International arbitration provides a binding, neutral, and consensual process for resolving contractual disputes between parties, often resulting in resolutions that are quicker, cheaper, more private, and more controllable than litigation in a court of law. Accordingly, arbitration for the resolution of international disputes between contracting parties from different legal jurisdictions has emerged as a fundamental method for resolving complex disputes in an ever-increasingly interconnected world. Multinational companies should make sure they stay up to date on the fundamentals of international arbitration, and it all starts with ensuring any arbitration clause included in an international agreement is drafted in a way that is enforceable and provides contracting parties a clear path toward the resolution of their dispute.
Why Should You Care about What Your Arbitration Clause Says?
An arbitration clause is the starting point for determining the parties’ intent in resolving their dispute outside a court of law. It is an independent agreement within the broader contract, likely enforceable even if the remainder of the contract is procured by fraud, and sits at the apex of what a court or arbitrator will look for to determine the parties’ intent with respect to how a dispute between contracting parties should be resolved.
A clear arbitration clause results in a meaningful, enforceable outcome, minimizes the intervention of U.S. or foreign judiciaries in what should be a private dispute resolution process, grants the third-party administrator and/or the arbitrator the powers necessary to resolve the dispute, and is conducted in accordance with procedures that help guarantee a fair, efficient proceeding.
In contrast, if an arbitration clause is ambiguous, there may be a finding that there is no dispute resolution agreement to enforce. This can result in challenges to the arbitration clause’s enforceability and potential litigation in unfavorable and less-than-ideal judicial systems. Of course, such ambiguity and challenges will create higher costs, longer windows of time to resolve disputes, greater risks that your claims in the dispute will be vulnerable to collateral attacks, and other unintended and unexpected consequences.
What Are the Hallmarks of a Clear Arbitration Clause?
For purposes of clarity, you should ensure your contract’s arbitration clause identifies:
- Applicable Law. Which country’s (or state’s) law applies?
- Forum and Rules. There are any number of arbitral forums, each with its own nuances in terms of procedure. Knowing the business and potential disputes that could arise will assist in selecting a good fit in terms of applicable rules.
- Seat of Arbitration. The seat of the arbitration is more than just the place where the final hearing will take place. It provides a significant backbone to the proceeding and is as important as the selection of the forum and applicable rules.
- Number of Arbitrators. The more arbitrators, the larger the cost, but a three-member tribunal has its place in certain disputes.
- Language. Selecting the language (or languages) of the arbitration can greatly affect the cost of the proceeding.
Why Does Selecting the Seat of Arbitration Matter?
More than just the physical place where the arbitration will take place, the seat of arbitration is a legal construct that determines the lex arbitri — the procedural law of the arbitration.
Where the contract between the parties or the rules selected by the parties do not provide for certain procedures, the procedural laws of the seat of arbitration will be applied. Among the important aspects of a proceeding that the seat of the arbitration determines is:
- Which courts will have supervisory jurisdiction over the arbitration;
- Definitions and form of an agreement to arbitrate;
- The arbitrability of the dispute;
- The constitution of the arbitral tribunal and any grounds for challenge;
- The equality of treatment of the parties;
- The freedom to agree on detailed rules of procedure;
- Interim measures of protection and court assistance;
- Default proceedings;
- The validity of the arbitration award; and
- The finality of the arbitration award, including which courts will hear challenges to the award.
If not clearly identified by the parties, the seat of arbitration — and the procedural laws of that seat — will be selected by the arbitral tribunal.
What Do the Rules You Picked Say About Interim Measures?
A major consideration in selecting the applicable arbitral rules is the availability of interim measures. These are measures of relief, which can include injunctive relief, obtained prior to the commencement of, or during, an arbitral proceeding.
One of the most interesting forms of interim measures is an award of security. An interim award of security in arbitration is a payment of an amount of monies (usually tied to damages) pre-hearing for the conservation of, and enforcement of, a judgment so as to not render a judgment in the future a Pyrrhic victory. These securities prevent the dissipation of assets before it is too late to reach those assets. As such, it is an extremely powerful tool, and determining whether the rules you select, and/or the seat of the arbitration, allows for such an interim award should be a key consideration in drafting your arbitration clause.
What Are the Abilities and Liabilities of Third Parties?
Depending on the circumstances, jurisdiction chosen, governing law, and seat of the arbitration, a third party (a non-signatory to the agreement) can compel arbitration and be compelled to arbitration, the latter being the rarer occurrence. Knowing if there is potential exposure to such parties, which can include directors, officers, employees, beneficiaries, and others, should be assessed prior to entering into an arbitration agreement.
On What Basis Are Arbitral Awards Enforceable?
Arbitral awards, because of the adherence by more than 160 countries to the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards (“New York Convention”), are the most enforceable award anywhere in the world. Under the New York Convention:
- A written agreement to arbitrate, including as contained in a contractual arbitration clause, is generally enforceable.
- Subject to very narrow exceptions, an arbitral award may be recognized and enforced as a final judgment in each contracting country.
In contrast, no treaty requires that the judgments of a country’s court system be recognized; these enforcement decisions are made on an ad hoc basis according to principles of comity and public policy. The Hague Judgments Convention on the Recognition and Enforcement of Foreign Judgments, a treaty similar to the New York Convention, may become the relevant applicable framework in the future but is still in its infancy.
How Can Foley Help My Multinational Company Address International Arbitration Issues?
The best way to ensure a reliable and enforceable arbitration agreement is a careful examination of the structure and purpose of the contract as well as the company’s unique business profile based on how and where it does business.
Foley provides clients with practical guidance in drafting and enforcing international arbitration agreements. Services provided to our clients include:
- Counseling: Counseling companies to understand how international arbitration clauses apply to their multinational operations, how they may benefit from such clauses, and/or how such clauses may not be in their best interest.
- Drafting: Working with clients to ensure enforceable and clearly understood arbitration clauses are prepared for the specific contractual relationship, considering the myriad factors that go in to preparing such a clause.
- Risk Assessments: Working with companies to conduct risk assessments in the event of contract disputes with arbitration clauses.
- Arbitration: Arbitrating before tribunals to secure interim securities and/or enforceable arbitral awards in the event of a contract dispute anywhere in the world.