The growing appeal of arbitration for resolving cross-border disputes

June 2022  |  SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

June 2022 Issue

More than two years since the outbreak of the coronavirus (COVID-19) pandemic, and with what is expected to be a protracted war on the outskirts of Europe, the world economy continues to undergo significant transformations. The risk of a global recession looms, coupled with the risks associated with rapid inflation.

Whether it be supply chain disruptions, labour shortages, the rising costs of materials, or project delays and cancellations, the ripple effects of the pandemic are projected to persist into the foreseeable future. Faced with these unique challenges, policymakers have sought to curb inflation by increasing interest rates while stimulating economic growth by boosting public spending. Governments have made major commitments to invest in infrastructure projects, including the US’s $1.2 trillion infrastructure package and the UK’s £600bn ‘Build Back Better’ programme, in addition to China’s longstanding trillion-dollar Belt and Road Initiative, which is set to expand in the coming years.

Russia’s unlawful war in Ukraine and the economic sanctions imposed in response have resulted in a severance of relations between several Western companies and Russia, while bringing further pressure on global logistics and supply chain networks and triggering a hike in energy and commodity prices.

These turbulent times are a recipe for an increase in cross-border disputes. In these circumstances, it is critical to engage in strategic ex ante dispute resolution planning. Among many other things, ensuring your contracts contain well-drafted dispute resolution provisions can help. This article will weigh the benefits and shortcomings of the different dispute resolution options available to corporate counsel: litigation, arbitration and mediation. We will then provide practical advice on how to draft an arbitration agreement, given that it tends to be the preferred option for cross-border disputes.

Weighing dispute resolution options

International arbitration is the dispute resolution mechanism of choice for cross-border business dealings. This is largely because arbitration in the international context carries certain key benefits over and above those generally associated with arbitration in the domestic context. However, even international arbitration has its limitations, and parties ought to carefully consider whether litigation or mediation might be preferable options in view of their needs, the underlying transaction, and the nature of their business relationship.

Three of the most commonly recognised benefits of arbitration, whether in the domestic or international contexts, are: (i) confidentiality; (ii) procedural flexibility; and (iii) the ability of the parties to select arbitrators. While confidentiality is not always guaranteed (the parties may need to expressly agree to it contractually), the ability to keep proceedings confidential is nonetheless an appealing feature for reasons ranging from protecting sensitive information to managing reputational risks. The ability to choose simple procedural rules, by avoiding extensive and expensive pre-trial discovery, for instance, and to tailor those rules to the nature of the dispute, are also attractive aspects of arbitration. Many companies also resort to arbitration because it allows them to select arbitrators with expertise and industry experience who can apply their knowledge to efficiently resolve technical disputes.

In addition to these advantages of arbitration in the domestic realm, international arbitration presents three more benefits unique to cross-border disputes: (i) a single forum; (ii) a neutral forum; and (iii) an enforceable award. Since cross-border disputes often involve events in more than one jurisdiction and nationals of more than one country, they can often trigger competing claims to jurisdiction by courts of different states. While it is possible to contractually grant a national court exclusive jurisdiction over a cross-border dispute, such as to the courts of England and Wales, there remains no universally accepted multilateral treaty in place for the recognition and enforcement of such judicial forum selection clauses. By contrast, a forum selection clause which submits a dispute to arbitration is widely enforceable, pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention, to which around 170 states have acceded. Moreover, international arbitration allows parties to avoid a foreign court where their adversary may benefit from a ‘home court’ advantage. An international arbitration can be seated in a neutral jurisdiction, governed by the rules of an impartial arbitral institution, and adjudicated by arbitrators who are not nationals of the state of either party. Furthermore, while there is no broadly ratified treaty for the recognition and enforcement of foreign court judgements (this process is still governed by principles of comity in most countries) the recognition and enforcement of arbitral awards is greatly facilitated by virtue of the widely ratified New York Convention, which compels the recognition of international arbitral awards, subject to limited exceptions.

Despite its many advantages, opting for arbitration often involves foregoing certain potentially interesting features of litigation. For instance, whereas a court judgment is typically appealable, an arbitral award generally is not. There are also usually more limited grounds for annulling an arbitral award than for vacating a court judgment. In addition, arbitrators generally have more limited powers than judges to decide on a host of matters that may arise during the proceedings, including compelling testimony, ordering injunctions, issuing summary judgments, and joining non-signatories in multiparty disputes.

As for mediation, it offers the prospect of avoiding a protracted dispute resolution process, whether through litigation or arbitration. However, the role of a mediator is merely to facilitate communications between the parties, who may nonetheless fail to reach a settlement agreement. Accordingly, if mediation proves unsuccessful, the parties will have no choice but to proceed with either arbitration or litigation. Nonetheless, mediation can be the most effective option to resolve complex disputes between parties, especially those with an ongoing business relationship because it does not pick a winner or loser. A good mediator can help the parties come up with creative solutions that all parties can live with.

Drafting an enforceable and effective arbitration clause

If the parties decide that they want their dispute to be resolved through binding arbitration, they must state this intent clearly and unambiguously. It is also important that the parties carefully define the scope of the matters they are agreeing to submit to arbitration. Splitting potential disputes between arbitration and domestic courts is generally not recommended, as parties will likely end up in court arguing over where the dispute should be heard, raising legal fees and prolonging resolution of the dispute.

Drafting an enforceable arbitration agreement, while critical, is not enough to avoid ending up in court. Parties still run the risk of making a detour through the court system to resolve a host of procedural questions unless they address them in their contract from the outset. Two elements that parties should certainly include in their arbitration clause are the seat of the arbitration and the governing rules. The seat is the jurisdiction in which the arbitration takes place legally (which can be different from the location of any hearings or meetings). The choice of seat determines the arbitration’s general legal framework, which can include statutes, such as the Federal Arbitration Act, and relevant case-law governing the arbitration. In selecting the seat of arbitration, parties will want to choose a jurisdiction which is both arbitration friendly (i.e., with minimal potential judicial interference) and a party to the New York Convention to enhance the chances that the award will ultimately be enforced. As for the arbitral rules, their careful selection is important because they govern the mechanisms and processes of an arbitration, such as filing a request, interim measures, time limits and so on. At this stage, parties will also need to decide, by weighing the advantages and trade-offs associated with each approach, whether they wish to choose rules administered under the auspices of an institution with powers to address certain issues, such as arbitrator challenges, or ad hoc arbitration rules.

We also recommend that the parties contractually agree to the following aspects of the arbitration: (i) the number and method of appointing arbitrators; (ii) the confidentiality of the proceedings, especially if not covered by the lex arbitri or arbitral rules; (iii) the language of the arbitration; (iv) the scope of discovery, for example, per the International Bar Association Rules on the Taking of Evidence; and (v) provisions that allow for joinder of third-parties and consolidation of multiple proceedings.

Parties may also want to consider providing a carve out for certain applications to court, such as interim measures, the tribunal with authority to allocate costs and attorney fees, and an agreement that the award can be enforced in any court of competent jurisdiction. Furthermore, while not technically part of the arbitration agreement, parties ought to specify the law applicable to the contract, including the arbitration agreement.

Although there are numerous elements to an effective and enforceable arbitration clause, parties should resist the temptation to introduce too many requirements and restrictions. For example, they should not impose unrealistic expectations on the academic, professional or linguistic qualifications of an arbitrator, or identify a specific arbitrator by name, lest such arbitrator be impossible to find or become unavailable when a dispute arises. Also, if they want to introduce so-called ‘step-clauses’ that require parties to engage in negotiation or mediation before arbitration can be initiated, they should be careful not to make the process overly laborious and provide a time limit for each step.

Finally, while ‘off the shelf’ model arbitration clauses can be a useful starting point, they should be tailored to suit the specific needs of the parties and the nature of the underlying transaction. Given that there is no ‘one size fits all’ arbitration clause and no ideal dispute resolution mechanism for all types of transactions and situations, we recommend that parties carefully weigh their preferences when making these decisions and consult with specialised legal counsel as needed.

Conclusion

The dispute resolution clause in a contract is often left to the very end of the parties’ negotiation of a contract. But it is the first clause the parties turn to when things go wrong. In turbulent times, it is more likely that there will be a need to turn to this clause, and the party that will have thought about it carefully will be better placed if and when that time comes.

 

Rahim Moloo is a partner and Abdallah Salam is an associate at Gibson, Dunn & Crutcher LLP. Mr Moloo can be contacted on +1 (212) 351 2413 or by email: rmoloo@gibsondunn.com. Mr Salam can be contacted on +1 (212) 351 2355 or by email: asalam@gibsondunn.com.

© Financier Worldwide

BY

Rahim Moloo and Abdallah Salam

Gibson, Dunn & Crutcher LLP

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