A business person's guide to negotiating an international arbitration agreement

Multinational Business Review, Spring 1998 by Reinsch, Roger W, DeVito, Raffaele

Dispute resolution among firms is becoming a more pressing problem as the international marketplace has expanded. This paper serves to identify needs in cross-border arbitration situations and recommends an Arbitration Agreement Decision Chain for use by for-profit organizations. In addition to the Decision Chain process, the paper provides detailed insight as to the obstacles and opportunities in each phase of the process.

INTRODUCTION

As the international marketplace has expanded, so has the need for dispute resolution. According to William K. Slate II, (1996), "The 21 st century promises an information age of accelerated change in a global environment. This new age will depend on swift and fair means of resolving conflict" (p. 7). A preferred method of dispute resolution in international agreements is arbitration. More than 100 countries have agreed to enforce arbitration awards made in one another's territories (Nation's Business 1996). This agreement is known as the Convention On The Recognition And Enforcement Of Foreign Arbitral Awards also known as the 1958 New York Convention.

The literature generally claims that two of the reasons for choosing arbitration are that it is less expensive and quicker than going to court. As commented on in the Corporate Counsel's Guide To International Alternative Dispute Resolution (1993):

"One of the most important aspects of any arbitration is the cost. Strangely, the cost is more directly proportional to the amount of time involved in resolving the dispute than to the number and complexity of the issues. Thus, parties can enjoy sharply reduced costs by expediting their case." The above statement will only be correct if the parties have included a properly negotiated arbitration clause in the original agreement. The cost of arbitration may be greater than the court option if the parties include an arbitration clause that merely states the parties agree to arbitrate and that they have chosen a particular arbitration body to administer the process (Corporate Counsel's Guide 1993). For example, using the International Court of Arbitration which is part of the International Chamber of Commerce (ICC) in Paris, the maximum cost for a claim of $1,000,000, using three arbitrators is $104,500. This represents a fee of more than 10% of the claim. The proportionality sharply decreases as the amount of the claim goes up (Casella 1996). Because the arbitration process needs much more than such a simple agreement clause the purpose of this article is to consider all the terms that should be in an arbitration agreement, so that arbitration may, in fact, be less expensive and quicker. Arbitration, just as everything else that is part of a contract, needs to be carefully negotiated by parties who have an understanding of what is involved in the arbitration process. (See Figure 1, The Arbitration Agreement Decision Chain).

EXAMPLES OF ARBITRATION ORGANIZATIONS

A person who is considering an arbitration agreement should understand that there are numerous arbitration organizations around the world that will administer the arbitration process. To control the scope of this article, discussion has been limited to arbitration organizations in Europe and the United States. Those selected represent variety regarding their location and in their rules. Even though no arbitration organizations from Asia or other locales are included, the issues that are discussed here also apply when choosing one of those organizations.

The organizations that were selected include the following: The American Arbitration Association (AAA), located in New York City, U.S.A.; The International Court of Arbitration of the International Chamber of Commerce (ICC), located in Paris, France; The London Court of Arbitration(LCA), located in London, England; The Zurich Chamber of Commerce (ZCC), located in Zurich, Switzerland; The Arbitration Institute of the Stockholm Chamber of Commerce (AISCC), located in Stockholm, Sweden; The Arbitration Court of the Hungarian Chamber of Commerce (HCC), located in Budapest, Hungary; and The Arbitration Court of the Russian Chamber of Commerce (RCC), located in Moscow, Russia.

Ad Hoc Arbitration Rules

In addition, two sets of rules that are not administered by an arbitration organization are also included. These sets are the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration and the Inter-American Convention On International Commercial Arbitration. One of these sets of rules may be included in an arbitration agreement when the parties decide to use ad hoc arbitration. Ad hoc means that the parties will administer the process themselves, instead of using an arbitration organization as the administrator. This method should be used only by very sophisticated parties who have experience in administering the arbitration process. There appears to be a trend toward administered rather than ad hoc arbitration in international disputes (Carter 1996).