James Nicholson
Managing Director, International Arbitration Practice – Paris
Howard Rosen
Senior Managing Director, International Arbitration Practice – Toronto and Paris
Abbreviations
- BIT: Bilateral Investment Treaty
- ECT:
- Energy Charter Treaty
- DIAC:
- Dubai International Arbitration Centre
- ICC:
- International Chamber of Commerce
- ICSID:
- International Centre for Settlement of Investment Disputes
- LCIA:
- London Court of International Arbitration
- SCCAM:
- Swiss Chambers’ Court of Arbitration
Trends in International Arbitration
Issue 2 - April 2010
Dispute Resolution in the Global Economy - continued
The Shortcomings of International Arbitration
Of course, international arbitration is not without its detractors. While its flexibility and limited discovery – certainly compared with U.S. norms – should mean shorter hearings, less preparation, and significantly lower costs, participants sometimes complain that in practice it can be as expensive and time-consuming as litigation. Take the battle for Poland’s leading mobile operator, PTC, between Vivendi, Elektrim, and Deutsche Telekom, which has mushroomed into a complex web of litigation and arbitration in various tribunals across Europe. One of the challenges has been the interaction between the rulings of different domestic courts in Poland and various arbitral panels. Then there’s the ongoing saga of the Ä50 billion claim brought against the Russian Federation by former shareholders of Yukos Oil. Running since 2005, this is the largest arbitration claim to date and one that is unlikely to be resolved for many years.
Arguably, with such significant amounts of money at stake, parties are not anxious to rush proceedings. Such cases involve multiple parties disputing sophisticated issues, and doing so takes time. However, due to the widespread binding consent given to arbitration in many commercial contracts and investment treaties around the world, international arbitration is here to stay for the foreseeable future. Moreover, experts in the field agree that, until a better system is devised, parties will continue to incorporate arbitration clauses into their contracts and to agree on arbitration as a mechanism for resolving investment treaty disputes.
The focus is therefore on how parties can strike a balance in terms of time and cost on existing cases, and on whether changes can be made to improve the current system. One influential body based in Paris, the Corporate Counsel International Arbitration Group – comprised of 50 leading multinationals such as Exxon Mobil, General Electric, and Siemens – is lobbying hard for reform. Suggestions include encouraging arbitrators to rule on key legal issues as early as possible, and ensuring greater transparency that would allow the performance of individual arbitrators and arbitration institutions to be assessed.
Implications of Arbitration
In order to minimize the likelihood of an undesirable arbitration outcome, businesses must understand the implications of the arbitration clauses contained in their commercial contracts, as regard both liability and damages. Getting the arbitration clause right can be the key to avoiding costs and delay further down the line. However, some lawyers say that many companies still are not placing enough emphasis in this area when negotiating their contracts; to many, the inclusion of an arbitration provision is viewed as a “boiler plate” clause in an extensive business agreement.
Critical points to consider are the governing law of the contract and the seat of arbitration. The former defines the national laws that will apply should a dispute arise, and that means that a detailed understanding of such laws should be achieved before agreeing to be bound by the laws of a country other than your own. FTI experts were recently involved in an international arbitration involving a leading energy company and an Asian firm over the misuse of confidential technical information. A neutral European country was identified in the contract as the venue for hearing disputes and its law was adopted as the governing law. However, many years later when a dispute arose and arbitration commenced, it transpired there was limited legal precedent (certainly relative to the U.S. or the UK) to establish how to calculate damages for this particular breach.
The seat of arbitration can also crucially affect the outcome of the arbitration. The location of the seat normally determines the lex arbitri (or set of procedural rules) that forms a backdrop to the arbitration, as well as the courts that will have supervisory jurisdiction over the conduct of the arbitration and hear any challenges to decisions of the tribunal. The courts of different countries can have significantly different approaches to such issues. When choosing a seat, it is therefore important to evaluate the likelihood that the courts of that jurisdiction will intervene in the arbitration process. A company may wish to choose a “pro” arbitration seat in a neutral venue, and it can do so by reviewing any interventions made by local courts in past cases.
In terms of potential damages, the contract may contain provisions on liquidated damages – for example, stipulating a formula for damages in the event of late completion of a project – or limiting damages to specific pre-agreed sums or categories of loss. Definition of terms can vary by jurisdiction, so it is best to define the compensation of an aggrieved party as precisely as possible in the contract.
If the arbitration proceeds to a hearing, this will typically have the same features as a court hearing: oral presentation of cases and cross-examination of witnesses of fact and expert witnesses. There are, however, important differences. Proceedings are generally less formal than court hearings, and tribunals can be more interventionist than judges, particularly as regards witnesses. Witnesses, including expert witnesses, may find themselves in extended dialogue directly with the tribunal. Another growing feature is expert conferencing, or “hot tubbing,” whereby expert witnesses engage in open debate over the issues, sometimes both responding to the same question from the tribunal. This unfettered approach can rapidly highlight the differences between the experts and assist the tribunal in judging which expert has the greater expertise or the more compelling viewpoint. This can be an unnerving process for clients, counsel, and experts who are used to the more structured cross-examination and re-examination processes followed in courts.
Planning for Disputes
It is important for businesses to consider international arbitration as a dispute resolution mechanism when planning and implementing their cross-border activities – either in crafting the dispute resolution clauses in their contracts with overseas partners, or in understanding the level of investment protection that will be afforded in the event of host government actions against investments made.
If companies do find themselves needing to engage in arbitration proceedings, it is important to obtain legal advice from experts in international arbitration, which operates in a different legal and procedural environment from court-based litigation.
Levels of cross-border trade and investment are on a rising trend across the global economy, particularly following the demise of the former Communist bloc and the rising levels of economic activity in parts of the developing world, including China and India. The evidence strongly suggests that, as a result, the resolution of disputes via the mechanisms of international arbitration will continue to grow in prevalence over the coming years. Partly as a result, leading businesses are thinking about ways of enhancing the existing mechanisms and practice of arbitration. This field of dispute resolution, practically unknown even 20 years ago, is set to form an ever-larger part of boardroom agendas in the coming years.