International Commercial Arbitration

Arbitration is a private method of settling disputes, based on an agreement between the parties. International commercial arbitration covers relationships of an economic nature involving more than one country.

Commercial arbitration is an important method of dispute resolution in the international arena. Its flexibility allows it to be combined with other methods of dispute settlement which, according to the circumstances, may prove to be more appropriate. The attitude of the parties will largely decide whether it takes place in timely fashion and at reasonable expense.

a) Main features of arbitration

1. Arbitration, a private method for resolving international economic disputes.
Arbitration is a private method of dispute settlement based on an agreement made between the parties. International commercial arbitration covers relations of an economic nature involving more than one country. The international aspect calls for a system in which the parties are given considerable latitude in deciding the applicable rules of law. It is this freedom that allows the parties to ensure that the legal framework for settling their dispute is as neutral as possible, failing an international court for dealing with private law disputes.

2. Ad hoc arbitration, arbitration rules or arbitration institutions.
The parties may arrange for their dispute to be settled pursuant to rules forged specifically for the case in hand. The arbitration is then known as ad hoc arbitration.

Often, however, parties prefer from the very outset, or when a dispute arises, to refer to a set of predetermined arbitration rules, an example of which in the field of international commercial arbitration is the set of arbitration rules drawn up by the United Nations Commission for International Trade Law (UNCITRAL), which the UN General Assembly adopted on 15 December 1976. Similar sets of rules may also be drawn up by institutions, which in addition provide administrative support in such matters as the choice of arbitrators and the conduct of proceedings. The arbitration is in this case known as institutional arbitration. The arbitration organised by the International Chamber of Commerce (ICC), like that of other institutions, provides parties with a set of rules and a highly developed administrative framework. Arbitration institutions also exist at national level. A further and unique feature of ICC arbitration is the International Court of Arbitration, a special body responsible for scrutinising arbitral awards in draft form. In so doing, the International Court of Arbitration does not act as a court of appeal or a supreme court, but rather - to use industrial terminology - monitors the quality of the process leading to the manufacture of a product, namely the arbitral award.

3. Difference between state court and arbitral decisions. There are two important differences between decisions made by state courts and those made by arbitrators.

• As an offshoot of public authority, state courts derive their powers from state law, which defines their jurisdiction. If a losing party fails to comply spontaneously with a decision, force may be used to ensure compliance, except in foreign countries, where an order must be sought from the competent local courts.

• Arbitrators' powers, on the other hand, derive from the will of the parties by whom they are appointed. If parties do not carry out arbitrators' decisions spontaneously, a local court order is always necessary to obtain implementation by force.

b) Terminology

In line with the currently prevailing practice in international matters, "arbitration agreement" will be used to refer to the expression by the parties of their wish to resort to arbitration, irrespective of when this wish is expressed. "Arbitration clause" will mean the agreement to arbitrate made when the main contract is negotiated and included in such contract. This is by far the most frequent situation.
It is useful to know, however, that in several legal systems a distinction, reflected in the terminology used, is made between an undertaking to resort to arbitration that occurs before a dispute arises and a similar undertaking occurring after the dispute has arisen. The different legal consequences formerly attached to this distinction have now for the most part disappeared, even if the terminology remains.

c) Organisation and conduct of proceedings

1. Party autonomy. The parties' wishes have a crucial part to play in the organisation and conduct of dispute resolution by way of arbitration in the international field. The wish to resort to arbitration may be present from the moment the contract is negotiated, if it contains an arbitration clause, or be formulated by way of a special agreement when the dispute already exists. However, party autonomy cannot be exercised completely unhindered. It is subject to the following restraints:

• compliance with international public policy, which means in particular that there must be no engagement in corruption, violence or fraud;
• the public policy provisions in the countries where the award might be set aside (for instance, the country of the place of arbitration), or need to be performed forcibly subsequent to an order (exequatur) from the competent court at the place of enforcement;
• the ability of the parties to make undertakings on their own account (their legal capacity), the powers of their representatives, or the fact that certain disputes may not be arbitrable due to the nature of the persons or the subject matter involved.

2. Careful exercise of party autonomy. The parties have considerable autonomy with regard to the organisation and conduct of dispute resolution by way of arbitration. It might thus reasonably be expected that they would use such freedom to ensure that their relations are carefully organised at the legal level. Why then do awards contain such abundant evidence of defective or even frankly pathological, contractual provisions? This observation cannot be totally explained by the very real difficulties of certain negotiations conducted under trying conditions and the need, which is sometimes mentioned, to keep the scope of certain undertakings ambiguous in order to seal the negotiations. Many disputes in fact arise out of weaknesses and errors which could be avoided. Shortcomings that have hindered the careful exercise of party autonomy include notably:

• failure to integrate the various aspects of the negotiation - technical, commercial, financial, legal, under the strict control of the final decision-maker ultimately responsible for the project;
• lack of a fundamental balance in the consideration offered by each party to the other, due sometimes to the abuse of a position of strength reflected in draconian terms, or sometimes, conversely, to so-called commercial concessions which may entail unbearable risks for a firm that secures a contract "at any price";
• the ingrained distrust many negotiators have towards dispute resolution clauses, seen as contrary, by definition, to the positive spirit in which contracts should be made;
• insufficient regard for the cultural differences between the parties who wish to contract and the impact of these differences on the understanding of the undertakings they make and the performance of such undertakings;
• inadequate updating of the contract once it has been made.

This last point is worth expanding upon briefly. It is sometimes forgotten that a contract is a living being and is therefore called upon to develop in the course of performance as circumstances change, or the underlying economic projects grow or are modified. If such developments are not taken into account, discrepancies will result between the actual reality and the terms of the contract.
Disputes feed on such discrepancies. Mutual accusations of bad faith follow hard at heel.

Such observations apply to all of the provisions in the contract. If they are of a bad standard, this will have an adverse effect on the settlement of disputes that may arise in connection with the contract.

3. Drawing up the arbitration clause. On the basis of the numerous cases studied, the following observations may be made. It is usually advisable to provide for friendly settlement to begin with. All too often the clause confines itself to a somewhat vague expression of goodwill at the intention stage. It is preferable to flesh it out, notably by stipulating a deadline after which recourse may be had to arbitration in the true sense of the word. Ad hoc arbitration may be advocated for certain disputes located in a fairly homogeneous geographical or professional milieu. However, it necessitates specific and detailed contractual arrangements, which may deter some negotiators. Also, certain hitches occurring in the implementation of such arbitration can be settled only by resorting to the courts. Parties may overcome the first of these difficulties, however, by providing for recourse to a set of pre-existing rules such as those drawn up by the UNCITRAL.

Institutional arbitration of the ICC kind will in most cases be the answer. It offers standard arbitration clauses with tested wording and a set of rules that serve as both a framework and a guide for the proceedings.

It is nonetheless desirable that, in addition to making the basic choice of including this clause, the parties also attempt to minimise uncertainties by answering a number of important questions, such as the choice of the arbitrators, the rules of law applicable to the merits of the dispute and to the proceedings, if this matter has not already been dealt with elsewhere in the contract, the place of the arbitration and the language in which it is to be conducted.

If such matters are not dealt with in the arbitration clause agreed by the parties, the ICC Rules, like those of most other arbitration institutions, provide mechanisms of decision-making by the institution itself or by the arbitrators, so as to fill gaps in the wishes of the contracting parties. Although guarantees exist to ensure the neutrality of any such backup action, parties should consider the risk of reduced predictability that such action entails.

4. Choice of arbitrators. Justifiably, the parties will wish that the arbitrator(s) comprising the arbitral tribunal will embody a whole range of - sometimes even conflicting - qualities: they must admittedly be independent, but also highly aware of the interests - legitimate, by definition - of the party that appointed them. They must certainly be skilled in law, but also open to legal adjustments for the sake of equity, at any rate in accordance with the conception each party has of this.
In practice, the parties will firstly decide upon the number of arbitrators. Psychologically, it is easier to suggest that three be appointed. Each party will feel reassured if it has appointed "its" arbitrator, who is often - though incorrectly - likened to a second lawyer.

In light of these factors, the ICC Rules of Arbitration provide that if there is more than one arbitrator, each party shall choose one and the third, who will chair the arbitral tribunal, shall be chosen by the International Court of Arbitration, unless the parties agree upon another procedure.

Like state judges, arbitrators should not be beholden to those who have chosen them. Indeed, arbitrators should be and remain independent of the parties throughout the proceedings. The ICC International Court of Arbitration will not be prepared to appoint or confirm them if they are unable to affirm their independence. They could be challenged if, by their own doing or as a result of circumstances, they lost such independence. Obviously, independence is first and foremost a state of mind, but it translates in practice as the absence of any relationship, be it family, professional, financial or other, which in the eyes of the parties could reasonably jeopardise such independence.

Once reassured on the question of independence, the parties should normally be able to refer their dispute to a sole arbitrator whenever the difficulty of the case or the amount at issue does not justify incurring the additional costs occasioned by three arbitrators.

5. Choice of the rules of law. The rules of law chosen to be applied to the settlement of disputes through arbitration - both as far as the merits and the procedure are concerned - are of great consequence to the parties.

Parties often view legal rules as a straight-jacket imposed upon them or even foreign to them. However, they should be reminded that the first rules of law to govern their contract are its very provisions, which they themselves have agreed. These agreed rules may be complemented, where insufficient, by relevant international trade usages.

The substantive provisions of the contract cannot arrange everything, however. Furthermore, definition of the exact content of usages is subject to uncertainty.
It may therefore be useful, for the sake of predictability amongst other things, to refer additionally to a body of pre-established rules, of state or other origin, which will be used to complement or clarify the legal framework of the contract.

Practice shows that in the great majority of cases parties choose a state law. This choice may be the subject of tough negotiations between the parties, each believing that it would benefit from the application of the law it knows best, which will more often than not be its national law. The parties' choice on this matter is often the result of a compromise with other arrangements for the resolution of disputes, namely the fixing of the seat of the arbitration and the language in which it will be conducted.
With the express agreement of the parties and subject to compliance with international public policy, the arbitral tribunal may be dispensed from applying rules of law. In this case, it rules in equity or ex æquo et bono or, to use the French terms, as amiable compositeur. Such an agreement presupposes that the parties have great trust in the arbitral tribunal. As such an approach leads to less predictability, parties are often reluctant to agree to this.

While it is common for the parties to fix the rules applicable to the merits in their contract, this is less so when it comes to the rules governing the proceedings. Negotiators are often put off by contractual arrangements in respect of procedural rules applicable to any disputes that may arise. This is one of the major benefits of institutional arbitration, since it allows the parties to take advantage of the procedural rules laid down by the chosen institution.

In this respect, the ICC Rules affirm a number of major principles, in addition to provisions of a more technical nature. These principles include ensuring that the arbitrators are independent of all of the parties, the fair and impartial conduct of proceedings by the arbitral tribunal, giving the parties full opportunity to present their cases, stating the reasons for the award, and the monitoring of time limits and costs.
The parties are advised to choose additional rules of law for any aspects of arbitral proceedings that are not covered by institutional rules. To this end they may refer to the procedural rules relating to international arbitration in the country where the arbitration takes place. Should the parties find it impossible to agree, the rules provide for backup decision-making (by the arbitral tribunal more often than not), which overcomes any risk of the proceedings being stalled.

6. Choice of the seat of the arbitration. Another sensitive issue is the choice of the seat of the arbitration, that is to say the place where, at law, the arbitration is deemed to take place. The legal implications of this choice are considerable, as it is likely to have an important effect on the conduct of the arbitral proceedings. In some cases the parties will be subject to special procedural rules. In any event, they will be required to comply with local public policy rules. Moreover, it is in the relevant courts where the seat of the arbitration is located that an action to have the award set aside may be brought.

In many cases, however, other concerns would seem to preside over the choice of the place of arbitration. It may, for instance, be the result of a trade-off against the language of the arbitration, an English party and a French party agreeing, in this respect, on arbitration proceedings based in Paris and conducted in English.

Rationally, the choice of the seat of the arbitration should seek to ensure a neutral procedural environment and a local law that is open to the special needs of international arbitration. Consideration should also be given to other factors of an entirely practical nature, such as ease of access, an adequate infrastructure, particularly with respect to communications, recording of discussions, translation of statements and documents, etc., and the cost of such items.

Cost considerations are often a reason for providing (as is the case in the ICC Rules) that hearings and meetings may take place at locations other than the seat of the arbitration.

7. Choice of the language of the arbitration. The language of the arbitration is a factor that should be considered independently, rather than as tender in negotiations. It is a highly important point, both at a theoretical and a practical level.

The parties should try to be consistent here. It is logical to select as the language of the arbitration that used in the agreements made between the parties.

It would also be preferable if the language chosen were that in which the governing law is normally expressed, as this will avoid the always delicate and often approximate transposition of concepts from one system of law into the language of another system.

It will often be difficult to encounter the second point, given the current preponderance of English as the language of international commercial arbitration. For this reason the parties should pay particular attention to the legal experience of the arbitrators they intend to choose.

Here again practical considerations must be borne in mind, notably the cost of simultaneous interpretation and the supply of often very large documents in a language other than the original.

8. Conduct of the arbitral proceedings. The parties may, if they so wish, exercise considerable autonomy in their choice of the rules governing the substance of the dispute as well as the conduct of the proceedings. This results in a great diversity of situations. To give an idea of how arbitration works in practice, reference will be made to the Rules of Arbitration of the International Chamber of Commerce, one of the world's foremost arbitration institutions.

The procedure begins with a request from one of the parties (the claimant), sent to the secretariat of the institution. This request should be based on an arbitration agreement, describe the subject matter of the dispute and provide information relevant to the commencement of the arbitration. A copy of the request is sent to the opposite party (the respondent) to allow such party to take a stance over the request, submit comments on the procedure to be followed and maybe also present a claim in response (counterclaim).

If the institution is satisfied that on the face of it a valid arbitration agreement can be said to exist, the proceedings may be commenced, allowing for the fact that the arbitral tribunal may rule on its own jurisdiction, once it has been formed.

Commencement begins with the formation of the arbitral tribunal in accordance with the provisions laid down by the parties or, failing such provisions, the backup procedure provided by the applicable rules. The arbitrators must be independent of the parties and must conduct the proceedings in an impartial manner. If not, they may be challenged.

When the parties have paid the advance intended to cover the costs of the arbitration (fees and expenses of the arbitrators, administrative costs of the institution), the file is transmitted to the arbitral tribunal comprising one or three arbitrators.

• The arbitral tribunal's first task is to define clearly the scope of the dispute and the questions upon which the parties ask it to rule, and to settle arrangements for the arbitration. These various points are recorded in a document called the terms of reference, which the parties are asked to sign together with the arbitral tribunal. If a party refuses to sign, this does not prevent the proceedings from continuing. At the same time, the arbitral tribunal draws up a provisional timetable for its work.

• The arbitral tribunal then proceeds to establish the facts of the case within as short a time as possible by all appropriate means. It studies the written submissions of the parties and may hold hearings, hear witnesses and call upon experts. It may order interim or conservatory measures. Hearings are not public, unless the arbitral tribunal and the parties agree otherwise.

• When the arbitral tribunal considers that the parties have had sufficient opportunity to present their cases, it declares the proceedings closed. The ensuing award must state the reasons on which it is based. It may be made by a majority of the tribunal. Having agreed to the application of the ICC Rules, the parties are bound to carry out the award promptly and are deemed to have waived their right to any form of recourse in respect of which such a waiver may validly be made. Such waiver means in practice that no appeal against an award may be lodged with another arbitral tribunal or any judicial authority.

• However, the award is not totally exempt from review by state courts. An application may be made in the relevant courts in the country where the seat of the arbitration is located for the award to be set aside. Also, if force is to be used to ensure that the award is carried out, an order must first be obtained from the relevant courts in each country where enforcement is sought.

International treaties such as the Convention of New York of 10 June 1958 and the Geneva Convention of 21 April 1961, have been drawn up for the purpose of facilitating the implementation of arbitral awards by restricting review by state courts to a limited number of essential points, such as the capacity of the parties to subscribe to an arbitration agreement, compliance with the terms of such agreement regarding the scope of the arbitration, the formation of the arbitral tribunal and the proceedings, the assurance that the parties have been given full opportunity to present their cases, and compliance with public policy in the country where an application is made for the award to be set aside or enforced.

9. Cost of the arbitration. Practice shows that no business remains totally immune to disputes, the settlement of which has its cost. The problem is to know how best to evaluate the amounts which must be set aside for solving disputes.

The most positive approach a business can adopt is to invest in the prevention of disputes by ensuring a high standard of contract management. Emphasis has been laid throughout this chapter on the need for such an approach, which is reflected in balanced and clear contracts, close monitoring of performance, and the endeavour to find a mutually acceptable solution to difficulties between the parties.
Despite attempts at prevention, disputes may nevertheless become inevitable. In such case, remember that no one method of resolution befits all circumstances and that there are links between the various methods.

Hence, there is little point in comparing, in an abstract fashion, the cost of the various methods of dispute resolution. The basic rule is that the cost must be assessed in relation to what is at stake and should be constantly monitored by the business that bears it.

If, on the basis of the various options analysed above, a business resorts to international commercial arbitration organised by an arbitration institution, it will incur various kinds of costs:

• the administrative costs of the institution and the fees of the arbitrators. Both are based on published scales and are therefore predictable;

• the parties will also incur costs related to their defence, starting with the costs of their lawyers and other external advisers;

• the parties should not forget either the cost of their own staff assigned to dealing with the dispute.

The parties should also remember that it is common practice in international arbitration for the loosing party to be ordered to bear all or part of the various costs mentioned above, provided the legal costs are not unreasonable.

It may be that the winning party will have to advance the costs of enforcement against the loosing party if the latter refuses to carry out the award spontaneously.
In this context, the pertinence of the various precautions required to limit these expenses becomes apparent. Several of these were pointed out in connection with the drawing up of the arbitration clause: choice of arbitrators, applicable rules of law, and the place and language of the arbitration.

Some institutions have simplified procedures for disputes involving small sums to which a less expensive scale applies. An example in Belgium is the CEPANI.
During the arbitration, the parties should avoid getting carried away with excessive claims or counterclaims which pointlessly place the dispute high in the scale of costs.
To sum up, optimisation of the cost of dispute resolution can be really achieved only if it becomes a permanent component of a business's overall management strategy. A great number of actual cases show that this is indeed an excellent indicator of the quality of such management.