THE BENEFITS OF INTERNATIONAL ARBITRATION

By Louis B. Kimmelman and Claudia E. Ray

United States businesses looking for global opportunities, and foreign businesses eyeing the United States market often fail to consider what might happen if their transactions turn sour. Thinking about dispute resolution is generally not a priority for parties engaged in exciting international deals. Unfortunately, the failure to prepare for possible disputes can prove costly. There are compelling reasons why both United States and foreign companies should consider how their disputes will be resolved at the time they negotiate their transactions.

RISKS OF LITIGATION

When problems arise in the absence of an agreed upon mechanism for resolving disputes, each party can be expected to seek a tactical advantage by commencing litigation in its home courts. When this happens, certainly one party will feel that it is the loser. This is because the forum selected for the litigation of an international dispute can significantly impact how it is resolved.

Home court advantage. Each party will attempt to pursue litigation in its own courts, under familiar procedures and laws. For the party that is not "at home," the proceeding may seem unfamiliar and incomprehensible.

Procedures. The legal procedures available in different countries vary significantly. For instance, United States procedural rules permit parties to engage in broad pretrial discovery and to have cases resolved by jury trial. These procedures are unavailable in most other countries.

Law. Substantive laws also differ significantly around the world. For instance, United States law allows punitive damages in certain contexts, and specific statutes, such as the antitrust laws, allow treble damages. In other countries, the types and measure of damages available are generally more limited.

Language. The language of a court proceeding will usually be foreign to one of the parties. This will make it more difficult for that party to understand and participate in the process.

Delay. Whether cases are commenced in United States or foreign courts, the process is often lengthy. It is not unusual for commercial disputes in the United States to be pending for years.

Cost. Judicial proceedings in national courts are not only long, but often costly. That is certainly the case with respect to United States litigation.

Enforceability. Even if a party obtains a judgment after a legal proceeding, there is no assurance that the judgment will be enforceable in another country. Because the United States is not a party to any international treaty providing for the recognition and enforcement of judgments, a United States judgment may not be easily enforced abroad.

ADVANTAGES OF ARBITRATION

A dispute resolution clause providing for arbitration in an international agreement can eliminate or at least significantly reduce many of the risks arising from international litigation.

Administering organizations. There are numerous international organizations that can administer an international arbitration. For instance, the International Chamber of Commerce (ICC), the American Arbitration Association (AAA), the London Court of International Arbitration and the World Intellectual Property Organization (WIPO) are among the leading international arbitration organizations. Each institution provides an administrative staff to organize and monitor an arbitration case and its own cost structure for providing these services.

Procedures. One of the benefits of arbitration is that the parties can choose the procedural rules that will apply to their dispute. For instance, they can choose the ICC Rules of Arbitration, the International Rules of the AAA, the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, or the WIPO Arbitration Rules, among others. Some of these rules are detailed, others are general, and some are intended to cover particular types of disputes. For example, the WIPO Arbitration Rules are specifically designed to resolve intellectual property disputes. The parties also can tailor their arbitration clause to meet their specific needs, such as providing for certain types of discovery.

Venue. The parties can select the location where their disputes will be resolved, thereby eliminating any "home court" advantage.

The Arbitrator. The parties can specify how many arbitrators will decide their dispute, what their nationality and background shall be, and whether they must have any particular substantive expertise. This can give both parties confidence in the impartiality and experience of the tribunal.

Less formality. Arbitration tends to be a more practical and less formal process. Because rules of evidence are not applied, as they would be in court, it is easier for parties to understand and to participate in the process.

Speed. Arbitration is often a faster process than litigation. Certainly where both parties seek a prompt resolution, there are no institutional constraints that prevent it, and many opportunities to accelerate the process.

Private proceedings. Arbitration is usually a private dispute resolution process, shielded from public scrutiny. Where confidentiality is a particular concern, the parties can and should specifically provide for such treatment in a confidentiality agreement.

Cost. Generally, arbitration is a faster process that involves fewer of the procedures common to litigation, such as extensive discovery. As a result, the cost of arbitration in the United States is commonly less than the cost of litigating the same dispute.

Enforceability. Unlike judgments, arbitral awards are covered by an international convention that provides for their recognition and enforcement. The United States and over 100 other nations are signatories to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. This makes an arbitration award easier to enforce in the United States and abroad than a court judgment.

As a mechanism for international dispute resolution, arbitration offers many advantages over traditional litigation including neutrality, speed and flexibility. Because differences in legal systems can pose significant obstacles for a party seeking to pursue or defend a claim, those involved in an international transaction should consider including an arbitration clause in their agreements.

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Louis B. Kimmelman is a partner and Claudia E. Ray an associate in the litigation department of O'Melveny & Myers' New York office. They have significant experience in international arbitration and litigation involving complex commercial disputes for U.S. and foreign clients.

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