to the parties.4 The advantage of this process is that it may provide the parties with assurance that the arbitrator has the knowledge and information necessary to make decisions requiring specialized competence, such as software development or applications. The drawback is that appointing an expert may result in additional time and expense. In contrast, the ICC rules do not expressly empower the arbitrator to seek an expert’s advice. Rather, under the ICC rules, the parties themselves decide the extent to which experts will be involved in the arbitration process.
Another notable difference between ICDR and ICC arbitration is in establishing the arbitral award. Under the ICC rules, the award is automatically scrutinized by the ICC Court after it is drafted by the tribunal. This affords an extra layer of protection in ensuring the “correctness” of the award. Under the ICDR, there is no scrutiny process. Rather, a party has only the right to request the tribunal to interpret the award or correct any clerical or computation errors or make an additional award as to claims presented but omitted from the award.
Advantages of International Arbitration In Resolving Intellectual Property Disputes
Selection of Arbitrator(s)
While national courts have expertise in law and in fact-finding, intellectual property disputes are likely to involve issues which may be highly technical or scientific in nature. Parties litigating a dispute in national courts are not permitted to choose their own judges, but parties to an arbitration have the ability to specifically require appointment of a particular arbitrator or one who has specialized competence in the relevant field or industry. For example, parties can specify in the arbitration provision the desired experience, education or other professional qualifications that one or more of the arbitrators should have.
Greater Confidentiality
Confidentiality is generally a significant concern in intellectual property disputes. Companies seeking to protect trade secrets and intellectual property interests while preserving the confidentiality of a dispute are often faced with the reality that litigation is generally not confidential. Even with a protective order, evidence and testimony may not remain private and can become available to third parties, particularly in the event the dispute does not settle prior to trial. Parties agreeing to an arbitration clause can provide for specific protections to ensure privacy and confidentiality. Moreover, absent an agreement, the ICC Rules provide that proceedings and the final award are confidential. Therefore, companies concerned about protecting the confidentiality of trade secrets, intellectual property, or even the actual dispute itself may find that the ICC’s arbitration process provides the structured privacy to meet these needs.
Drafting an Arbitration Clause
When using arbitration (either administered by the ICC Court or some other entity) as a means of dispute resolution, it is important to tailor the arbitration provisions in the original agreement as much as possible to suit the specific needs and goals of the company. Detailed arbitration clauses are rare since they require parties to have sufficient foresight and arbitration experience to consider, while in the midst of negotiating a complex deal, how future disputes, even those that might well be unforeseeable at that time, will arise. Even so, the arbitration provision should at a minimum 1) demonstrate an intent to use arbitration rather than national court litigation to resolve disputes; 2) legally bind the parties to arbitration in most countries in the world; and 3) reference effective procedures for commencing the arbitration, appointing arbitrators, and conducting the arbitration process, thus minimizing the need to negotiate procedural points at a later date after disputes have occurred.5
Pitfalls to Avoid
Parties typically specify in the arbitration clause the law governing the contract, the number of arbitrators, the arbitration forum, and the language of the proceedings. While all of these elements are important, companies contemplating international arbitration should consider other issues as well since carelessness in drafting an arbitration provision can result in a procedure worse that litigation. For example, imprecise wording about the law and procedures to be applied in the arbitration can lead to satellite litigation, leaving the parties with a lawsuit as well as the arbitration. Similarly, a poorly chosen arbitration forum may leave the prevailing party with a judgment that is unenforceable in the country where the opposing party’s assets are located. Because lack of discovery may result in incomplete information and ultimately unfair results, an arbitration provision should ideally address the extent to which discovery will be permitted.
Issues to Address
Clearly a badly-worded arbitration clause can cause delay and impede the process, resulting in a process that is more time-consuming and expensive than litigation, particularly where litigation is used to clarify ambiguous terms in the clause. To avoid such problems, companies should take care in focusing on the details of arbitration clauses included in its agreements, giving thoughtful consideration to what will happen if a dispute arises out of the particular transaction. One element that should be carefully crafted in drafting the arbitration provision is the scope of the arbitration, which clarifies the disputes that will be arbitrable. To avoid vague language and ambiguities, the provision should specifically mention, without limitation, possible areas of contention. One method for being inclusive is to state that disputes which “arise from” the underlying contract and “relate to” the validity and scope of the contract, arbitration clause, or arbitration proceeding itself are covered by the agreement. Alternatively, parties may choose to limit arbitration by subject, specifying for example that “disputes about the value of intellectual property rights are not to be arbitrated.” In determining the scope of arbitration, parties should assess whether it desires to have either a broader or narrower provision in light of the particular deal under negotiation.
Another consideration in drafting an arbitration provision is the issue of appeal. Arbitral awards are subject to limited rights of appeal, and they are more likely to be final than a judgment in a national courts. Although parties who choose to settle their disputes through arbitration generally consider the finality of the award as an advantage, companies should also be aware of the risk that the arbitrators will render an unfair decision or erroneously interpret the law.6 While arbitral awards may be challenged either in the country where the award is entered or where enforcement is sought, the grounds of challenge available against arbitral awards is usually very limited. As a result, parties to an arbitration agreement should manage these appealability issues when drafting the arbitration provisions. More specifically, companies who desire appellate review may include a clause in the arbitration agreement which empowers a court to review the arbitrators’ interpretations of law, and to reject the arbitral award if the court finds it to be based on a material error.
Alternatively, parties to an arbitration agreement may provide for private arbitral appellate review. Although potentially more expensive, this may be a safer alternative, if permitted by applicable law. Parties may stipulate that the award by the “trial” arbitration panel is subject to independent review by another arbitral panel under specified appellate standards. The idea of using a non-court tribunal for judicial review has been endorsed by courts in the U.S., and private arbitral review clauses are being enforced more frequently in both precontractual clauses and post-dispute submission agreements.
When drafting an arbitration provision, a company should also consider the implications a choice of law clause may have on a dispute arising from an international business transaction. In making this decision, parties should keep in mind that there are at least three sets of laws which should be addressed: 1) the law governing the rights and obligations of the parties as set forth in the main agreement; 2) the law that determines the validity and scope of the arbitration; and 3) the law governing the arbitration proceeding itself. While companies who opt for litigation regularly consider choice of law decisions in drafting domestic agreements, these provisions are likely to have an even greater impact when resolving an international dispute. In international arbitration, as many as five or six different laws could become relevant to the resolution of the underlying dispute. Furthermore, because arbitrators operate in a specially constructed environment, they are more likely than judges to accept and comply with choice of law provisions that involve an assortment of different laws.
Determining the scope of the arbitration and selecting the choice of law for arbitrating the dispute are among the many considerations which should be addressed when drafting an arbitration provision. When crafting this provision, it is crucial to consider the details of desired arbitration procedures, and to establish clear parameters for commencing the arbitration and for exchanging and presenting evidence. By choosing administered procedures under the ICC Court, one of the benefits is that the ICC Rules provide default procedures and methods for overcoming potential impasses. Nonetheless, arbitration clauses should usually be customized to the agreements and deals they relate to. As a result, every party should be prudent in determining whether the situation warrants additional considerations or special arbitration provisions.
Conclusion
In deciding whether international arbitration is the appropriate method for resolving a particular dispute, a savvy company should first consider the advantages of arbitration in light of the special concerns and realities of conflict management in the international commercial arena. In choosing an administering institution, further evaluate the advantages of ICC Arbitration generally and with regard to intellectual property disputes in the international realm. Although it may be difficult to anticipate and adequately address prospectively all of the risks that may arise over the duration of a business relationship, a company can take preventative measures by carefully drafting an arbitration provision which is tailored to best suit the specific business objectives presented.
1 G.C. and K.B. Investments, Inc. v. Wilson, 326 F.3d, 1096, 1105 (9th Cir. 2003).
2 417 U.S. 506, 516 (1974).
3 Apart from the place of arbitration and a summary of the parties' respective claims, the Terms of Reference contain particulars concerning the applicable procedural rules and any other provisions required to make an eventual award enforceable at law. It generally also contains a list of issues to be determined, and the arbitrator's provisional timetable to be followed in the conduct of the arbitration. The Terms of Reference must be transmitted to the ICC Court within two months of the file being initially given to the arbitrator. Should one of the parties refuse to take part in drawing up or signing the Terms of Reference, the latter is submitted to the ICC Court for approval, whereupon the arbitration may proceed. For further details regarding the ICC process, see http://www.iccwbo.org/index_court.asp.
4 If the arbitral tribunal appoints experts, the parties are then asked to provide such expert(s) with any relevant information or produce for inspection any relevant documents or materials that the expert may require. The parties also have an opportunity to question the expert at a hearing, and to present their own expert witnesses to testify on the points at issue.
5 A possible starting point is to use the standard arbitration provision recommended by the ICC, which is similar to provisions recommended by other leading arbitration institutions: “All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”
6 Although arbitral awards are generally not subject to appeal, the ICC provides a procedure for examining the reliability and correctness of an arbitral award. The ICC Rules require the ICC Court to scrutinize and approve all awards to better ensure the quality of arbitral awards, thus making them less susceptible to annulment in national courts. The ICC regards this process as a quality-control mechanism that increases the reliability and recognition of the ICC’s arbitration system.