By Charles V. McPhillips, International, Manufacturing & Distribution

In our last edition, we identified a problem: the difficulty in litigating a contract dispute with a foreign party whose assets are located abroad. The problem is compounded by the strong resistance of many foreign counterparts to accepting U.S. legal jurisdiction over disputes arising out of their international business contract with an American company.

The best solution to this problem is international commercial arbitration. Although lawyers debate the pros and cons of arbitration as a domestic dispute-resolution procedure, there are a number of reasons that arbitration is the way to go internationally.

The first is enforceability. The United States is one of approximately 140 countries which are signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). Under the New York Convention, there are limited grounds on which a court may refuse enforcement of an arbitration award granted in another treaty country. Unless one of the specified exceptions applies, the courts of each treaty country are compelled to recognize and enforce arbitration awards rendered in another treaty country.

The second advantage is transparency. There are various sets of international arbitration rules ripe for the picking: the International Chamber of Commerce (ICC), the United Nations Commission on International Trade Law (UNCITRAL), the American Arbitration Association (AAA) and various other organizations publish — and several also administer — their own international arbitration rules.

Whichever set of rules is selected, they can be transparent to both parties. In contrast to the often mysterious and complex procedural rules that plague the world’s various court systems, requiring local knowledge (and local lawyers) to navigate, international arbitration rules are accessible to both sides of an international transaction. And they are usually written in plain English.

Privacy is advantage no. 3. Arbitration takes place in a lawyer’s conference room or a similar private setting. No public notices are issued; the proceedings may be closed to the public; and no public record of the arbitrator’s award must be published unless it becomes necessary to enforce the arbitrator’s award in a court.

Advantage no. 4: No service of formal “legal process” is required to conduct arbitration. When invoking an arbitration clause, the enforcing party need not comply with the cumbersome, costly and time-consuming rules for the service of formal legal papers, whether under the Hague Service Convention or local court rules. Arbitration rules typically contain a simple protocol for giving effective notice of the arbitral proceeding to the other party.

Advantage no. 5: No juries or judges. Depending on the arbitral rules selected, the decision-making process will be vested in one or three arbitrators, usually professionals of some professional standing who are more likely to be truly neutral than juries or judges from one party’s home country.

Less expensive discovery is advantage no. 6. Although some arbitral rules do permit pre-trial discovery — the parties may always cede authority to the arbitrator to compel discovery — the liberal discovery rules of the U.S. court system will not govern arbitration. This is often perceived as an advantage by the foreign party and not necessarily as a disadvantage by the U.S. party. However, if the foreign party will have control over relevant documents and information, then the less robust discovery regime may ultimately prove to be disadvantage.

And finally there is advantage no. 7: the greater flexibility afforded by arbitration, enabling the parties to mitigate uncertainty and minimize unnecessary expense and risk. The parties may stipulate a place of arbitration that is mutually convenient (or at least mutually acceptable) as long as it is a signatory to the New York Convention. By agreement, the arbitration should be conducted in the same language as the contract, thereby avoiding the expense and imprecision caused by translating the contract and other relevant evidentiary documents into whatever language might be used in the local court of either party. Finally, the parties may agree on the number of arbitrators and the method of selecting them.

Alas, there is no free lunch. It is undeniably true that arbitration can be expensive. However, the inability to enforce a contract effectively against one’s foreign counterpart through judicial proceedings could be a whole lot more expensive.

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 – Chuck McPhillips

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.