Introduction
Substantive law
Seat of arbitration
Arbitration rules and administering institutions
Appointment of arbitrators
International commercial arbitration is not simply domestic commercial litigation in disguise. It involves a unique skill set and requires particular training and expertise. Law firms around the world have recognised this by developing distinct and renowned international arbitration practices. This update highlights the importance of having experienced international arbitration counsel and discusses some issues that can arise during negotiation of an arbitration agreement and in arbitration itself.
A company that ignores the highly specialised nature of international arbitration does so at its own peril. It is obvious to arbitrators when counsel are learning as they go. Many parties have gained important procedural and substantive advantages because the opposing counsel was unfamiliar with international arbitration practice. For example, an investment treaty arbitration involving a company from one country that claimed that its investment in another country had been mistreated to the tune of millions of euros in damages, one party's counsel did not submit detailed witness statements with its submissions. Although counsel was highly experienced litigation counsel, it was unfamiliar with international arbitration practice. Opposing counsel was experienced in international arbitration and exposed this error to its advantage when the first party announced its intention to present witnesses at the final hearing. The arbitrator eventually admitted last-minute will-say statements into the record, but the late-submitted evidence could have been more effective had it been submitted in a timely manner in support of the party's submissions.
An arbitration agreement is subject to the principle of severability; it is a standalone contract within a main contract (or separately made when a dispute arises). Generally speaking, only the parties to the arbitration agreement (almost always the parties to the main contract) are bound by its terms.
The days of the last-minute call requesting an off-the-shelf arbitration agreement to be inserted into a contract – the subject of which was almost always unknown to the lawyer asked to provide the agreement – are fortunately behind us. In today's global market, it is common for sophisticated parties to turn their minds to the dispute resolution provisions of their contracts early in negotiations. Four questions that are often the subject of negotiations, and later arbitration proceedings, are:
- What substantive law should govern the arbitration?
- Where should the arbitration be held?
- Which arbitration rules and which institution's administration should apply?
- How should an arbitrator be appointed?
If the parties are from countries of different languages, it is also advisable to agree on the language of the arbitration. Whether a specific term is appropriately included in a particular arbitration agreement depends on the circumstances. Important arbitral institutions – such as the International Chamber of Commerce, the London Court of International Arbitration, the Stockholm Chamber of Commerce and the International Centre for Dispute Resolution – provide standard arbitration agreements which parties may use. Whether a standard agreement should be used in any given circumstance requires careful consideration. Indeed, input from experienced arbitration counsel may reveal that an arbitration agreement is not the best option in the circumstances. Arbitration is not the best choice in all cases.
Agreeing on the substantive law to govern the underlying agreement is essential. This identifies the law that an arbitrator will apply to the substance of a dispute, including the interpretation of the contract and available remedies. Without an identified substantive law, a contract is subject to a quagmire of uncertainty, requiring complex legal analysis by the arbitrator (considering, among other things, the nationalities of the parties and where the contract was signed, performed and allegedly breached). Facilitating such uncertainty by leaving out a substantive law provision makes little commercial sense.
Determining which substantive law should apply requires thoughtful consideration and is usually a matter of negotiation. Understanding the place of the contract in the parties' overall relationship and each party's goals, obligations and benefits under the contract is imperative to ensuring the appropriate stance to take in negotiations. As a recent example, conceding the substantive law resulted in an unexpected benefit to a British Columbia party when a foreign party insisted that its country's civil code apply. The British Columbia party consulted local counsel in that country to confirm that there were no peculiarities in that code which could adversely affect them, and then agreed. The result was a contractual advantage for the British Columbia party: it obtained the benefit of an established concept of good-faith performance of contractual obligations in a contractual relationship in which almost all of the performance obligations fell to the foreign party – unlike in British Columbia law, where the role of good faith in the performance of contractual obligations is uncertain, the principle is expressly codified in the laws of almost all civil code countries.
From a purely arbitration perspective, probably the most important issue during negotiation or after a dispute has arisen is the seat of arbitration – where it legally (not physically) takes place. The arbitration laws of the seat govern the arbitration, including with respect to issues such as grounds for challenge to awards, rules of evidence and posting of security.
The arbitration is also subject to the supervision of the courts of the seat with respect to these issues and others. The grounds for challenging an award are not uniform; in some jurisdictions courts may be more interventionist than others. Therefore, a principal consideration in choosing the seat may be whether a party expects to be on the winning or losing side of an arbitral award. If the latter, a jurisdiction with broad grounds for challenging an award may be the best option. A party must consider its options before agreeing to a particular seat. For example, where parties have chosen the popular seat of London, England and expect a final and binding award, the victorious party may be surprised to learn that the English Arbitration Act provides the English courts with relatively broad powers of intervention.
The seat is not merely the place of the final hearing (although this is generally the case). Meetings between the arbitrator and counsel may take place anywhere, which does not affect the seat. For example, a procedural hearing on document production may take place in Paris by agreement of the parties or at a tribunal's request, even though the seat of arbitration may be New York, Singapore or Vancouver.
The seat may also be a party's negotiation concession. The issue is most acute when a dispute has arisen and the arbitration agreement is silent on the seat. For example, a party may have designs on an application for security for costs; however, that concept is not uniformly addressed in the laws of all seats, making certain seats more likely venues for success. Without agreement of the parties, the seat will be determined by the administering institution or the arbitral tribunal itself, usually in light of the parties' submissions and certain other factors. Parties should be wary of losing control of this important aspect of international arbitration.
Arbitration rules and administering institutions
There are numerous international arbitral institutions and procedural rules. For the purposes of this update, the principal question is whether the arbitration should be administered by an institution under identified rules, or be ad hoc (ie, un-administered). Ad hoc arbitrations may still have a place, but parties are increasingly keen to have as much certainty as possible about process and costs. Thus, they generally agree to specific rules and an institution to administer the arbitration.
This issue normally arises during negotiations, rather than after a dispute arises. A common misconception is that the applicable arbitration rules are those of the seat. This is often the case, but it is the arbitration laws of the seat that apply, not its rules. For example, the International Chamber of Commerce Rules can apply to arbitrations seated anywhere in the world. Arbitration is based on contract and the concept of consent; thus, the parties' agreement to use named arbitration rules will trump most, if not all, procedural rules in the seat's arbitration laws.
In most cases the arbitration agreement identifies the institution and the rules that apply. However, a recent arbitration agreement provided for a dispute to be submitted to a certain institution, but specified the application of the UN Commission on International Trade Law rules. The result is tensions between the institution's efforts to administer the arbitration and the tribunal's mandate to adhere to those rules.
The appointment of arbitrators provides parties with a meaningful say in how the arbitration will unfold and, in some cases, the approach that arbitrators are likely to take to the substantive issues. There are two stages to the process: agreeing on the number of arbitrators and the method of appointment, and making the actual appointments.
Issues related to the number of arbitrators and the method of their appointment are often addressed during the negotiation of an arbitration agreement and include:
- deciding whether one or three arbitrators will decide the dispute;
- identifying who appoints the arbitrators (which is very important in multi-party contracts); and
- setting out what happens if a party does not appoint, or the parties cannot agree on, a chair (if they have agreed to do so).
Leaving these issues to be resolved when a dispute arises usually results in disagreement, delay and increased costs. Deciding them at the negotiation stage requires a careful look at the parties' relationship and the relevant contract. For example, the cost of having three arbitrators as opposed to one is significantly higher, so it may matter if one party has deep pockets and the other does not. Similarly, it may matter if the value or importance of the dispute to a party's overall business is significant. It is also worth considering whether the parties want to have a say in appointing any of the arbitrators or the chair of a three-member tribunal or if they prefer a particular arbitral institution to appoint one from its list of arbitrators.
This leads to the second aspect of appointing arbitrators: who should be appointed? At this stage, a dispute will have arisen and the relative positions (and to some degree, the strengths and weaknesses of those positions) will be known. A respondent may also know whom the claimant has appointed. Involving arbitration lawyers who are aware of the international milieu and the key personalities may shed light on the choice of an appropriate candidate. For example, in a recent case, the claimant appointed a respected and well-known arbitrator in international arbitration circles. That suggested that the respondent might want to appoint someone of equal stature, who would not be overshadowed in deliberations among the arbitrators.
This is only a sampling of the issues that arise in international arbitrations. In many cases, the issues are interrelated. They must always be addressed on a case-by-case basis, with full knowledge of the relevant factual matrix.
For further information on this topic please contact Craig Chiasson at Borden Ladner Gervais LLP by telephone (+1 604 687 5744), fax (+1 604 687 1415) or email ([email protected]).
