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Why international arbitration clauses should be in contracts

hubbard-and-mrozekNew England is home to world-beating companies that operate all across the planet, from manufacturing companies that have been in business for centuries to the innovative life sciences companies being created every day.

Our local companies have a global reach, entering into mergers, acquisitions, manufacturing contracts, licensing agreements, joint ventures, and research and development partnerships with companies and institutions around the world. Such global partnerships offer innumerable opportunities.

But there are also serious risks. From cross-cultural confusion to simply failing to meet the terms of their deals, global partnerships can lead to complicated disputes. When working internationally, the solution of choice for resolving those disputes is to include international arbitration clauses in the contract.

What it is

International arbitration is the resolution of contractual disputes by an arbitrator or arbitral panel, instead of resolution of a dispute in judicial courts.

From a practical standpoint, this means that parties will not have their disputes resolved in one or the other party’s home courts, but rather will have their dispute heard and resolved by neutral arbitrators selected in accordance with the parties’ agreement.

International arbitration is a creature of contract, so in-house counsel need to plan ahead and include the necessary dispute resolution provisions in any international contracts.

It also means avoiding the “rush to the courthouse” in which both parties rush to have a case heard first by their country’s courts, in hopes of preventing the other party from doing the same.

International arbitration is a creature of contract, so in-house counsel need to plan ahead and include the necessary dispute resolution provisions in any international contracts.

Why use it

One word: Enforceability. The United States and 158 other nations are signatories to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the New York Convention).

Signatories to the New York Convention are obligated to give effect to arbitration provisions and enforce arbitration awards rendered in other signatory states. This means that a U.S. company can take an arbitration award to the national courts of another signatory country (i.e. China, France, India, etc.) and the local courts will enforce the award, increasing the chance you will get paid or have your injunction enforced.

There is no similar international mechanism to enforce court judgments in foreign countries. For example, it can be very difficult to take a judgment issued by a U.S. court and have it enforced abroad. So while an arbitral award increases the likelihood of having your rights enforced in 158 different countries, a U.S. judgment is often just a piece of paper outside of our borders.

Other benefits

While enforcement is the greatest advantage of international arbitration over courtroom litigation, there are several other significant advantages:

Customization. Unlike national court rules, which are binding for all parties appearing before the courts, the parties in international arbitration can customize the proceedings to fit their needs.

This includes customizing how the arbitrator is selected, whether the arbitration is confidential, how long the arbitrators have to resolve their dispute, how much discovery should be allowed, and any other special procedures that may make sense for a specific contract or dispute.

Selection of the arbitrators. One of the key advantages of arbitration is that the parties select the arbitrators, either by agreement or — in the case of three arbitrators — by each party selecting one arbitrator, and having those arbitrators select the final arbitrator.

This provides two significant benefits: expertise and neutrality. Rather than being randomly assigned a judge, or selecting a random jury, parties can choose individuals with expertise in the industry or the specific dispute who are very familiar with the issues involved.

Parties also get a neutral decision-maker, rather than having to rely on a national judiciary that may not be truly independent.

Confidentiality. Unlike litigation in American and other national courts, there is no presumption of public access in arbitral proceedings. Thus, arbitral proceedings are by their nature more confidential than judicial proceedings.

Moreover, parties can include heightened confidentiality measures in their international arbitration clauses. The confidentiality of international arbitrations is particularly beneficial for industry disputes that may involve highly valuable and sensitive information.

Speed of resolution. Parties can include in their international arbitration clauses that certain types of disputes will be resolved in specified time frames. This can be particularly useful for disputes that arise in the course of production and require speedy resolution in order to get products to market.

Types of disputes

Disputes arising out of virtually any contract can be resolved by arbitration. These include general commercial issues such as licensing issues, manufacturing problems, supply agreements, complications from regulatory decisions, breach and other contractual disputes.

Whenever a deal goes international, however, such standard disputes can become significantly more complicated. By using international arbitration as the dispute resolution mechanism, companies can be assured they will know the rules and applicable law governing any disputes, and that resolution will be binding and enforceable on all parties.

Other types of disputes are more unique to specific industries. For example, New England is a hub for life sciences companies, which regularly deal with disputes relating to co-inventorship issues, patent infringement, joint venture, research and development, and co-promotion of products.

There can also be disputes in the course of mergers and acquisitions between start-ups and larger companies. In an international arbitration, these disputes can be resolved by arbitrators with specific industry experience, often — if necessary — on an emergency basis, and with any decision then enforceable around the world.

How it works

While the exact procedures of an international arbitration will depend on the contract language, the arbitral rules selected, law of the seat of the arbitration, and the arbitrators chosen, generally the procedures will be as follows:

The proceedings begin with the claimant (plaintiffs are referred to as claimants, and defendants as respondents) providing notice of the dispute. The notice can be as simple as a short statement saying that the contract has been breached or be akin to a complaint as in U.S. litigation.

After the notice, the respondent submits an answer or a denial.

Following this initiation of proceedings, the parties select the arbitrator or arbitral panel. If the contract calls for an arbitral panel, each party will generally select one arbitrator and the two arbitrators will then select the chair.

Once the arbitrator or panel is selected, they will hold a conference with the parties to establish the procedures going forward. This conference is often done by phone or video and ends with the issuance of a procedural order governing the case.

Following the establishment of the procedures, both sides will brief their side of the case. The briefing includes papers putting forth the arguments from both sides and witness statements.

After the first round of briefing, the parties will engage in limited discovery, focusing on narrow document production.

Depositions are rare in arbitral proceedings, and typically the first time to question the other party’s witnesses will be at the hearing.

Following the document disclosure, the parties will submit their second round of briefing, which responds to arguments from the first round of briefing and brings in new evidence from the document production.

Prior to the arbitral hearing, the arbitrator or tribunal will hold a pre-hearing conference. There may be briefing ahead of this conference summarizing the issues and parties’ arguments. At the hearing itself, the tribunal and the parties will gather in order to hear evidence from the witnesses.

The parties will frequently make opening statements. Because witnesses have already put forth their case in chief in written witness statements, direct examinations are normally very short (on the order of five to 15 minutes), with most of the time being spent on cross-examination of witnesses.

Frequently, unique procedures are adopted for expert witnesses, such as requiring the parties to submit points of agreement and disagreement between experts prior to the hearing or having both parties’ witnesses on an issue questioned at the same time (known as “hot tubbing”).

Closing arguments are sometimes heard following the testimony.

Following the hearing, the tribunal may request additional post-hearing briefs, and after all briefing is complete, will issue an arbitral award. The timing of such an award will depend on the contract, the rules, the complexity of the dispute, and the arbitrators.

What clause works best?

The eternal lawyer’s answer applies here: It depends. Most of the major arbitral institutions — such as the International Chamber of Commerce and International Centre for Dispute Resolution (which is the international branch of the American Arbitration Association) — provide draft clauses on their websites that can be put into a contract.

But companies should generally have an experienced attorney familiar with international arbitration assist with drafting these clauses for their contracts. There are significant choices to be made: which arbitral rules to use, where to have the arbitration (which determines the procedural law for the arbitration), whether to include a mediation provision (known as a step-clause), and whether to adopt any specific rules (such as time limits) based on the contract and relationship between the parties.

Jared L. Hubbard, counsel at Fitch Law Partners in Boston and president of the nonprofit Boston International Arbitration Council, represents clients in complex litigation matters, with a particular focus on helping clients navigate international disputes. Malgorzata Mrózek, an associate at Fitch Law, focuses her practice on business litigation and international disputes.

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