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    Settling Out of Court


    © International Trade Centre, International Trade Forum - Issue 4/2002

    by Christophe Imhoos and Herman Verbist

    How can you have a final and binding decision over a business dispute out of court? Arbitration is the only definitive solution.

    You are a South American company entering into several agreements with different buyers in Asia and Africa. The last thing you want is to be entangled one day in a dispute before the other parties' courts. Incidentally, they feel the same about your own courts! Arbitration may then be what you are looking for, but remember... the arbitration option must be spelled out clearly in your contracts, and it is not free.

    Q What is arbitration?

    A Arbitration is an out-of-court method to settle commercial disputes through a binding decision. It is a private, highly flexible method of dispute resolution, where the parties select the arbitrators, the place where the hearings will be held, the rules, language and type of procedure. All this has a price which is paid by the parties. In return they receive a decision that can be enforced practically anywhere in the world.

    Many companies that have experienced arbitration will state that it is not as appealing as it is often described. The truth is, while not perfect, arbitration is still the best solution currently available for international contracts.

    Q What makes it different from a court case?

    A There are four basic differences. First, the arbitration agreement. Courts are generally open to all parties that have a dispute. Arbitration is only open to parties that have agreed (usually in a contract) to arbitrate.

    Second, the selection of arbitrators. Parties in court cases do not select their own judges, but in arbitration, they select their own arbitrators.

    Third, neutrality and flexibility. Imagine a dispute between a Canadian company from Montreal and an Indian company from New Delhi. A court dispute will probably be resolved before the courts of Montreal if the Indian company is claimant, and before the courts of New Delhi, if the Canadian company initiates the proceedings. In an arbitration, the parties can select, say, an Egyptian or a Swiss arbitrator, and the arbitration can take place somewhere in between, Italy, for example.

    Fourth, international enforcement. The Canadian company will not easily be able to enforce a Canadian decision in India, and vice versa for the Indian party. In contrast, an arbitration award can be recognized by judges in most countries of the world.

    Q Can any company resort to arbitration?

    A The basic rule for all arbitrations is very simple: "no agreement to arbitrate, no arbitration". In practice, if companies are already having a dispute, there is little hope for them to sign an arbitration agreement. Apart from a few exceptions, companies must agree to use arbitration when they first sign their contract. This demands foresight on the part of contract negotiators.

    Q What type of arbitration should companies opt for in their arbitration agreement?

    A The major choice is between "institutional" and "ad hoc" arbitration. Institutional arbitration means that parties choose to conduct their arbitration procedure in accordance with the rules of, and with the assistance of, an arbitral institution. For example, in accordance with the rules of arbitration of the International Chamber of Commerce, of the Permanent Arbitration Court at the Croatian Chamber of Commerce, of the Indian Council of Arbitration or of any other reliable arbitral institution. Most arbitration institutions recommend their own standard clause to be included in contracts (see box p. 24).

    In ad hoc arbitration, no institution assists the parties. Therefore, they have to determine what are the rules governing the procedure, how arbitrators are to be appointed, where the arbitration will be held, how long it will last, etc. Because this is complex, the United Nations Commission on International Trade Law (UNCITRAL) developed in 1976 a special set of arbitration rules, known as the UNCITRAL arbitration rules. These rules have been widely used all over the world and can be referred to by the parties. However, UNCITRAL does not offer any assistance in the conduct of arbitrations.

    Q What is the difference between mediation and arbitration?

    A In mediation, a neutral person, the mediator, examines the claims of the parties and assists them in order to reach a negotiated settlement for the dispute.

    Parties can always attempt a mediation without a mediation agreement.

    With the assistance of a mediator, they may settle their dispute, but their settlement agreement will not be internationally enforceable.

    For example, a company cannot seize the money on another's bank account with a mediation settlement.

    As for arbitration, as previously stated, you simply cannot start an arbitration without an arbitration agreement. But at the end of the arbitration process, there is an arbitration award and with that, the winning party can enforce the arbitrators' decision through the courts.

    During the mediation proceedings, the mediator attempts to set out what he or she considers to be the best solution to transform a contentious situation into conciliation.

    In arbitration, the arbitrators will generally base their decision on a particular law or legal rule.

    The recommendations made by the mediator, after hearing both sides of the conflict, have no binding effect: the parties remain free to apply or reject them. However, they may transfer the proposals into a signed contract.

    The efficiency of mediation depends on the goodwill of the parties, who are free to comply or not with the recommendations of the conciliator or the mediator. In China, mediation in international business disputes tends to have a relatively high rate of success. The success rate is not so high in Europe. Several international contracts envisage a two-tier approach: as a first step, recourse to mediation and, where this is not successful, arbitration proceedings as a second step.

    Q How much does arbitration cost?

    A The costs of arbitration proceedings involve fees and travel expenses of the arbitrators, fees and expenses of experts appointed by the arbitral tribunal, legal fees of the parties' counsels and of their own experts, if any. In the case of institutional arbitration, the administrative costs of the arbitral institution have to be added.

    For international commercial arbitration, costs may be substantial, representing 5% to 20% of the amounts in dispute. The transnational law issues sometimes require that lawyers from more than one country be involved. For institutional arbitration, there are advance costs at the outset of the arbitration. This covers the fees and expenses of the arbitrators and the administrative expenses until the end of the arbitration.

    This advance on costs, which is either fixed by reference to the amount in dispute and based on fee scales, or on an hourly or daily basis, is normally paid in equal shares by the parties. If one of the parties fails to advance its share of the amount, the other party will have to substitute for the defaulting party's share and pay the balance of the advance on costs. Generally the advance on costs will have to be paid in full prior to the rendering of a final award. Who supports the costs of the arbitration is a decision that is taken by the arbitral tribunal in its final award. The tribunal generally takes its decision in the light of the outcome. In international arbitrations, the winning party is generally awarded full or partial reimbursements of costs.

    Q What are major pitfalls to look out for when drafting an arbitration clause?

    A Companies should avoid simply copying a clause from another contract. Also, they should not fail to check with the arbitration institution concerned whether their clause is properly drafted. Each new contract creates a new situation, in which possible disputes need to be identified and addressed.

    An arbitration clause does not necessarily need to be long and detailed in order to be effective. The two basic principles that should guide any drafter of a dispute resolution clause are simplicity and precision. This means simplicity in wording and precision in laying down the elements to insert in the clause (scope of the clause, ad hoc or institutional arbitration, number of arbitrators, place and language of the arbitration, etc.). Experience shows that the more detailed and perfect the clause is meant to be, the greater the risk that it may become inoperable.

    The following clause is a prime example of how being too specific can paralyse proceedings:

    "[...] the arbitrators appointed by the parties shall be called in the first place to attempt to amicably settle the dispute. Should they not succeed in this attempt, they shall choose a third arbitrator who shall be a lawyer, specialized in patents, national of a third country and shall be fluent in the Italian, German and English languages."

    The two "appointed arbitrators" would probably find it difficult to locate a "third arbitrator" corresponding to the qualifications set out in the clause! Hence, contrary to what was originally intended, requirements that are too precise or sophisticated may result in exceptionally long and costly proceedings.

    Christophe Imhoos is an attorney at law at the Geneva Bar, Switzerland. He can be contacted at ci@imhoos-law.ch

    Herman Verbist is an attorney at law at the Brussels Bar, Belgium. He can be contacted at herman.verbist@landwell.be

    Main arbitration Institutions

    The following are some of the most reputed arbitration institutions. There are over 100 arbitration centres in the world involved in international arbitration. Contract negotiators can always contact the selected arbitral institution directly for advice. A list of addresses of arbitration institutions is provided in ITC's guide, Arbitration and alternative dispute resolution. See also http://www.jurisint.org

    Recommended drafting for arbitration agreements

    Institutional arbitration clauses

    If parties opt for institutional arbitration, they should draft a clause that is as close as possible to the recommended standard clause provided by the selected arbitral institution. Here are two examples of standard clauses:

    • International Chamber of Commerce (ICC) model arbitration clause
      "All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules."
    • China International Economic and Trade Arbitration Commission (CIETAC) model arbitration clause
      "Any dispute arising from or in connection with this Contract shall be submitted to China International Economic and Trade Arbitration Commission for arbitration which shall be conducted in accordance with the Commission's arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties."

    UNCITRAL model ad hoc arbitration clause

    In the clause below, parties are recommended to specify an "appointing authority" - that is, a person or institution that will appoint an arbitrator in case one of the parties fails to do so.

    "Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force."

    Parties may wish to add:

    "(a) The appointing authority shall be... [name of institution or person];
    (b) The number of arbitrators shall be... [one or three];
    (c) The place of arbitration shall be... [town or country];
    (d) The language(s) to be used in the arbitral proceedings shall be... "