International arbitration – are you sitting comfortably?
by Stephen Rayment, Group Managing Director -
International Arbitration is a popular form of alternative dispute resolution which allows disputes to be resolved outside of the traditional courts system. It is particularly favoured by parties to international contracts since it gives them the opportunity to tailor the conditions applicable to the resolution of their disputes at their convenience. Their choices will be set out in an arbitration clause in their contract or in a separate arbitration agreement (together referred to as the “International Arbitration Covenant”).
An adequate International Arbitration Covenant
An adequate International Arbitration Covenant is the key to the success of international arbitration. International Arbitration Covenants will typically specify the following:
- Ad hoc or institutional arbitration;
- The rules applicable to the arbitration;
- The substantive law governing the merits of the disputes (the “governing law“);
- The language of arbitration;
- The composition and mode of selection of the arbitral tribunal; and, last but not least,
- The seat of arbitration
Myth and reality of the seat of International Arbitration
Generally added as an afterthought and chosen for logistic or business convenience, the seat is in fact strategically important in many respects which may not be appreciated fully by the parties to an international contract. The seat is the object of numerous misconceptions as illustrated below.
The difference between the seat and the venue
The first misconception is that the arbitration proceedings and hearings have to be held at the seat, even if reaching such location means crossing half the world on each occasion for either or both parties. Although it is customary to hold the arbitration proceedings at the location of the seat, the parties can decide to hold such proceedings at a different more convenient venue and such decision will not affect the choice of the seat or its legal effects.
The curial law of international arbitration
The second misconception is that, if the parties have agreed upon an institutional arbitration and opted for the rules proposed by the relevant institution – such as the rules of the International Chamber of Commerce (ICC) or of the London Court of International Arbitration (LCIA) – no other rule will apply to the arbitration proceedings. Whilst such in institutional rules provide a useful procedural framework, they are not legal rules but only a contractual arrangement.
The seat will actually determine the legal framework underlying the arbitration process, including the mandatory legal provisions of the law of the arbitration which is referred to as the “curial law” or the law of the courts. The curial law will prevail over any conflicting provision of the contractual rules.
By opting for international arbitration and moving away from the authority of the national courts in the country where the dispute arose, the parties have, when selecting the seat, chosen alternative courts which have the power to support or interfere with the arbitration proceedings. Most importantly, the arbitration award may be challenged in the courts of the seat and each jurisdiction will allow such challenge on different grounds.
The curial law will not necessarily reflect the governing law and the interface between such laws may lead to some issues. Say the parties have a contract governed by the laws of England and Wales (“English Law”), with a seat of arbitration in Paris resulting in the curial law being the laws of France (“French Law”). The dispute will be resolved by application of English Law, but French Law will apply to the procedure of the arbitration and the validity of the award.
Counsels of the parties do not need to be qualified in the law of the seat although it would be advisable for them to ensure the support of a local firm to advise on mandatory provisions and procedural rules of the seat as well as the enforcement process of the award. The popularity of London-seated arbitrations can be attributed in part to the prevalence of English Law governing international commercial contracts drafted in English language, which goes hand-in hand with the choice of English Law as the curial law.
International Arbitration is essentially private but not necessarily confidential
Surveys suggest that confidentiality is one of the main reasons commercial parties choose arbitration over court proceedings. It is assumed that arbitration proceedings will be confidential as a general rule. This third assumption is erroneous. Whether an arbitration is confidential or not will depend upon the curial law or, (if they so provide) the terms of the International Arbitration Covenant.
Since London, Paris and Geneva are the most popular seats for international arbitration, the confidentiality obligations deriving from each curial law will be assessed below. The 2012 Swiss Rules on International Arbitration provide that unless the Parties both expressly agree to the contrary, they undertake to keep confidential all awards and orders as well as all materials submitted by another party for the arbitral proceedings. These undertakings apply also to the arbitral tribunal. By selecting Geneva as their seat of arbitration, the parties will ensure confidentiality of the arbitration as well. In France the Law 2011-48 (the “French Arbitration Act)” provides for the confidentiality of domestic arbitration but is oddly silent as to international arbitration. Only the deliberations of the tribunal are confidential under the French Civil Code. If the parties have opted for Paris as the seat of arbitration, they would be well advised to provide for a confidentiality undertaking in the International Arbitration Covenant. Such confidentiality obligations should also be extended to the arbitral tribunal in order to fill the gaps of the French Arbitration Act.
Although the UK Arbitration Act 1996 fails to address the matter of confidentiality, English courts have evolved a common law rule to the effect that all documents produced in or created for the purpose of arbitration are confidential. This makes arbitrations seated in England attractive for parties concerned about the disclosure of commercially sensitive information and potential reputational damage.
Main features of a good seat
A good seat should be neutral, arbitration-friendly and located in a signatory state of the New York Convention for the Recognition and Enforcement of Arbitral Awards of 1958 (the “New York Convention”).
Recognition of the International Arbitration Covenant and enforcement of the award generally takes place under the New York Convention, to which 157 countries are currently signatories, including the United Kingdom, France and Switzerland.
As stated above, the most popular international arbitration seats are London, Paris and Geneva – where the oldest and most renowned arbitration institutions are based. The order of preference between these seats vary according to the nationality of the parties and their strategy with regard to the enforcement of the award.
When opting for arbitration, the parties wish to minimise judicial intervention in the running of their dispute. There are however circumstances where judicial assistance becomes necessary to ensure compliance of a defiant party. The level of court intervention in each dispute will vary significantly depending on the seat of arbitration. In France, England and Switzerland, the courts will intervene only in support of arbitration by issuing interim measures and enforcing the arbitration award. The range of their respective intervention will vary as outlined below.
A choice of Geneva as the seat of arbitration will ensure limited support but also minimum interference of the local courts on the international arbitration.
A choice of Paris as the seat of arbitration will allow the intervention of the local courts, at the request of either party, to impose the production of documents retained by the other party and the French courts have the power to impose fines (“astreintes”) on a party who refuses to comply with their interim orders. No such curial power is found in England or Switzerland. cal courts in disregard of the Arbitration Covenant.
A choice of London as the seat of arbitration will allow applications for security for costs and interim relief or freezing orders to the local courts. French and Swiss courts do not have such power. English courts may also issue anti-suit injunctions to prevent a party from bringing proceedings before the local courts in disregard of the Arbitration Covenant. The English Arbitration Act allows, under certain conditions, for challenge of an award for an error of law. The parties may however opt out of this ground in the Arbitration Covenant. There is no room for such challenge in France or in Switzerland.
Among non-legal grounds to opt for one seat or the other, language and costs should be considered. Although each case is to be assessed carefully on its own circumstances, there does not seem to be a noticeable difference in terms of arbitration costs between seats in Paris, London or Geneva.
On average, the costs of international arbitration (the fees paid to the arbitral tribunal and to the selected institution, if any) represent only some 20% of the overall costs involved. The remaining 80% consists of legal fees to counsels, expert costs, traveling and accommodation costs. If the governing law is different from the curial law and expressed in another language, then the possibility of certified translation costs for the purpose of seeking the assistance of the local courts, resisting an application to have the award set aside or securing its enforcement, together with the costs of
retaining two sets of counsels, should be given some consideration.
Enforcement of the International Arbitration Award
The foreseeable outcome of international arbitration is often neglected by the parties and their advisers alike. Without the ability to enforce it, a successful arbitration award may well result in a Pyrrhic victory. International arbitration awards are by their very nature final and binding upon their notification. However, despite these key features, the awards are not always voluntarily executed by the losing party. Arbitration awards are incapable of direct enforcement without the assistance of the local courts, which in some cases, may be challenging. The seat of arbitration will again be of strategic importance to secure enforcement of the award in some jurisdictions.
Although this is not always a legal prerequisite, the place of enforcement will be determined by the location where the assets of the losing party lie. Ideally, before embarking on an international arbitration, those assets should be identified by the party expecting to win its case. If the assets are located at the seat of an arbitration-friendly state, enforcement is generally facilitated and swift. If this is not the case, several alternative enforcement actions may have to be considered. In any case, parties entering into an International Arbitration Covenant with a party whose assets are located only in a country where enforcement of foreign awards is frayed with difficulty should be aware that they undertake a considerable amount of risks. If the losing party is a state or a state agency, the defence of sovereign immunity should have been waived in explicit terms in the International Arbitration Covenant.
Enforcement of awards outside the seat of arbitration is facilitated by the New York Convention. In an ideal world, an award obtained from a seat located in any of the 157 signatory countries of the New York Convention should be enforceable in any and all of them. In practice however, once adequate assets are identified and located, the rules concerning the recognition and enforcement of arbitration awards in each relevant jurisdiction should be investigated, in particular with regard to reciprocity reservations and any troublesome interpretation of the grounds for refusal to enforce, based on public policy grounds. In such respect, the New York Convention is simply indicative and not binding, which grants leeway to signatory states and their local courts.
Entering into an International Arbitration Covenant is a strategic decision for any contractor wishing to proceed to arbitration and then enforce a successful award. Whilst expecting the best from an attractive commercial contract, the wise contractor should be well prepared for the worst. Like celebrities who commit to the terms of their sophisticated pre-nuptial agreements before any promise is broken, parties to an international contract should be well advised to carefully examine and agree beforehand all the relevant provisions of their International Arbitration Covenants and give careful consideration to the critical stage of enforcement of awards.
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