Strategy Regarding International Arbitration

Arbitration is not appropriate for every international dispute. Sometimes litigation is a better, other times both can be used, according to Bruce Marks of Marks & Sokolov, with offices in Philadelphia and Moscow, and Peter Ashford, Solicitor for Fox Williams, LLP in London at the International Business Initiative. Wise counsel weigh all the factors before drafting a contract: what law applies, risks in litigation and judgment collection in a given country, what disputes are arbitrable, who decides this, where and under what rules. An arbitrator can be named and appointed in the agreement as a mediator and arbitrator. In those involving the USA and U.K., American Arbitration Association (AAA) or London Court of International Arbitration (LCIA)rules with arbitration in London, New York or Philadelphia is common.  In Russia, other organizations’ rules may apply. Standard rules apply in maritime or other disputes.  Often each party appoints an arbitrator; they appoint a neutral.  Most clients prefer litigation “at home” with arbitration a second option. Consideration must be given as to whether a judgment can be enforced in a foreign country if the Defendant has no assets in the U.S. Broadly define disputes to be covered by the clause to keep the matter out of the courts. Consider including a clause mandating a meeting between directors of a corporation or mediation as a prerequisite to arbitration.

In the LCIA, arbitration fees of £450 or $1000. per hour are common for arbitrators. The parties must pay and administration fee and to rent a venue. In complicated matters arbitration can cost more than litigation.

An arbitration award can be attacked on due process grounds but courts usually uphold awards. In the U.S. international and interstate arbitration awards cannot be reviewed by the courts except as provided by federal statute even if the parties so agree. They cannot confer jurisdiction on the courts although this occurred in the past. The great power of the federal courts is to confirm awards to be reduced to an enforceable judgment.

Arbitration has advantages. Generally the proceedings are kept confidential although sometimes as in a case before the LCIA involving disputes in the Ukraine the results of an award were published in a newspaper. Often court judgments are not enforceable internationally. Countries that are signatories to the New York Convention on the Enforcement of Arbitral Awards enforce arbitration awards, with some exceptions such as Iran. Some countries may deny enforcement for “public policy” exceptions. While under the various versions of the Uniform Act for Enforceability of Foreign Money Judgments enacted by over 15 states U.S. courts may enforce foreign money judgments where there is due process such as those of the U.K., most countries require a new trial and will not enforce U.S. judgments. Having assets in the U.S. may not be enough for a U.S. court to enforce an award against a foreign defendant. Minimum contacts are required.

The disadvantages of arbitration are often overlooked. The hardball approach in litigation is often not as successful in arbitration. There can be a mismatch of expectations. Discovery may be limited or non-existent. Where discovery is important, and information needed is still not yet known, often litigation is the best option. There may be no cross-examination of witnesses in certain countries, such as France and Germany, or it is done only by the arbitrators. Arbitrators may give injunctive relief but there may be limits on enforcing such relief. It can be very difficult to get parties and arbitrators and witnesses schedules synchronized. There is less power to compel appearance than in U.S. courts, or none at all. If an award includes punitive damages or interest certain countries such as the U.K. will not enforce the punitive damages. Sharia law countries will not enforce an award of interest.

Under 28 U.S.C. §1782, litigants  in foreign disputes (including arbitrations under Intel )  may obtain discovery in the U.S. District Courts in aid of foreign proceedings, but there is no discovery over a party since it is expected this will occur in the arbitration. Under the Hague Convention for Taking of Evidence Abroad, a request must usually be sent to the appointed authority. Questions are submitted to a judge who may or may not ask them to the witness. It does not apply to arbitrations. In the U.K. court processes can be used to get a subpoena for testimony or documents. It must be narrowly drawn. There are no depositions, as in civil cases. A witness statement is prepared and the witness is asked if it is true. Cross examination at the hearing is permitted.

A difficult problem occurs when a third party may be liable yet not a party to an arbitration agreement. The opposing party may refuse to pay the cost of the arbitration in advance. To avoid this, the contract may state that a party may not present a defense or counterclaim if it does not pay for their portion of the arbitration costs in advance. Not all arbitration organizations will enforce such a provision.The court may permit litigation of there is a material breach of an arbitration agreement. Sometimes arbitrators may make an interim award for costs of arbitration.

In dealing with foreign government agencies, include a clause waiving sovereign immunity or the award or judgment may be unenforceable.

There can be simultaneous litigation and arbitration. Emergency injunctive relief is available in the courts. Sometimes wild things happen like gunmen physically taking over a plant in the Ukraine with machine guns. Now that’s a hostile takeover! In the UK, courts can provide relief such as access for possession of a building so a tunnel-boring machine can operate. The court may order pre-judgment arrest—freezing of funds before litigation. This is more easily obtained in the U.K., Isle of Man and SZ. The likelihood that assets will be disposed of or moved overseas must be proven.

Arbitration awards may include attorneys fees and costs. Sometimes the panel will  award 70% or less of what is requested. In litigation in the U.K. and other countries, the losing party generally pays attorneys fees and costs, unlike the U.S.

Each case has different circumstances and challenges. Weigh them in drafting an arbitration clause and inform the client of risks. Avoid hostile takeovers!

  1. Michael Considine, Jr. is chair of the International Business Initiative, a task force of the Philadelphia Bar Association, which announces the formation of an international business panel that will sponsor presentations, publish articles and provide help to readers of the Philadelphia Business Journal on issues of international business. The seminar How the Strong Dollar Can Help Your Global Business with Joseph Manimbo, Senior Market Analyst, and Andrew Gummer, Manager, Foreign Exchange, Law Firms, Western Union Business Solutions, Washington, D.C. will be held at noon February 27, 2015 at the Philadelphia Business Journal, 400 Market Street, Suite 1200, Philadelphia, PA. with a lunch sponsored by National Penn Bank. Pre-registration is required by February 26, 2015 at noon. There is no cost for the luncheon. Register online at www.philadelphiabar.org/page/Event Details. Registered guests will be given passes to enter at security.