International Commercial Arbitration: ADR in Cross-Border Business Disputes

Table of Contents

Introduction

Arbitration: The Agreement, Mechanics and Process

The Dispute Resolution Clause

After the Arbitral Award: Appeal, Modification and Third-Party Issues

Enforcement of Arbitral Awards

Ad Hoc v. Administered Arbitrations

Disadvantages of Arbitration: Discovery Limitations, Lack of Equitable Relief, No Joinder of Parties

Mediation: Facilitative Alternative Dispute Resolution

Litigation: Engaging the Wheels of Justice

Arbitration is a Useful Method of Resolving International Disputes

Final Observation and Injunction

This article is also available as a PDF file.

International Commercial Arbitration: ADR in Cross-Border Business Disputes (page 3)

Ad Hoc v. Administered Arbitrations

Arbitration is either "ad hoc" or "administered." The parties must decide which method is preferred. Each has its own merits.

In an ad hoc proceeding, the parties privately manage their arbitration. This ensures complete privacy and control. In addition, the parties and arbitrators either develop their own rules or use recognized standards to govern their ad hoc proceedings.

A prominent standard, for example, is the widely accepted unanimously approved 1985 United Nations Commission on International Trade Law Model Law on International Commercial Arbitration ("UNCITRAL Model Law")18 Member countries have subsequently adopted enabling legislation. So have some U.S. states, like Illinois.19

Today, as a result, the UNICTRAL Model Law embodies a supranational arbitral standard, recognized and applied around the world. Legislation based on this Model Law has been enacted in dozens of countries and several progressive state legislatures in the United States.20 Consequently, the UNCITRAL Model Law is often used by parties to govern their ad hoc arbitration proceedings.

In contrast to ad hoc proceedings run by the parties, an administered or "institutional" arbitration involves the services of an arbitral agency. In the United States, for example, the largest such administrative agency is the American Arbitration Association ("AAA"). In response to increasing global demand for effective commercial dispute resolution and arbitrations, the AAA established its International Centre for Dispute Resolution ("ICDR").21

The ICDR, with offices in New York, Ireland and Mexico, often applies its own arbitral rules and is charged with the exclusive administration of all the AAA's international matters 22 For a fee, the AAA administers the entire case from initiation to enforcement of an arbitral award.

Other organizations also offer arbitration services. The International Institute for Conflict Prevention & Resolution ("CPR"), for example, provides limited arbitral services and encourages parties to apply its rules. In particular, the CPR adopted the 2000 Rules for Non Administered Arbitration of International Disputes.23 The CPR encourages the parties to apply its arbitral rules, yet it does not administer arbitrations. Instead, the parties use CPR services to assist in selecting a panel of arbitrators. The parties then manage their own proceeding.

There are many institutional agencies around the world that administer arbitrations or provide rules that can be incorporated into arbitration agreements. Some of these agencies have industry specific expertise and are located in areas active in global commerce. Among them are:

Disadvantages of Arbitration: Discovery Limitations, Lack of Equitable Relief, No Joinder of Parties

Arbitration has its disadvantages. First, discovery may be too limited. Arbitrators evaluate the relevance and materiality of the evidence offered. However, the arbitration agreement or the parties' choice of applicable rules may restrict the scope of discovery from the outset, so that marshalling appropriate proof may be difficult or impossible.

Second, as discussed above, absent fraud, corruption or excess of authority, the appellate remedies available to vacate an arbitral award are narrow. This limitation expedites the dispute process, but may deprive the parties of adequate review.

Third, hearsay evidence may be offered in an arbitral proceeding. This could prove persuasive, and the arbitrator's use of the evidence is not subject to strict evidentiary rules. Even where the arbitrator relies on only marginally trustworthy evidence, the subsequent arbitral award is likely to be upheld.

As noted, an arbitrator may not manifestly disregard the law (i.e., be conscious of the law and deliberately ignore it). However, an arbitral award will not be vacated where an arbitrator"manifestly disregarded" the evidence.24 This is unsettling, especially when no substantial appellate review is available.

Finally, arbitration does not impose compulsory or permissive rules of joinder. Thus, a necessary party may not be added to enable a complete resolution of the dispute. The decided issues are only binding as to the arbitrating parties, though they may have issue preclusion consequences beyond the arbitration.


18 See, United Nations Commission on International Trade Law ("UNCITRAL"), http://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf back
19 Illinois International Commercial Arbitration Act, 710 ILCS 20/1-1 et seq. back
20 See. Status, UNICTRAL Model Law on International Commercial Arbitration, http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration_status.html back
21 http://www.adr.org/sp.asp?id=28819 back
22 Id. back
23 See, http://www.cpradr.org/CPRStore/tabid/67/ProductID/19/Default.aspx back
24 See, Wallace v. Buttar, 378 F.3d 182, 193 (2d Cir. 2004). back

International Commercial Arbitration: ADR in Cross-Border Business Disputes (page 4)

Mediation: Facilitative Alternative Dispute Resolution

Mediation is a non-binding form of facilitative dispute resolution.25 It is a conflict resolution variant of "thin-slicing," the ability of the human subconscious to identify patterns and make responses based on very quick "slices of experience."26 Unlike trials or arbitrations, mediations usually take place in several hours or a day. Mediators act as neutrals, assisting the parties in constructing their own solution. Importantly, mediators do not decide the case, and are not concerned with evaluating evidence, proof or liability. Instead, the focus of the mediator is on facilitating and encouraging constructive party dialog.

In this regard, mediation differs sharply from both arbitration and litigation. Mediation is not adversarial in form. There is not an express winner and a loser. Mediation offers an opportunity to settle matters on an expedited, cost efficient, client-controlled basis. It can be especially useful, if the parties are motivated to reach an agreement. Attorneys can powerfully shape the outcome, but the ultimate success or failure depends largely on the parties.

The mediator's function is fundamentally different from the arbitrator's. The mediator's concern is facilitative, focused on developing party dialogue. The arbitrator concentrates on the arguments made and evidence offered in order to determine the merits of the case.

Mediation is less "risky" than arbitration or litigation. The parties direct both the process and outcome. They may conclude the mediation in agreement or end it at any time and proceed to arbitration or litigation. As in arbitration, the rules of evidence are relaxed and documents may be submitted to the mediator upon agreement.

To begin the process, the parties select an experienced, neutral third-party mediator. Usually, both sides are given an opportunity to submit written materials to the mediator a short time before the mediation. The parties then present their positions at an in-person several hour or longer conference at which the mediator presides. After initial presentations, mediators typically separate the parties and discuss the issues privately, shuttling between the parties, returning to group discussions as may be appropriate.

The individual sessions, or "caucuses," allow each party to explore and reality test the strengths and weaknesses of their positions in the case. The mediator is then able to facilitate a discussion attempting to stimulate the parties into generating options and solutions.

As a means of dispute resolution, mediation may be the most empowering to the parties. The outcome determinative decisions rest with the parties. Success in mediation is often attributed to such factors as a safe environment with motivated parties, direct communication, and independent mediator appraisal, development of options, and the occasion and reinforcement for needed compromise.

Mediation is not binding. Unless the parties reach a settlement, the mediation remains confidential and cannot be used to determine the parties' respective rights. In a successful mediation, the parties agree to resolve their dispute on mutually acceptable terms.

For best results (borrowing from AAA Chicago's Robert Matlin):

  1. Make sure the right client is in the room.
  2. Make sure the right attorney (and mediator) is in the room.
  3. Be prepared.
  4. Communicate with the mediator beforehand.
  5. Provide a written submission.
  6. Provide the right opening statement.
  7. Don't waive the opening session.
  8. Engage in small-talk.
  9. Understand the other side's point of view.
  10. Consider your BATNA ("Best Alternative to No Agreement").

Litigation: Engaging the Wheels of Justice

Litigation is dispute resolution by judicial process. The parties employ the machinery of the court to arrive at a final, binding decision. In the process, strict rules of evidence and procedure apply. The final judgment of the court may be appealed, adding to the time and expense, but also offering more safeguards against unfair result.

Litigation in the United States and certain other established national systems can be the best means of obtaining recourse. The need for immediate equitable relief, a dispute requiring substantial discovery from the opposing party, or the benefit of establishing a judicial precedent may require litigation. But even in these circumstances, lawsuits are expensive and uncertain, and the justice may be slow due to crowded court dockets and expansive discovery. The cost of preparing a claim for trial can be high, sometimes higher than the possible recovery. Finally, the judiciary may not offer the expertise and flexibility necessary to resolve some complex commercial disputes. For these reasons, arbitration and mediation stand out as attractive alternatives.

Arbitration is a Useful Method of Resolving International Disputes

No one dispute resolution mechanism is per se superior to any other. Rather, each method has its advantages and disadvantages. When commercial conflicts arise, there may be a need to litigate. Depending on the circumstances, mediation and arbitration may be preferable.

Increasingly, arbitration is the preferred method for resolving international commercial disputes. Arbitration, built on a specific contract between the parties, and governed by experienced arbitrators, is often an effective method of resolving an international commercial dispute.

There are significant advantages in choosing to arbitrate a transactional dispute, including: finality and worldwide enforcement of arbitral awards, neutrality of the arbitrators and venue, confidentiality and privacy of the proceedings, speed of the process, lower cost, and the potential to preserve valuable business relationships.

Resolving disputes is never easy. But an understanding of the alternative mechanisms for resolution is an important foundation for good decision-making.

Final Observation and Injunction

French philosopher Voltaire once wrote: "I had two negative experiences concerning the law. The first was when I lost a trial. The second was when I won another one." There is a time for litigation. But there are alternatives that may be better. Arbitration and mediation may be among those alternatives.

Lincoln the Illinois lawyer enjoins us: "Discourage litigation. Persuade your neighbors
to compromise whenever you can... As a peacemaker, the lawyer has a superior opportunity of
being a good man [or woman]. There will still be business enough.
"

  Peter V. Baugher
  Schopf & Weiss
  One South Wacker Drive, 28th Floor
  Chicago, IL 60606
  Phone: 312.701.9315
  Fax: 312.701.9335
  www.sw.com
  February 2009

25 Mediation may be "facilitative" or "evaluative." For more, see Hoberman, Robin, "Mediation: A Nonadversarial Alternative to a Win-Lose System," http://www.isba.org/IBJ/nov02lj/p588.htm. For an illustrative statute, see (Illinois) Uniform Mediation Act, 710 ILCS 35/1, et seq. back
26 Malcolm Gladwell, Blink! 22 (2005). back