Arbitration Offers a Valuable Solution in International Business

The movement of good and services often lead to disputes that international arbitration can resolve.

As businesses continue to explore global opportunities and ambitious entrepreneurs seek new revenue streams, disputes and disagreements naturally find their way in the path to prosperity. Many of these disputes arise because individuals refuse or are unable to fulfill all terms of the agreement. When this occurs, the aggrieved party has options such as:

File a lawsuit in a local court,
Negotiate for the party to right its wrong, or
Seek a path through alternative dispute resolution such as international arbitration.

Arbitration

Arbitration is a form of alternative dispute resolution where disputes are resolved and the arbitration court’s rulings are binding, similar to a traditional courthouse. Arbitration is often the path more commonly taken for international parties to avoid the dreaded hometown advantage that can occur in the traditional courthouses. The hometown advantage occurs when a company files a lawsuit in its country and the other party is not from that country. The home company may have an advantage over the foreign company, due to the fact that the home company will likely have more goodwill in its own country. To prevent a company from the undue benefits of favoritism, an arbitration agreement clause is expressly written in most contracts.

Arbitration Agreement

A contract is often the most important legal document when parties agree in business. A contractual agreement identifies:

Parties involved in the contract,
Offer of services or products and price,
Acceptance of the terms,
Consideration of the exchange of products/services typically for money, and
Each party's obligation to uphold its terms of the deal.

The arbitration agreement helps ensure each party upholds its terms of the deal by allowing the wronged party to litigate the case in arbitration court. The arbitration agreement can either be a clause in the contract or a separate submission agreement if the parties fail to have an arbitration clause in the contract.

Arbitration is similar to traditional litigation, but there is no jury, the proceedings are confidential, and the ruling authority is called an arbitrator. In addition, the arbitrator is not required to have a law degree and the parties are able to choose the arbitrator. If there will be three arbitrators, each party will select an arbitrator and the arbitrators will choose the third arbitrator. The arbitrators will then deliver a binding decision that the losing party must respect.

If the losing party does not pay the amount, the winning party must then petition an actual court to force the losing party to pay the arbitration award. However, all disputes should not require arbitration, and well-written arbitration clauses often allow parties to avoid arbitration.

While arbitration has historically been cheaper than traditional litigation, due to the rising complexity of disputed issues, that is no longer the case. Yet, costs can be saved when arbitration clauses lay the proper framework for selecting arbitrators and having the hearing in the ideal location to help the process flow as smooth as possible.

Types of Arbitration Clauses

There are many types of arbitration agreements that can address specific issues of the parties.

Issues can often be resolved before arbitration, and arbitration agreements can be drafted to allow for both negotiation and mediation between the parties, before arbitration is pursued. This is shown below in the sample arbitration clause:

In the event of any controversy or claim arising out of or relating to this contract, the parties hereto shall consult and negotiate with each other and, recognizing their mutual interests, attempt to reach a solution satisfactory to both parties.
If they do not reach settlement within a period of 60 days, then either party may, by notice to the other party and the International Centre for Dispute Resolution, demand mediation under the International Mediation Rules of the International Centre for Dispute Resolution.
If settlement is not reached within 60 days after service of a written demand for mediation, any unresolved controversy or claim arising out of or relating to this contract shall be settled by arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules.

Many times, an arbitration hearing involves very technical facts and requires an arbitrator to be knowledgeable. When drafting an arbitration agreement, it is important to have the requirement of an industry expert arbitrator. A sample clause is below:

In the event of any dispute arising out of or in connection with a clause of the present contract, the parties agree to submit the matter, in the first instance, to administered expertise proceedings in accordance with the Rules for Expertise of the International Chamber of Commerce.
If the dispute has not been resolved with the administered expertise proceedings it shall, after the Center’s notification of the termination of the expertise proceedings, 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 of Arbitration.

Also, a sample arbitration clause can address important matters such as the number of arbitrators, the location and language that will be spoken during the arbitration hearing, etc. This is shown below in the sample arbitration clause:

Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the American Arbitration Association Rules, which Rules are deemed to be incorporated by reference into this clause.
The number of arbitrators shall be [one or three].
The seat, or legal place, of arbitration shall be [New York City, New York, USA; Paris, France; Hong Kong, China; Singapore].
The language to be used in the arbitration proceedings shall be [English, French, Swahili, Mandarin Chinese, etc.]
The governing law of the contract shall be the substantive law of [ United States of America, Paris, Singapore].

Conclusion

Arbitration offers an alternative path to handle disputes and disagreements. It is often quicker to resolve disputes and easier to enforce decisions involving international parties through arbitration as over 150 countries are apart of the New York Convention, an international convention that requires countries to recognize arbitration awards. Arbitration offers a valuable solution for the right situation and global businesses need to become familiar with this alternative.

If you would like more information, please feel free to contact us.

Geremy Johnson, Esq.

gj@geremyjohnson.com