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International trade contracts can give rise to disputes, which need resolution. This can be done through a process of litigation, or arbitration, to mention just two methods. Certain issues however, need to be taken into consideration when using either of the two methods for dispute settlement.
Many businesses in recent times have preferred to use the latter method of arbitration. This has in many cases become the norm. It has also been suggested, the increased use of arbitration as a mechanism of dispute settlement is due to the perception it has significant advantages over the former method.
‘In the recent past international commercial arbitration owing to its advantages over litigation in a national court has emerged as an effective alternative dispute resolution device for the settlement of transnational disputes’. (Vibhute 1998).
Thus, it is pertinent to mention the issues relating to litigation as a form of dispute settlement, to place in perspective the role of international commercial arbitration as an alternative means of settling disputes in international commercial trade.
The litigation process is rather complex and even when deciding where the case is to be heard can be problematic. Questions such as, whether the plaintiff’s chosen court has jurisdiction, or which other courts also have jurisdiction need to be addressed first and foremost. This in itself can be problematic as there may be numerous locations that may be able to hear the case. Consider the following example, a San Diego business orders goods from the India.
The goods will be taken by truck from Delhi to Rotterdam where they will be loaded on board a ship bound for California if something were to go wrong in the transaction, the courts of San Diego, Germany or India could hear the case, but so could any other country’s, whose coastal waters the ship happened to pass through.
It is apparent from even such a brief example managers would prefer to reduce the number of locations that may hear a lawsuit involving their international transactions. To resolve an issue such as this, a ‘choice-of forum’ clause may be included in the contract, however this is only as good as the chosen court’s willingness to enforce the law
The next consideration in litigation is, which law is to be applied to resolve the dispute. However, many contracts do now also include a ‘choice-of-law’ clause. Here they specify which state or country’s law will govern the obligations of the parties. The whole process of litigation can nevertheless be costly and lengthy, which perhaps goes some way to explain the preferred use of arbitration over litigation for dispute settlement.
The advantages of arbitration are many, these have been highlighted by the ICC (International Chamber of Commerce) International Court of Arbitration on their website, the ICC states, decisions are ‘final’ and binding’, or as described in different terms by Schmitthoff (1990), businessmen prefer ‘finality to meticulous legal accuracy’. As arbitral awards are not subject to appeal, they are far more likely to be final than the judgement of courts of first instance. Though the arbitral award maybe subject to a challenge, the grounds of challenge are limited. If this occurs, it is likely to result in a large amount of time passing before a final judgement is passed.
The second advantage listed by the ICC International Court of Arbitration is, the ‘international recognition of arbitral awards’. It is thought an arbitral award is recognised more than judgment of a national court, as ‘over 130 countries have signed the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the “New York Convention”. (iccwbo.org, 2004). The 1958 convention succeeded on the basis of the 1927 Geneva Convention and the 1923 Geneva Protocol, where it is stated, under the Article III, each state contracting ‘shall recognise arbitral awards as binding and enforce them in accordance with the rules or procedure of the territory where the award is relied upon’.
Thus the convention has facilitated the enforcement of awards in all contracting states. Furthermore, as highlighted in Fletcher (2001) the UNCITRAL Model Law, and the UNCITRAL Arbitration Rules have also directly influenced the way arbitrations are conducted, allowing for greater unification of arbitration across nations, as such the rules of the ICC, the London Court of International Arbitration (LCIA), and the American Arbitration Association (AAA) are similar. Some other multilateral conventions have included, the Panama or Inter-American Convention of 1975 which has be likened to the New York Convention, and the European or Geneva Convention of 1961.
The primary purpose of this convention was to facilitate the efficiency of arbitration within Europe particularly between Eastern and Western European countries. The US and Middle East have also been willing to cooperate between them in terms of arbitration, and in 1987 executed the Amman Convention. Therefore, it can be seen conventions concerned with the enforcement of the international arbitration awards cover most of the world. This has provided greater confidence to international traders, which has led to making arbitration as a mechanism for dispute settlement more popular.
Another advantage of arbitration is it also offers ‘neutrality’. As the ICC suggests, parties to a contract can places themselves on an equal footing in 5 key respects:
Hence, arbitration offers greater flexibility and party autonomy in decision making, as parties are free to contract where and how the arbitration will be conducted. The arbitration be conducted in any language, any country and with an arbitrator of any nationality. This may be of particular benefit if there is a question of trust, as according to Schmitthoff (1990), parties may prefer to entrust the resolution of the dispute to an arbitrator of their own choice. This is further commented on by Fletcher (2001) who said, ‘When contracting parties from different countries mistrust each other’s legal system, arbitration can level the playing field on the event of disputes, reducing the risk of unfamiliar procedures, perhaps in foreign languages before xenophobic judges’.
Like the ICC the SCC (Stockholm Chamber of Commerce) also allows for significant party autonomy in selecting the procedural rules that apply to be followed by the arbitrators. This common principle has made international arbitration more acceptable to the international traders.
The fourth advantage presented by the ICC is the ‘specialized competence of arbitrators’. As judicial systems do not allow parties to a contract to select their own judges, they may find themselves faced with a judge who has little or no expertise in the nature of the business of parties involved. This can be particularly important if the dispute is related to the quality of goods being offered, for example, it will enable the parties to have their dispute resolved by someone who has a specialized competence in the field, related to them. Hence they will actually be able to more effectively judge the quality of the product in dispute.
Arbitration as identified by Schmitthoff (1990) can be advantageous over litigation if the dispute concerns only facts, such as the quality if goods being offered, and the majority of these ‘quality arbitrations’ are resolved cheaply and promptly, it is also unlikely a dispute arising from the arbitration will be taken to court. However if the dispute is not concerned with facts, but of question that is wholly legal, it may be cheaper for the parties to a contract to settle the dispute in court. ‘In these so-called technical arbitrations it is often to the advantage of the parties to waive mutual agreement and go straight away to the commercial court’ (Schmitthoff 1990)
There can in instances be ‘mixed arbitrations’ where the dispute is not only concerned with questions of fact, but also of law. Here the arbitrator’s decision on legal questions will be subject to a judicial review, but not the arbitrator’s decision on facts.
Another advantage mentioned by the ICC, is ‘speed and economy’. It is suggested arbitration is cheaper and quicker than litigation in the courts, however an international dispute that is particularly complicated, even with arbitration is likely to taker a larger amount of time to resolve at greater expense. Nevertheless, as mentioned previously the limited scope for challenge for arbitral awards does offer a distinct advantage.
The final advantage listed by the ICC on their website, is that of ‘confidentiality’ which has also been recognised by Schmitthoff (1990), who said ‘arbitration’s private and does not take place in open court’, and as suggested by Hotchkiss (1994), in sensitive matters this can be beneficial as, if a business is concerned about the disclosure of confidential information, but can also be beneficial if a business is concerned about the negative affect publicity of any lawsuit can have on the company. As unlike court proceedings, which are open to the public, and can result in published decisions. Arbitration is a private process, and has a lack of publicity.
Another advantage of arbitration not mentioned by the ICC, is that it is linked to lex mercatoria.
It is important to note, arbitration can only take place with the agreement of both parties to a contract to submit to this method of dispute settlement. This can take the form of an ‘arbitration clause’ or a separate ‘arbitration agreement which may be drawn up particularly after the dispute has arisen. The agreement will determine the jurisdiction of the arbitration, and that an arbitrator should not exceed the powers that have been bestowed on him. As the agreement is contractual other considerations need to addressed, the issue that, if the parties to a contract disagree over whether an arbitrator actually has jurisdiction, then will the arbitrator be ultimately able to decide himself whether he has jurisdiction. A second issue to be addressed is whether an original contract can be deemed void, by the arbitrator if the arbitration clause is found within that very same contract.
Under the arbitration agreement parties to the contract may decide upon either ad hoc arbitration or an institutional arbitration. In ad hoc arbitration, the parties may either collectively decide upon the arbitrator, or leave the selection of the arbitrator to a third person. The arbitrators in this instance will arbitrate themselves. However, if there is a problem in starting the arbitration process, the parties may require assistance from the state court or an independent appointing authority, such as the ICC or London Court of International (LCIA). The parties will be able to select ad hoc rules they would like to be applied, such as the UNCITRAL arbitration rules. In ad hoc arbitration if the country in question (such as Australia) has adopted Model Law then UNCITRAL rules should be applied.
In institutional arbitration the parties will agree on arbitration under the rules of one of the institutions, which provide for the arbitral settlement of disputes, be it the ICC, or the LCIA. This can be more advantageous over ad hoc arbitration, as the intuition may offer some assistance with administration with regard to the conduct of arbitration. Though this will require the payment of a fee to the institution that will be administering the arbitration, this can be vital in making sure the arbitration results in an arbitral reward with a limited amount of disruption, and without the need to take the case to court. The ICC court will for example, as necessary:
Despite the advantages of arbitration mentioned above, it still has some shortcomings, as arbitration can still be considered to be slow and inconvenient, particularly if the award is challenged, (though it is faster than the alterative of litigation), or in the extreme example of, the parties involved in arbitration living in different countries as well as the arbitrator, with the arbitration institution again in a different county. All people involved will have to find a common location to meet, but there may be issues of visa applications, they may also be required to meet on more than occasion, again delaying the process, which may make the arbitration process undesirably long and costly. Thus, if it is being used in a case that is related to a technological dispute for example, arbitration may be an unsatisfactory procedure as the technology may in fact become obsolete by the time a final judgment has been made. Therefore in certain situations like in the example presented above, arbitration may not be the most desirable mechanise for dispute settlement.
Although the assertion has been made that arbitration is a less expensive mechanism for the settlement of international dispute settlement, (when compared to litigation, the costs attached to arbitration however, can still not be ignored. As previously highlighted there are arbitration fees, if an institutional arbitration is selected, add to this the expenses for the arbitrators travel and accommodation, as well as those of the parties to the contracts, and any legal fee, as it can be argued that only the very simplest of cases can be dealt with without the assistance of lawyers. Thus a legal fee will be charged.
Another disadvantage as identified by Fletcher (2001) is, ‘International commercial arbitration lacks any universally recognised standard-setting body.’ This may lead to ‘abuse’ in arbitration, as statues and conventional contain only general principles. With institutions that assist in arbitrations forming their own set of rules, though they are considered to be similar. However, under Model Law the rules will usually be adhered to, as in model law, rules are ‘not legally binding, but which in practice will be adhered to by those who subscribe to them (Goode, 1995) The rules of model law will not be enforceable unless the parties that subscribe to a commercial transaction decide otherwise.
There can also be a tension between fairness and efficiency as the arbitrator will be faced with the difficult task of balancing efficiency against the careful consideration of all arguments, which may not be easily done, this can result in long and costly court actions, especially if a party feels the haven’t received full opportunity to present their case.
In recent times, arbitration has been met with competition from other alternative dispute resolution (ADR) tools, such as negation, mediation, conciliation and mini-trials. These ADR mechanisms have been constantly developed as an alterative to either compliment arbitration or to displace it completely. Nevertheless arbitration is the most commonly used mechanism for dispute settlement in international trade.
In conclusion, as presented arbitration is an ever increasingly popular mechanism for dispute settlement in international trade. It has many advantages over the other dispute settlement mechanisms, particularly litigation which has been discussed. However the advantages may only exist in certain situations.
The international recognition of arbitral awards has made the arbitration process easier to implement, as it is accepted by over one hundred counties, who have signed the New York Convention. There is a greater unification of the arbitration process, with the rules of institutions that provide arbitration support, such as the ICC, SCC, LCIA and AAA in various nations being similar. This has perhaps contributed to the growth and popularity for the adoption of arbitration as a dispute settlement mechanism, as well as the other advantages discussed.
Nevertheless, some of the perceived advantages of arbitration, can also present a disadvantage, such as the assertion, arbitration is a cheap and fast way of settling a dispute. As described, this may not necessarily be true in all situations. It is still possible the case may still go to court for the settlement of a dispute, as it has been suggested only the simplest of cases escape this. This will, of course result in legal fees. Additional to the expenses included in arbitration.
Also, in some situations it may be more desirable to go to court in the very first instance, depending upon the nature of the dispute, but only of both parties agree, particularly if dispute is of a entirely legal nature. It may also be beneficial to conduct a ‘mixed arbitration is the dispute calls for it.
Moreover, Fletcher (2001), mentioned the lack of a universally recognised standard setting body can lead to ‘abuse’ on arbitration. Thus it is suggests, for some international trade disputes, arbitration is indeed the most appropriate mechanism for dispute settlement, but perhaps only in the simplest of cases. Business people should also always take in to consideration the dispute may result in being settled in court, which can be costly and lengthy despite the use of arbitration. (perhaps this is only true in extreme circumstances). Also if both parties agree, it may be favourable to go through a process of litigation immediately for the dispute settlement.
Nevertheless, regardless of the negative points highlighted above, arbitration is a valuable alternative dispute resolution mechanism. One that is increasing it is popularity, with many distinct advantages that by far outweigh the disadvantages.
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