The International Commercial Arbitration: Its Advantages and Disadvantages

Subject: Law
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Introduction

According to some scholarly writings, international commercial arbitration has become a preferred means of settling international commercial disputes. In this regard, these scholarly works suggest that international commercial arbitration has several advantages over the domestic court systems. This paper shall explore whether or not international commercial arbitration has become preferred means of settling disputes, its advantages and disadvantages, and whether or not implementation of a formal dispute resolution policy is effective for a firm.

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Is international commercial arbitration a ‘preferred’ means of dispute resolution in international commerce?

According to Gary Born and Wendy Miles, international commercial arbitration has experienced increased popularity as a preferred means of resolving international commercial disputes. At the same time, most courts in different nations are also supporting arbitration. However, there are some elements of sporadic resistance from some states interested in protecting their interests and actions from international scrutiny. These trends of resistances are declining as these states find themselves isolated and difficult to defend their actions (Born and Miles, 2009).

Arbitration has been a persisting popular choice for parties, in both state-to-state and commercial dispute resolution. The attractions of arbitration have remained and growing due to various reasons (NAFTA, 2009). Parties prefer to arbitrate in order to avoid the expense, delays, and rigidities of lawsuit in state courts, together with the peculiar uncertainties of international litigation (including jurisdictional, choice-of-law and enforcement disputes). Rather, they seek neutral, expert dispute resolution in a tribunal of their preferences and a single, centralized mediation.

The Geneva Protocol of 1923 laid the current legal foundation for international arbitration. Since then, the legal framework for the international arbitration has evolved due to varied needs of the business environments. Consequently, international arbitration has ensured that the international legal system and main national legal bodies have become firmly pro-arbitration. The development in international arbitration has led to the modern New York Convention also known as the United Nations Commission on International Trade Law (UNCITRAL) of 1985 (Simmonds, 1978).

Statistics show that the number of nations that are party to the New York Convention is growing. Currently, there are more than 130 nations that are party to the New York Convention. The New York Convention has been in existence for over 50 years and has remained the foundation of all global arbitrations (Gaillard, 1988). The developments in the global legislative systems have enhanced the growth of international arbitration. At the same time, the ever increasing caseloads in some arbitration institutions have also resulted into the growth of international commercial arbitration (Berg, 2003; Born and Miles, 2009).

Advantages of resolving disputes through international commercial arbitration

International commercial arbitration is gaining recognitions due to several advantages to the parties involved in disputes. Firstly, it provides a neutral forum for the parties. The neutral forum detaches the disputing parties from their respective home legal systems. This neutrality has become a central focus for firms that prefer international commercial arbitration. Disputing parties prefer favourable and neutral forums for dispute resolution. Most parties would prefer their disputes resolution to occur in a familiar home ground. However, this is not favourable to the counter-party (Born, 1996). The nature of international business involves firms and people from different geographical regions, legal ideologies, culture, and language. In this regard, what a party may find attractive in its local court may be unattractive to the other party. Therefore, parties must seek a neutral ground that does not favour either party, and at the same time, will provide open and fair forum for presentations of cases. Firms find arbitration as the best option with a neutral forum (Rashda and Michelle, 2011).

International arbitration gives both parties a chance to choose a presiding arbitrator with a different nationality (Born and Miles, 2009). This eliminates chances of favouritism, and parochial concerns. In fact, leading institutions of arbitration recognise the fact that presiding arbitrators should come from a different nationality. This ensures that any favours due nationality orientations do not interfere with the process. Furthermore, the arbitration gives both parties opportunity of getting internationally-neutral processes and rules based upon the leading national and international legal systems of the New York Convention. Neutrality ensures that both parties do not experience some rigid or unfamiliar local or national laws of some countries (Simmonds, 1978).

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Secondly, international commercial arbitration provides a chance for centralised dispute resolution forum (Born and Miles, 2009). This aims at avoiding widespread jurisdictional and different choices of laws available to the parties. International arbitrations tend to eliminate the use of many proceedings. It gives both parties a linear process with centralised dispute resolution procedures in a single contractual forum. At the same time, parties draft, draw and interpret the agreements expansively to include a wide range of possible disputes between the parties.

International arbitration agreements and awards between parties have broad powers to stop any parallel proceedings in a national court. This move enables the international arbitration to achieve its objective of providing a central and single forum for disputing parties, instead of allowing several court proceedings on one case to take place around the globe (Redfern, 2004).

Thirdly, international arbitration has the advantage of providing enforceable agreements and awards. The international and leading national legal systems that control arbitration and awards have enforceable and conclusive results than local courts’ proceedings. This enables international arbitrations to have wide interpretations and powers than proceedings that occur in most local courts. This happens because of the New York Convention which has more than 135 countries has parties to it, and countries national arbitration laws that have their foundations from the UNCITRAL Model Law (Berg, 2003). The national arbitration laws ensure enforcement of the parties’ international arbitration agreements. The international arbitration agreements have the support of the New York Convention and different countries’ national arbitration laws. These laws ensure that there is an enforcement rule with almost no grounds of denying the agreements. To this end, internationals awards and agreements have been successful in most developed states in terms of enforcement (UNCITRAL, 2006).

On the other hand, not many regional arrangements exist to facilitate enforcement of foreign, mutual agreements or awards. At the same time, there is no any other international arbitration that functions like the New York Convention for international judgment and enforcement. Most countries are not party to multilateral agreements on the enforcement of external rules. Therefore, international rules are not practical alternatives to international commercial arbitration (Redfern, 2004).

Fourthly, the international commercial arbitration provides competence and expertise in a dispute resolution. Most local courts lack the technical know-how of complex international legal system or dispute resolutions. In addition, local judges take up cases without consideration for the experience or expertise in an international dispute resolution. In a case where expertise or experiences are available, the need to translate legal proceedings into another language creates legal problems or hinders understanding of proceedings. Disputing parties also believe that some countries lack the basic standards of judicial integrity, independence, and competence, especially in cases of local or regional proceedings where a fair judgement is almost impossible (Moses, 2008).

International arbitration provides opportunities for disputing parties the right to choose arbitrators with the experiences and expertise. In cases where parties cannot agree among themselves on the choice of a presiding arbitrator, the arbitral institution has the mandate to choose on their behalf. There are leading international arbitral institutions such as the International Chambers of Commerce, and the American Arbitration Association, among others that provide such solutions to the disputing parties (NAFTA, 2009).

The fifth attraction of international commercial arbitration is finality of decision. The international commercial arbitration lacks appellate review of arbitral awards. In developed nations, judicial reviews occur only under issues of jurisdiction, public policy, and procedural fairness. The international arbitration discourages any attempt to scrutinise the judicial decision. However, such finality in decisions has both positive and negative effects. Lack of appellate review mechanism reduces costs and delays associated with appeals, and further appeals. Conversely, this also implies that any wrong or eccentric arbitral decision can never be reversed. All in all, business entities consider finality and efficiency of arbitral procedures even if it means foregoing appellate rights (Mark and Nicholas, 1999).

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The sixth advantage of the international arbitration is speed and cost. Parties tend to believe that international arbitration provides quick and cheap means of resolving disputes than proceedings in local courts. However, this may not be necessarily true since international commercial arbitrations can have considerable expenses and delays (Davidson, 1991).

Some statistics indicate that international commercial arbitration is sometimes not cheap. Parties normally pay arbitrators’ fees and arbitral body. At the same time, there are also logistic costs associated with rentals of proceeding rooms, travelling, and other expenses. These are expenses that parties avoid through using local courts. However, in cases where there are multiple legal proceedings and representations, then the local courts become expensive than international arbitration (Bergsten, 1997).

Conversely, international commercial arbitration is not always quick in dispute resolution. In most cases, disputes may take up to 36 months in order to reach a final agreement, with bleak chances of earlier dispositions. However, international commercial arbitration responds fast to disputes and has effective tracking mechanisms for fast-tracking cases (Davidson, 1991). In most local or national courts, there are significant delays, sometimes resulting from appellate review. International commercial arbitration rarely has appellate reviews. This reduces delays and chances of another new trial in a case of reversal of the initial decision. The speed of dispute resolution on international arbitration varies. Therefore, it is difficult to rate such systems since they have no standard reference points. Before parties enter into a contract, they are free to choose which courts fit their needs, particularly with regard to domestic interventions. Many courts have a backlog of cases, and there are chances of significant delays. Therefore, they may not offer efficiency both parties need in terms of costs and speed (Davidson, 1991).

International commercial arbitration offers the parties confidentiality of dispute resolution processes. International arbitration stresses the importance of confidentiality in proceedings. Occasionally, international arbitration may not provide complete confidentiality, but the system operates under strict guidelines of ensuring confidential proceedings. To this end, parties must also respect confidentiality of the proceedings (Yves and Bryant, 1996).

International commercial arbitration usually takes place in private areas. Therefore, the public and the press do not have access, and in most cases, the submissions remain confidential under most jurisdictions. The international commercial arbitration achieves confidentiality through imposing it as a law whereas other arbitration bodies have it embedded expressly as a rule (Born and Miles, 2009).

This level of confidentiality is not present in most national courts. Some national jurisdictions may make the proceedings and arbitral agreements public using enforcement tactics. In order to enhance confidentiality between the counterparties, the agreement must reinforcement confidentiality through its draft.

Disadvantages of resolving disputes through international commercial arbitration

The main challenge in international commercial arbitration is language differences. In some cases, disputing parties may not come from regions with a similar or common language. Language of the contract may also be different. Most parties tend to believe that the language of the contract reflects the language in use. However, this may not be the case in situations of dispute resolution. If the parties cannot settle on a single language, then the arbitral institution will decide on the language of the proceedings. Sometimes, the proceeding may involve the use of more than a single language. However, this is a tedious procedure and not recommended (Sherwin, Vermal and Figueira, 2011).

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International commercial arbitrations almost lack appeal. The decisions are usually final, and parties cannot appeal in most countries. There are limited chances for reviewing concluded disputes. However, appealing and reviews occur under rare circumstances mainly in countries that have changed the New York Convention section regarding appealing. Absence of appeal may be a disadvantage to one party, but an advantage to the counterparty. The losing party feels cheated in case of a flawed procedure and final award. Therefore, lack of appeal only works better where the arbitration processes guarantee a well-founded agreement (NAFTA, 2009).

The business and legal circle of the NAFTA (North American Free Trade Agreement) community consider arbitration a suitable form of dispute resolution. However, NAFTA survey shows that some potential and current users express their reservation due to issues of pre-award or award solutions particularly in enforcing or seeking review. The committee recommends massive promotion of international use of arbitration among business communities. The promotion should address negative perceptions of managements about international arbitrations (NAFTA, 2009).

The international commercial arbitration awards have a challenge of enforceability. Most countries have now ratified the section of foreign award enforcement. This section requires nations to recognise foreign, international awards from other countries. Before the agreement, a party should check whether or not another party has assets in a signatory country. In addition, there is no other multilateral agreement where nations agree to recognise and enforce other judges’ decisions. Consequently, local or national court system will subject foreign rulings to domestic laws where chances of recognition are almost non-existing. Occasionally, the local courts may subject the foreign ruling to further review and denies it enforcement (Coe, 1997).

In some cases, international commercial arbitration may need court intervention in countries where the arbitral tribunal is lacking or where a court order is necessary in order to enforce or obtain interim action (Coe, 1997). In addition, where disputing parties fail to appoint arbitral institution, then court intervention is necessary for proceedings to begin. Parties should agree to appoint a third party to resolve dispute instead of resorting to court intervention. Several national regulations acknowledge parallel jurisdiction of courts and arbitral proceedings in cases of providing the necessary protections. When a party applies for relief from a local court, does mean that the party has a waiver to arbitrate the dispute. A party to a dispute may resort to a local court in a place where there is no arbitral body (Reisman, 1997).

International arbitral tribunals have no imperium. Consequently, there orders have limited effects compared to those of national courts. In this regard, arbitral tribunals may require a different court order to enforce them. Moreover, courts can act as facilitators in cases of needed evidence to the extent of compelling a third party to testify or produce relevant documents. International arbitration lacks this local force. A court intervention of this nature only complicates the proceedings of the international arbitration (Hill, 1988).

Most international arbitrations experience difficulties in joining a third party or consolidating actions. The consensual nature of arbitration leaves no room for the arbitrators to consolidate actions missing from the agreement. This normally creates drawback in situations where disputes involve various contracts that are not under the same arbitration agreement. In most cases, such disputes require two parallel tribunals, or a national court. This translates to increased cost, delays and two separate decisions that may not yield satisfactorily results. The privity of international arbitration prevents arbitrators from joining any actions between parties who have not reached an agreement. A joinder rarely occurs in international arbitration (Gaillard, 1988).

International commercial arbitration is costly and time-consuming mediation process. Geographical distances together with the language barriers may create the need for an interpreter that will attract additional cost to the proceedings. The process of finding a neutral arbitrator who is conversant with the cross-cultural issues makes international arbitration process difficult in comparison to domestic interventions (Sherwin, Vermal and Figueira, 2011).

Should your firm implement a formal dispute resolution policy requiring all disputes to be settled by arbitration?

According to surveys, majorities of firms’ management teams are not conversant with the arbitration. Consequently, the initial idea to implement arbitration as a way of resolving dispute usually comes from the in-house counsel. Since arbitration is an effective means of reducing conflicts and cost, every firm involved in international transactions should consider it (Coe, 1997). At the same time, international arbitration enhances confidentiality and can help maintain business relationships between the disputing parties.

There has been consistent growth in international commerce that has resulted into a demand for international legal services (Sherwin, Vermal and Figueira, 2011). Consequently, developed nations have taken a lead in fuelling growth of international commercial arbitration. International arbitration is developing because of parties that require services of such nature. Arbitration remains a preferred choice among disputing parties because of its advantages. At the same time, its international perspective make is it capable of overcoming most difficult witnessed in domestic courts.

Studies show that most firms or parties are embracing international commercial arbitration because it serves the objectives of the parties. However, some few elements of resistance are increasingly finding themselves isolated from the international business community (NAFTA, 2009). Scholars consider this a short-term trend that is not a threat to the growth of international arbitration. Therefore, any serious firm must implement a formal international dispute resolution in its legal procedures to exploit the benefits of international commercial arbitration.

Reference List

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Yves D and Bryant, G 1996, Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order, University of Chicago Press, London.