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Foreign Feuds (InsideCounsel)

Thu, Jan 3, 2008

By: Mary Swanton

When your company has a contract issue overseas, you’re in a whole different ballgame. And you’d better be ready to step up to the plate. Because for resolving cross-border contract disputes, international arbitration is really the only game in town—whether that town is Shanghai, Stockholm, Mexico City or Mumbai—and the rules of the game are different from those of both U.S. courts and arbitral panels.

“International arbitration is not a perfect process,” says A. Stephens Clay, partner in Kilpatrick Stockton. “You have to work around its shortcomings. But there isn’t any substitute that is satisfactory, and it’s a waste of time to try to find another way.”

Arbitration trumps litigation for overseas contract claims for two reasons. First, your dispute will be heard in a neutral forum, instead of in the other party’s home court where you may start with an insurmountable disadvantage and face a corrupt judiciary or a backlog that stymies resolution of the matter for a decade.

Second, with arbitration you have an excellent shot at getting an award enforced—not the case when a contract dispute goes to court in many countries around the world. Consider,too, that you will need to enforce the award in the country where the other party has assets, not necessarily the country where the dispute occurs. Under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention, 142 countries agree to enforce international arbitration awards. No comparable treaty governs foreign court judgments.

“The key thing is that you want to have the opportunity to collect a judgment against the other party,” says Mark Katz, general counsel of Singapore-based First Oriental Holdings Corp. “We go to arbitration because it’s better than the local courts, and awards can be enforced anywhere in the world.”

Crafting Clauses
A successful conclusion to the arbitration game requires the general counsel’s attention long before any dispute arises. GCs need to ensure that every international contract contains a carefully drafted arbitration clause. The major arbitral organizations offer standard clauses, but arbitration experts advise customizing the provisions to fit your business objectives and accommodate the unique circumstances of your agreement.

“There is no such thing as a one-size-fits-all arbitration clause,” says Christopher Tahbaz,partner in Debevoise & Plimpton. “A well-drafted clause requires some attention, but it is well worth the effort.”

Among the variables you should define: the venue for the arbitration; the arbitration institution, if any, that will administer it; the law that governs the contract; the language in which the proceedings will be conducted; and the number of arbitrators who will decide the matter.

Problems arise when general counsel aren’t involved early enough to understand the parties involved and the cultural and legal issues that might surface. Too often the parties add arbitration clauses at the conclusion of negotiations, when, in the euphoria surrounding the contract completion, everyone is oblivious to the land mines that might lie ahead. As a result they overlook details that come back to haunt the company.

“Almost no one pays sufficient attention at the front end, when everyone is a friend,” says Mark Baker, head of the international arbitration practice at Fulbright & Jaworski. “But if you get it wrong in your arbitration agreement, you are on a very expensive odyssey.”

Most likely, getting it right will mean consulting outside counsel experienced in international arbitration in the part of the world where you are operating. That’s because designating a venue is one of the most challenging parts of drafting an arbitration clause—but also one of the most important. Not only do you want to ensure the country chosen is a signatory to the New York Convention, but you also want a country whose legal system is supportive of arbitration. In some countries local courts will vacate an - arbitration award or interfere with the arbitration process.

Even a country with a strong legal system may not suit your situation. John Gardiner, partner in Skadden Arps Slate Meagher & Flom, recalls a case where a U.S. company and its foreign partner had agreed to conduct an arbitration in London. The arbitration clause called for the parties to bear their own legal fees and split the cost of the arbitral tribunal. However, British law renders void any agreement about arbitration costs.

“The English Arbitration Act has a lot of provisions that are a trap for the unwary,” Gardiner says. “By venuing their arbitration in London, the parties unwittingly ended up with a clause that was not enforceable.”

Unearthing Arbitrators Once a dispute arises and the arbitration clause is invoked, your next challenge is selecting the best possible person or panel to decide the matter. Arbitration clauses usually specify either one arbitrator or a panel of three. With arbitrator fees of up to $1,000 per hour, using one arbitrator reduces costs substantially and usually expedites the proceedings because it’s not as difficult to schedule hearings.

But a panel of three arbitrators—each side picks one, and those two pick the third—offers more comfort of a balanced result. Katz suggests using one arbitrator for smaller disputes but three for matters over $1 million. Regardless, finding the right arbitrator can be a challenge.

“The first condition of being satisfied with international arbitration is that you get high quality and experienced arbitrators,” Clay says. “The process will only be as good as the arbitrators, but the inventory of qualified people is hard to come by.”

No one maintains a central worldwide registry of arbitrators, though some arbitral institutions have their own lists. International arbitration counsel agree there are 50 to 100 big name arbitrators—mostly males over age 60 in London, Paris, New York and Washington—who constantly surface in word-of-mouth recommendations. But those people are among both the most expensive and the most difficult to book. Some overschedule themselves, leading to unexpected delays.

Counsel selecting arbitrators often overlook a younger crop—men and women who have substantial arbitration experience but aren’t on the list shared among the old boys’ network.

“There are qualified people in the 45 to 60 age group in Toronto, Dublin, Chicago and other places around the world who are very able and cost less money,” Clay says. “The challenge is to find them.”

He recommends attending conferences where arbitration is the principal topic to develop a list of possible arbitrators. In addition the International Institute for Conflict Prevention and Resolution (CPR) provides lists of qualified arbitrators to members, and the American Arbitration Association’s International Centre for Dispute Resolution (ICDR) provides lists as part of its arbitration administration service. Regional arbitration organizations, such as the Singapore International Arbitration Centre (SIAC), maintain their own lists.

Among the important qualities to seek in arbitrators, according to CPR’s senior vice president Helena Tavares Erickson: their ability to bridge cultures and legal systems, reputation for impartiality, commitment to availability and willingness to enforce decisions that will move the process along. Arbitrators on CPR’s list average $600 to $700 per hour, compared to $1,000 an hour for the top names.

“People tend to routinely go back to a few dozen well-known, well-established arbitrators, but there is a much greater number of qualified international arbitrators, especially younger arbitrators who have spent their entire career in arbitration,” she says.

Ditching Discovery
Once the arbitrators are chosen, it’s time to prepare for the proceedings. That means throwing away most of what you’ve learned about litigation—and even some of what you know about domestic arbitration. For example, dispositive motions aren’t commonly a part of international arbitration, although the right to seek a preliminary injunction or summary judgment can be written into the arbitration clause. But generally the parties meet with the arbitrators and explain what the case is about. Often the next face-to-face contact will be an evidenciary hearing, but that may be a year later.

“Sometimes people are not aware that it is not common to have motion practice [in international arbitration],” Erickson says. “If the issue is ripe for summary judgment, they may have to go through the entire arbitration to get that issued.”

Clay points out that because attorneys aren’t appearing before the arbitration panel to argue motions, they don’t get a read on what the arbitrators are thinking. Requesting a couple of conferences with the panel prior to the final hearing, preferably by videoconference to reduce travel costs, can spur a settlement.

“There can be a long period of time when no one is changing positions because they are not getting feedback from the [arbitration] panel,” Clay says. “In litigation, we usually know which side the judge is more likely to sympathize with, and that has a big effect on getting settlements.”

Don’t expect the kind of deposition and discovery process you find in the U.S. courts either. A decade ago international arbitrators never allowed discovery, and they still may exclude it. Even when they allow it, they expect specific requests and a strong argument for why discovery is necessary. For example they probably will not grant a request for emails exchanged among several individuals unless it is limited to e-mails on a narrow topic.

“The arbitration bar feels that if you don’t have enough evidence [without discovery], you should not have brought the case,” Clay says. “In the U.S. we are so dependent on discovery that we’ve forgotten how to investigate the facts.”

While it is possible to write a discovery provision into the arbitration clause, Richard Naimark, senior vice president of ICDR, doesn’t think discovery is worth the substantial cost it adds to the process.

“The reality is that basic document exchange usually works well,” he says. In lieu of depositions and extensive oral testimony, arbitrators expect witnesses to submit written testimony. Written documents—including expert testimony and the briefs submitted by the parties—carry more weight than what is said at the hearing.

“Appreciate that just because the ways are different, they are not inferior,” Tahbaz says. “For example, to U.S.-based general counsel, testimony through written statements may be a very foreign concept, but there is no diminishment in the quality of the outcome and it is much more efficient. Being open to these kinds of differences is important.”

Culture Clashes
In addition to adjusting to unfamiliar legal procedures, U.S. lawyers embarking on international arbitration need to adapt their style to accommodate cultural differences. Americans, trained to be aggressive and freewheeling, stumble before arbitrators accustomed to a more restrained style. What the American might think is a dramatic closing argument may strike the arbitrator as unnecessary hyperbole.

“Almost all the things U.S. litigators want to do are wrong in arbitration,” Baker says. “If you take the Perry Mason approach of trying to show that someone is a lying son-of-agun, the arbitrators will hate that and sympathize with the witness.”

Americans also may come off as arrogant, disrespectful of differences in legal traditions, insistent on doing things the way they’re done at home and “offended when the tribunal doesn’t agree to that,” says Larry Schaner, partner in Jenner & Block. The direct, takeno- prisoners American style also may impede negotiations with a party from a culture where people are indirect in their responses and take a slow, studied approach to business dealings. Americans may think they are getting the runaround, while their counterparts simply need time to get comfortable with the situation.

“We move like bulls in a china shop,” Katz says. “Frequently Americans intimidate people from other cultures. We get so carried away that we don’t listen, and so we don’t understand the other side.”

Language issues also can cause misunderstandings. Naimark cites a dispute between companies from Texas and France where the Texans were up in arms because their French counterparts kept making “demands.” The Texans didn’t realize that “Je demande” is French for “I request.”

Misunderstandings can even develop between English-speaking parties. Michael Pillow, director of energy service contracts for Orlando, Fla.-based Siemens Power Generation, recalls an arbitration in India involving arbitrators from Scotland and India and attorneys from India and the U.S.

“In terms of what people were saying, it was not clear we were speaking the same language,” he says. These misunderstandings can be costly, particularly when they cause the parties to miss opportunities to settle the dispute. One of the biggest mistakes you can make is getting locked into arbitration when the matter could be settled at a great cost savings.

“Every dispute has a series of opportunity points under which it can be resolved,” Baker says. “But the cross-cultural clash can be so extreme and the Americans so tone deaf that they don’t see the opportunities that are presented. So all kinds of opportunities for business resolution are missed because it’s ships passing in the night.”

Costly process
Settlement often makes sense because international arbitration is expensive—on par with the cost of litigation. Couple the high fees charged by arbitrators with the fees of outside counsel, arbitration administration fees and travel costs, and the sum can be staggering.

Naimark notes a recent trend of companies specifying a tiered dispute resolution process, attempting to first resolve the issue through negotiation and mediation before invoking arbitration. “It can work and save a lot of money,” he notes.

But if you can’t settle the dispute without a formal process, you’ll be glad you have that arbitration clause. You will already have selected a venue where you know a judgment against the other party can be enforced, you’ll have chosen the rules that govern the proceeding and you’ll have a voice in who will decide the dispute. In addition to improving the prospects for collecting on a contract gone bad, an arbitration clause offers you some comfort if your counterpart takes action against you.

“You have to look at the alternative,” Gardiner says. “[Without an arbitration clause], you leave yourself open to defending yourself in a far-flung land with a court system you are completely unfamiliar with.” The consequences can be serious. In India, for instance, it can take a decade to bring a lawsuit to trial. In some emerging countries, the rule of law Americans take for granted does not apply. So while it may be a close call between arbitration or litigation in domestic contract disputes, for international contracts arbitration is the clear-cut choice.

“In the international context, arbitration wins hands down over litigation,” Schaner says. “The case for international arbitration is very strong.”

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