Arbitration has been used as a dispute resolution mechanism for centuries. It is a carveout from sovereign authority to resolve disputes that are vested in national law, constitution, and statutes. Arbitration has become increasingly popular in international commercial settings because of its unique features and advantages compared to litigation. Parties agreeing to submit their disputes for arbitration have control over how the process works. Parties should consider the compatibility of arbitration with the underlying transactions and exercise prudence in drafting their arbitration agreement.
Advantages of Arbitration
Arbitration is preferred over litigation by many in international business transactions. It has many advantages over litigation, such as party autonomy; neutrality; time and cost efficiency; confidentiality; and flexibility. Parties can design the arbitration process, screen arbitrators based on the desired qualification, and select the place and mode of the hearing. Depending on the magnitude and complexity of the disputes, the parties typically select one or three arbitrators. The selection of three arbitrators significantly reduces the likelihood that the decision would be influenced by biases. In either case, parties are protected from local biases in litigation.
In litigation in the United States, Federal Rules of Civil Procedure or parallel state court rules often allow for robust and burdensome discovery. Parties in arbitration may limit the scope of discovery and engage in cost-efficient discovery procedures. Arbitral hearings are held in private settings and are attended by only the parties and their counsels, unlike trial proceedings open to the public. Confidentiality in arbitration is particularly desired by larger corporations because disputes could damage their reputation, affect stock prices, and prevent the disclosure of trade secrets.
Furthermore, the average duration of a commercial dispute in arbitration is about 12 to 18 months, whereas commercial litigation can drag out for years. Parties can rest assured that awards are binding and enforceable against their counterparties. The New York Convention sets forth applicable standards for contracting states, and these standards are generally built into their domestic arbitration law. In short, contracting states are required to recognize the validity of arbitration agreements; and recognize and enforce international awards in their jurisdiction. As of 2021, the Convention has 168 signatories, including major commercial trading countries.
Importance of Arbitration Agreement
The arbitration agreement is especially important because arbitration is a creature of consent. It is also the source of authority for arbitral tribunal and source of rights and obligations of the parties. The jurisdiction of the tribunal is defined by the scope of the parties’ agreement. There are two jurisdictional questions: 1) what have the parties agreed to send to the tribunal (subject matter jurisdiction) and 2) have the parties agreed to arbitrate before this tribunal (personal jurisdiction)?
In Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 202 L. Ed. 2d 480 (2019), the Court clarified that subject matter is decided by the court in the first instance unless the parties expressly delegated it to the tribunal by the adoption of institutional rules or valid arbitration agreement. Parties should consent to arbitrate when drafting an arbitration agreement by stating “…shall be resolved by arbitration” or similar phrases. Parties should be cautious of permissive and mandatory language in the arbitration agreement. For example, “may/could/permitted to be resolved by arbitration” may be inadequate to compel an unwilling party to arbitrate. Similarly, an agreement that simply refers to arbitration as “expert determination, accounting, conciliation, mediation, settlement, or alternative dispute resolutions” is insufficient to demonstrate consent and would render an invalid arbitration agreement.
In BG Grp., PLC v. the Republic of Argentina, 572 U.S. 25, 134 S. Ct. 1198, 188 L. Ed. 2d 220 (2014), the Court explained that questions of arbitrability are decided by the court in the first instance unless the parties clearly and unmistakably delegated them to a tribunal, but the adoption of the institutional rule is insufficient. Parties should spell out the types of disputes that will be subject to arbitration. Parties can delegate to the tribunal broad jurisdiction by using phrases like “All disputes shall be finally resolved by arbitration” which means that any conceivable connection to their contractual relations will be arbitrated. The scope includes matters like torts, contractual and regulatory. On the other hand, parties can limit subject matter jurisdiction by agreeing to submit only contractual claims to arbitration using terms like “under”.
Furthermore, parties can refer to arbitral institutions and their rules in the agreement. Institutional arbitrations are conducted according to procedural rules promulgated by a particular arbitration institution that administers the arbitration. Institutional rules fill the gaps when the parties haven’t agreed on something or disagreed in the arbitration agreement. If there are still gaps, the law of the seat of the arbitration will fill the gap. But parties don’t have to pick institutional rules if they want an ad hoc arbitration. In addition, parties should negotiate the appropriate seat of the arbitration because it is the procedural law that governs internal matters to the arbitration itself and matters that affect the award — it is the only jurisdiction in the world where the losing party can set aside the award.
Parties are not required to include all the elements above in the arbitration agreement; however, it would be harder to agree on these issues later on or after disputes arise. Parties must unequivocally and unambiguously consent to arbitrate in the arbitration agreement. The expressed consent would prevent disputes concerning the arbitration agreement in addition to the disputes of the underlying contract. Arbitration has relative advantages to litigation in international commercial contracts. Given that arbitration is a creature of consent, careful drafting of the arbitration agreement is crucial.
Author Biography: Sandy Chen is a moderator for the International Law and Policy Brief (ILPB) and a J.D. candidate at The George Washington University Law School. She received a B.A. in Political Science and Philosophy from Queens College. Tweet