This article is written by Jisha Garg, a student currently pursuing B.A.LLB (Hons.) from the Rajiv Gandhi National University of Law, Punjab. This is an exhaustive article dealing with International Commercial Disputes and the various mechanisms to deal with it. The article discusses in detail the working of litigation, arbitration and mediation and their respective drawbacks. In conclusion, the best method to resolve international commercial disputes is being talked about.

Introduction

There are trade and commerce constantly in action at the international level and as a result of that, there arise some inevitable disagreements and conflicts between the two contracting parties. These disputes can have serious repercussions on the trade links between the parties resulting in delayed imports and defaulted payments. These can also adversely impact the future commercial relations of the parties involved in the dispute. Therefore, the international commercial disputes arising amongst various parties be resolved and relations must be restored. There are two ways of resolving international disputes, the pacific means and coercive means.

Pacific means include arbitration, negotiation, mediation, conciliation, judicial settlements etc. Coercive or compulsive means include retorsion, reprisal, embargo, pacific blockade etc. Although there are two ways available for the settlement of international disputes, the method that has been most effective in recent times has been the pacific method. The various international laws governing international disputes include The Hague Convention of 1899 and 1907 and the United Nations Charter.

When do international commercial disputes occur

Payment terms

There can be disagreements on the terms of payment among the parties involved in international commerce. There can be times when one of the parties may demand advance payment from the other party and agree to collect the remaining amount on a later date. The non-payment of this amount by the opposite party can lead to conflicts. Conflicts can also arise due to some other factors such as delayed completion in contracts, modifications in the contract without informing, deteriorated quality of goods etc.

Letter of guarantee

Disputes can also arise in the failure to issue letters of guarantee while negotiating the terms of the agreement. Letters of the guarantee are issued to decide the liability of the opposite party in case there is a non-compliance with the terms of the agreement. The letters of guarantee can also be misused by the buyer to obtain additional funds.

Foreign exchange rates

In the case of international agreements, the contracts are usually signed in International currencies. Trading in foreign currency exposes the parties to the risks of foreign exchange. There can be depreciation or appreciation of currency at any point in time. This appreciation or depreciation can lead to increased profit margins for one party and decreased profit margins for the other. This is the reason why conflicts may arise in international commercial relations.

Documentation error

There can be various errors in the documents issued by either of the parties involved in commercial trade. The important documents in which there could be errors include a letter of guarantee, letter of credit, forward contracts etc. E.g., if there is an error in the letter of credit issued by the importer’s bank, this may lead to delayed payments from the exporter’s bank leading to international disputes.

Litigation

International litigation is fundamentally different from domestic litigation in the sense that international litigation is the litigation between two or more than two disputing countries, or between a state and an international organisation, or between two international organisations, or between a state and other privatised state entity. International litigation is essentially based on consent. Consensual basis of litigation means that no party can haul the other entity into court without the consent of the other party. Even the International Court of Justice, which is the premier organisation for litigation at the international level, does not have provisions for compulsory jurisdiction.

There can be several forms of consent. One of the most significant ways of consent is ad hoc, which is given through a special agreement. Ad hoc refers to consent to a special situation/dispute that may arise in the future, for instance, the dispute relating to the interpretation of statutes/treaties to which both the states are a party. Some of the major disputes relating to land and maritime boundaries have come up before various ad hoc tribunals formed by the disputing states through special agreements. 

How and when is it used in the resolution of international commercial disputes?

There are two phases as to how litigation helps in resolving International commercial disputes. First in the written phase. In this phase, both the parties are required to make written submissions along with their statements and supporting pieces of evidence. The second phase is the most crucial phase in which both the parties confront each other. This is known as the oral phase and it is made accessible to the public. Each party pleads its case and the decision is pronounced by the judges who are adjudicating the dispute. The decision of the court is subject to public and electronic media.

The path of litigation is followed usually when all other attempts of reaching an agreement fail. This means that it is only when a person has exhausted the other methods such as mediation, conciliation and arbitration that the person turns on to litigation. All attempts are made to avoid the path of litigation by the disputing parties due to its cost ineffectiveness. The decision to follow the route of litigation is usually political decisions influenced by the domestic politics of the country. It usually indicates a deadlock that has been reached between both the parties.

Challenges faced

Although international litigation has proven to be instrumental in addressing international disputes in the past, it has its challenges and discrepancies.

One of the major challenges to international litigation is related to its complex nature. This complexity is due to the involvement of several nations in the dispute. All nations have different sets of laws and procedures for administering justice. Different countries have different sets of values and traditions governing their justice systems. There are different methods of submitting evidence and presenting witnesses. To achieve this purpose, it requires the litigators to obtain knowledge about the legal systems of the respective countries which in itself is an unpragmatic exercise.

Another challenge encountered by international litigation relates to the jurisdiction. Due to the involvement of several countries, deciding jurisdiction becomes a difficult task. There can be conflicts relating to the jurisdiction. Even the International Court of Justice has been encountering various jurisdictional fallouts in its exercise of administering justice because even the ICJ has been provided with consensual jurisdiction and not compulsory jurisdiction. The Kargil war dispute of 1999 between India and Pakistan is a case in question.

Enforceability of the decisions given by international courts and tribunals is a worrying drawback in determining its legitimacy. International law is soft law and not a law of enforcement. There is no way through which the international courts can coerce one of the parties into following its judgement. The least that the country can do is to drag the other party to the UNSC. Even at the UNSC, the international court’s decision can be vetoed by the five permanent members. The recent example of a country not enforcing the International Court’s decision can be China in the South China Sea dispute case in which the ICJ pronounces an order in favour of the Philippines.

Arbitration

Arbitration is a dispute resolution mechanism wherein the disputing parties refer their dispute to a neutral third party, who has specialised knowledge of the subject concerned, for resolving their disputes. The term arbitration is not defined in any document of the world. Arbitration is a private procedure of dispute settlement which means it is not a part of any state legal system. The process of arbitration is known for its confidentiality and all the evidence presented in the process of arbitration are non-admissible in the court of law. The decision of the arbitrator is final and binding as provided under ICC arbitration rule 28(6) and Article III of the New York Convention. There are many advantages of international arbitration some of which are listed below:

1. A neutral and specialised judge.
2. A secure legal system.
3. A flexible procedural framework.
4. Swift and confidential justice.

International arbitration refers to the appointment of one or more than one arbitrators to adjudicate on disputes arising between two or more states. The international enforceability of arbitration is ensured through the New York Convention of 1958. The international arbitration centre known as the International Chamber of Commerce is located at Paris with regional centres in various states.

How and when is it used in the resolution of international commercial disputes?

Before providing a rigid and legal basis to international arbitration there were three failed attempts made in the form of UN Economic Commission for Europe, UN Economic Commission for Asia and the Far East and the Uniform law. All these laws saw very little usage due to which they soon became defunct. After these failed attempts, there was another rule that was formulated for the ad hoc arbitrators known as the UNCITRAL Arbitration Rules, 1987. This rule worked effectively and was later adopted by the Model Law, 1985. This law lays down the procedure of the arbitration. According to this law, the procedure of international law is quite flexible and is subject to the agreement of the parties. The procedure as laid down in the arbitration clause of the agreement between the parties is enforceable by the arbitrator. It provides for party autonomy in deciding the place of arbitration, rule of arbitration and the substantive and procedural law to be applicable. This is how arbitration is used to resolve international commercial disputes. 

International arbitration is the preferred path when disputes are not settled by diplomatic conciliation or negotiation. The practice of arbitration has its origin in ancient times when it was used to adjudicate disputes between ancient Greece city-states with the Pope as the sole arbitrator. Even in present times, it has been used by various countries and international private entities to resolve their disputes due to its effectiveness.

Challenges faced

The power to choose the decision-makers is vested in the hands of the disputing parties. This raises crucial questions on the competence of the arbitrators. The arbitrators need to be experts in the relevant field study and need to be carefully decided, the failure of which may lead to flaws in the final decision making. Also, there can be a conflict of interests between the arbitrators which will in turn adversely impact the final decision.

Secondly, the conduct of the counsels is different since they belong to different states. There is a diversity of background and difference in principles and values. There is no formal document to conduct the conduct of the counsels.

Thirdly, the parties are provided autonomy in choosing procedural rules which leads to ambiguities and discrepancies. Sometimes, the parties are not competent to decide the laws which raise questions on the legitimacy of the decision reached.

Mediation

Definition

When the disputing parties refer their dispute to a neutral third party it is called mediation. However, unlike the arbitrator, the role of the mediator is to facilitate conversations so that the negotiations do not come to a standstill. The mediator is not the final decision maker because mediation is a process in which both parties are the winners. The mediator does not suggest solutions but helps the parties to reach those solutions.

The enforceability of International mediation mechanism is ensured through the Singapore Mediation Convention, 2019. The benefits of the international mediation process are numerous:

1. Much faster and cheaper than contested litigation
2. Private and confidential
3. Non-binding on the parties
4. Preserving commercial interests

How and when is it used in the resolution of international commercial disputes?

The process of mediation is quite simple. There are mediators appointed by both parties. Both the parties and their counsels along with the mediators sit in a private room and negotiate their differences. There is an opening session in which the mediator introduces himself and asks the party to introduce themselves. Once the opening session concludes, there is a joint session wherein both the parties negotiate their terms of disagreements and the mediator ensures that the process takes place in a civilised manner. In case there is a deadlock between the two parties, the mediator calls a private session known as a caucus. Once the negotiations are over, the mediators conclude the sessions highlighting the major takeaways from the session and fixing the next meeting if required.

The parties often take the path of mediation when commercial interests are of paramount importance. It takes a short time to conclude an international commercial dispute and due to that, it is an inexpensive method of dispute resolution. In this way, the parties not only save their reputation amongst the other players of the market but can also save their business ties with the disputing parties. Also, the parties have complete control over the process which makes it an effective avenue for dispute resolution. A survey conducted by the American Arbitration Association suggests that 86% of the companies were highly satisfied by the mediation process. 

Challenges faced

Voluntariness of the parties is one of the strengths of the mediation process but it can turn into a disadvantage. This can happen because the parties are not bound by any obligations and are free to leave the negotiations at will. This fails the overall attempt to reach a peaceful conclusion through the process of mediation.

Secondly, although the whole process is quite confidential and the information disclosed in the process is not admissible in the court of law, the mere fact that the business secrets of one party get disclosed in front of the other is disturbing and discourages the party from coming to the mediation table.

Thirdly, since the mediation requires a neutral conversation and in-depth knowledge of the topic concerned the appointed mediator must be competent. If the mediator is not competent, it may turn the entire mediation process as futile.

Conclusion

The scope of arbitration, mediation and litigation have been expanding in a society full of disputes. There are various laws passed and treaties signed to cater to the needs of the present time. Although they were successful, their effectiveness needs to be re-evaluated and retested. However, these initiatives have proven that there is a global awareness about various alternative dispute resolution mechanisms. 

Various methods of alternative dispute resolution mechanisms have been used from time to time to adjudicate international commercial disputes which have proven to be of great success. All the methods have their own drawbacks but despite that, they have proven successful in different situations and circumstances. However, the most effective method for resolving disputes has been the mediation process. The mediation process is known for its confidentiality which builds trust amongst the parties and encourages them. However, the process of mediation does not guarantee solutions.

On the other hand, arbitration works on a solution-based approach. No system can ever be perfect. The ideal approach can be that the countries opt for mediation as their first resort and follow arbitration or litigation as a backup resort in case mediation fails.

References

• https://unctad.org/en/Docs/edmmisc232add38_en.pdf
• https://www.britannica.com/topic/arbitration/International-commercial-arbitration
• https://www.lse.ac.uk/study-at-lse/summer-schools/Summer-School/Courses/Secure/Law/LL203
• http://www.legalservicesindia.com/article/2196/International-Commercial-Arbitration.html 
• https://www.jstor.org/stable/23644002

---

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: