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Why is international commercial arbitration a preferred mode for dispute resolution in international transaction

December 17, 2021

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This article has been written by Anisha Saksena, pursuing a Diploma in International Business Law from LawSikho.

It has been published by Rachit Garg.

Table of Contents

Introduction

With the emerging trend of doing business “internationally”, international commercial contracts have become the backbone of international trade. From the United Nations Convention on Contracts for the International Sale of Goods (Vienna) in1980 to the UNIDROIT Principles of International Commercial Contracts in 1994 and the Hague Principles on Choice of Law in International Commercial Contracts in 2015, international commercial contracts have had a long journey of recognition and application.

It is an obvious fact that if a commercial relationship emerges, there are chances of having disputes between the parties. International commercial disputes can lead to major trade conflicts with serious political and economic repercussions. That is why it is essential that these disputes get resolved fairly, quickly and efficiently. For the purpose of settling the existing or future disputes arising from an international commercial contract, the parties usually decide and specify the dispute settlement forum beforehand by adding a “choice of forum for dispute resolution” clause along with “applicable law” clause in their contract. This is done so that there is no inconvenience or discrimination to either party or conflict regarding the choice of forum after the contractual relationship is made. The forum decided can either be a local court via litigation as per the agreed applicable law or any alternative dispute resolution court.

The most commonly used alternative dispute resolution (ADR) court is International Commercial Arbitration. Arbitration is a consensual mechanism used for dispute settlement where disputes are heard outside of courts before one or more arbitrators. These arbitrators are chosen by the parties and the award granted by the arbitrators is final and binding on the parties. Without the element of ‘final’ and ‘binding’, there can be no international commercial arbitration.

International commercial arbitration is the most preferable mode for dispute resolution in international transactions around the world. This article explains the reasons as to why international commercial arbitration is the preferred mode for dispute resolution in international transactions.

Why Is International Commercial Arbitration Preferable?

Ease Of Enforcement

The arbitral awards have a higher degree of recognition as compared to a decision of foreign court. The credit for such recognition goes to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also called “the New York Convention of 1958”. As said by the Secretary of UNCITRAL, Renaud Sorieul, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards is the cornerstone of the international arbitration system.

According to the Article III of the New York Convention, 1958, arbitral awards are binding and enforceable in accordance with the rules of procedure of the territory where the award is relied upon. The New York Convention has made the enforcement of arbitral awards far easier than the enforcement of a court judgment.

The New York Convention has been signed by over 169 countries; this means that most of the major countries have accepted the recognition of arbitral awards and its enforcement process. Thus, the enforceability of an arbitral award can be ensured due to the New York Convention.

On the contrary, when it comes to foreign court judgments, its enforceability, outside of the country whose court rendered it, cannot be ensured. Although there are several conventions enforcing the foreign court judgments like the Lugano Convention 2007 or the 2019 Hague Convention on the recognition and enforcement of foreign judgments in civil and commercial matters, they are not as widely accepted as the New York Convention. This makes the enforceability of the foreign court judgment uncertain. The enforceability depends on the country’s procedural laws which vary country to country and the Convention that the country has signed.

For instance, in the United States of America, the States rely on state laws and common laws instead of a uniform federal law for the recognition and enforcement of foreign judgments. The State laws are derived from two main model acts, which are the Uniform Foreign Money Judgments Recognition Act, 1962 and the Uniform Foreign-Country Money Judgments Recognition Act, 2005. In order to recognize and enforce the foreign judgment, the party has to prove that the Uniform Foreign-Country Money Judgments Recognition Act, 2005 applies to the judgment. States like Arizona, Georgia and Massachusetts, have made it mandatory that the foreign judgments will be recognized in their states only if the American judgments are enforceable in the country in which that particular foreign judgement was made. If American Judgments are not enforceable in that particular country then this is called ‘the lack of reciprocity’ and it is a mandatory ground for non-recognition of foreign court judgments in these states. In some states of America like Florida, Idaho, North Carolina, Maine, Ohio and Texas, this ground is a discretionary ground for recognition.

Moreover, according to Section 328 of German Code of Civil Procedure, foreign judgments, involving claims other than non-pecuniary claims, cannot be enforced in Germany if there is lack of reciprocity.

Both of these instances prove that enforceability of foreign judgments is not guaranteed and its process is very complex due to the varying laws around the world. On the other hand, arbitral awards are easily enforceable because they are internationally recognized due to the widely accepted New York Convention.

Privacy And Confidentiality

Major corporations, especially in high profile cases, want to resolve their disputes without getting in the eye of the general public, competitors and media as this can bring bad publicity for their firm. Since most of the court proceedings are held in public, the element of “privacy” and “confidentiality” cannot be obtained in litigation.

However, the arbitral process is a very private and confidential process. In some arbitral rules, parties are free to provide a provision in their arbitration agreement stating that the arbitration procedure will be private and confidential. The confidentiality can be to an extent that even the existence of the arbitral proceedings between parties is not allowed to be revealed.

According to Article 30 of the London Court of International Arbitration (LCIA) Rules:-

“Unless the parties expressly agree in writing to the contrary, the parties undertake as a general principle to keep confidential all awards in their arbitration, together with all materials in the proceedings created for the purpose of the arbitration and all other documents produced by another party in the proceedings not otherwise in the public domain – save and to the extent that disclosure may be required of a party by legal duty, to protect or pursue a legal right or to enforce or challenge an award in bona fide legal proceedings before a state court or other judicial authority.”

More Control Over Parties

Arbitration gives more control to the parties over the proceedings than any other court could give. Litigation is not flexible like international commercial arbitration.

Arbitration is a consensual procedure. This means that the parties have to agree and give their consent to arbitrate. Only after the parties consent, an arbitration procedure can occur.

Parties have the right to choose the arbitrators and the number of arbitrators. Parties even have control over the authority of the arbitral tribunal. They can limit the authority of the tribunal to which they have agreed in their arbitration agreement. They can also agree to various essential details of proceedings that can make the arbitral procedure cheap, private and time-effective. In litigation, there are no such rights to the parties.

Furthermore, the parties can choose their preferred date of hearing or trial, the place of arbitration and the governing law. They can also agree to a procedure that is most appropriate for resolving their disputes.

Neutrality

Litigating in the ‘home-country’ of one party can be unfair to the other party. Generally, courts are biased against the foreign party and rule in favor of the local party.

In addition to that, litigating in a domestic country is expensive enough; forget about litigating in foreign country. There are language barriers that can waste a lot of time. It is very difficult and costly to litigate in a country whose language may or may not be known by the foreign party’s lawyers or/and may or may not be the language of the contract. Also, the foreign party may not be acquainted with the procedural laws of another party’s national courts. All these will not just waste time but will also increase the cost of litigation for the foreign party.

It is unfair for one party to bear so many difficulties and the other party to be at ease because the case proceedings are held in their domestic court.

Arbitration is a perfect choice for fair settlement of disputes. Parties can choose their arbitrators and the applicable law. With the help of international arbitration rules which are applied by multinational tribunals, parties can have a fair and neutral dispute settlement. The International Chamber of Commerce (ICC) Rules of Arbitration, 2021 are widely accepted rules that provide a neutral framework for the resolution of cross-border disputes.

According to Article 18 of the UNCITRAL Model Law on International Commercial Arbitration,

“The parties shall be treated with equality and each party shall be given a full opportunity of presenting his case.”

This has started a trend to allow full autonomy to the parties and the tribunals with regard to the conduct of the proceedings thus guaranteeing neutrality.

Cases When State Is A Party

When a State is a party, its domestic courts will apparently be biased against the foreign party as the State can easily influence its domestic courts. Moreover, arbitration in that State can also be influenced by the State. In such cases, the other party has an option to arbitrate in any arbitration organization situated in a third country. There are so many competitive and leading arbitration organizations around the world that provide neutral and efficient arbitration procedures.

Expertise And Quality-Judgments

As said before, parties can choose the arbitrators for their arbitration procedure. These arbitrators can be chosen on the basis of their expertise or experience in the field/industry to which the particular dispute is related. They can select arbitrators who are experts in International Arbitration as well. This ensures that the award is granted after carefully considering all the aspects of the disputes.

On the other hand, in domestic courts, there are higher chances that the proceedings will be held by a judge who has little to no expertise/experience that is relevant to the dispute. Due to lack of sufficient time and overload of cases, courts, sometimes, cannot provide good judgments whereas arbitration can provide great judgments.

Not Appealable

Court judgments can be appealed in higher courts. This leads to delay in enforcing the court judgments. But arbitral awards are final and non-appealable on the merits and therefore quickly enforceable. Only in certain cases, the arbitral awards are appealable, for example if a party was incompetent at the time of execution of arbitration agreement or if the composition of the tribunal or the arbitral procedure was not according to the arbitration agreement.

Faster And Cheaper

The litigation process involves high cost, excessive documentation and is very time-consuming. The path of litigation is a very lengthy and an expensive path. There are strict rules and regulations of the court that the parties have to abide by.

On the other hand, parties can choose for a speedy arbitration at lower costs. Arbitration is a very cost-effective process. There are no court fees in arbitration and the parties can agree for a fast-track procedure or any other procedure that is tailor-made for their dispute. In some arbitral rules, parties can set a time limit for the award to be granted and can also limit the extent of time-consuming or expensive procedures e.g. limiting the extent of document disclosure. This is also one of the reasons as to why firms prefer International Commercial Arbitration for dispute settlement.

Conclusion

Due to several conventions, arbitral awards have become recognized throughout the world and are easily enforceable. This has led to an increase in the usage of the cost-effective process of International Commercial Arbitration in the disputes involving transnational relations/transactions.

Litigation has become less preferable in international transactions due to its lengthy and expensive nature. Moreover, the parties also fear that the litigation process in the country of one party can be biased and unfair against the foreign party.

On the other hand, international commercial arbitration is more attractive because the parties have an advantage of having a more fair and desirable procedure for solving their disputes. Arbitration procedure gives more control to the parties. And the icing on the cake is the aspect of “privacy and confidentiality” in the arbitration process. Parties can solve their disputes without the bad publicity that generally comes along when disputes, especially high profile cases, are handled through litigation.

Hence, it can be concluded that International Commercial Arbitration has proved to be a preferable method of dispute resolution in international transactions.