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What Is International Arbitration?


Published 22 May 2021

What Is International Arbitration?

What Is International Arbitration?


Disputes between business partners are always a risk - even for larger companies. These risks are magnified abroad. Neither the place of jurisdiction chosen by the opponent nor the duration and costs of the legal proceedings are always foreseeable. An alternative to this is arbitration. In these proceedings, the needs of the companies are better taken into account.

One of the imponderables of the ordinary legal process is that judges' legal knowledge is usually limited to national issues. In addition, a court judgement abroad can often only be enforced with difficulty, if at all.

Companies shy away from legal proceedings abroad for various reasons. In many cases, it is therefore advisable to agree on arbitration as an alternative to the ordinary legal process. Arbitration proceedings are similar to state court proceedings. The parties exchange pleadings and there is usually also an oral hearing with the possibility of taking evidence. At the end of the proceedings, there is a binding arbitral award, which has the same effects for the parties as a judgement.

 

What Is International Arbitration Used For?

Arbitral tribunals are private, i.e. non-governmental, courts that decide on disputes in a final and legally binding manner. Since private arbitration, unlike ordinary jurisdiction, has no state power, an arbitral tribunal can only decide on an asserted claim if its jurisdiction has been agreed by the parties. As a rule, the parties agree on this when concluding the contract by including an arbitration clause. Sometimes the parties make formal errors in the wording of arbitration clauses.

International arbitration is sometimes called a hybrid form of international dispute resolution, since it blends elements of civil law procedure and common law procedure, while allowing the parties a significant opportunity to design the arbitral procedure under which their dispute will be resolved. International arbitration can be used to resolve any dispute that is considered to be “arbitrable,” a term whose scope varies from State-to-State, but which includes the majority of commercial disputes.

Companies frequently include international arbitration agreements in their commercial contracts with other businesses, so that if a dispute arises with respect to the agreement they are obligated to arbitrate rather than to pursue traditional court litigation. Arbitration may also be used by two parties to resolve a dispute via what is known as a “submission agreement”, which is simply an arbitration agreement that is signed after a dispute has already arisen.

Often it is not sufficiently clear from them which arbitral tribunal should have jurisdiction or there are other legal problems. We therefore recommend using the model clauses drafted by the respective institutions. Then there is no danger that the clause will be invalid and that you will have to go to the state court after all. Such agreements are not unusual between merchants.

Typical arbitration agreements are very short. The ICC model arbitration clause, for instance, merely reads:

“All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”

Parties also frequently add rules concerning the law governing the contract, the number of arbitrators, the place of arbitration and the language of arbitration.

 

Arbitration Is Often Cheaper, Less Risky And More Flexible For Businesses

International arbitration is similar to domestic court proceedings, but instead of taking place before a domestic court, it takes place before private arbitrators known as arbitrators. In terms of procedural arrangements, arbitrators are more flexible and free than judges in a state court. The parties themselves also have a stronger influence on the proceedings. They are involved in the selection of the arbitrators and can mutually agree on the place of the hearing and the language of the proceedings.

It is a consensual, neutral, binding, private and enforceable means of international dispute resolution that is typically faster and less expensive than domestic court proceedings.

The use of international arbitration has evolved to allow parties of different jurisdictions, linguistic and cultural backgrounds to settle their disputes finally and bindingly, usually without the formalities of the procedural rules of their own legal systems.

 

Arbitration Proceedings Are Confidential

In most cases, strict confidentiality is agreed upon, unless it is already stipulated in the arbitration rules. Unlike in public court proceedings, confidential or reputationally damaging details, business secrets and the arbitral award itself cannot leak out.

Many companies see this as the most important advantage of arbitration, which stems from a commercial tradition. Confidentiality also facilitates the continuation of existing business relationships, especially since arbitration proceedings often end with a consensual agreement anyway.

 

Types of Arbitration

There are two types of arbitration tribunals:

1. Institutional arbitration tribunals

Institutional arbitration tribunals are associated with an institution, often a chamber of commerce or business association. These provide procedural rules and, in most cases, rules on costs, and support the parties in the initiation and, in some cases, throughout the arbitration proceedings.

2. Ad-hoc arbitration tribunals

Ad hoc proceedings take place without the support of an institution; the parties and the arbitrators then conduct the proceedings on their own.

Many international arbitration cases are heard by the International Chamber of Commerce (ICC) in Paris.

 

What Does Arbitration Cost?

The cost of arbitration varies greatly from one arbitral institution to another. Many arbitral institutions have fee calculators for procedural and arbitrator costs on their websites.

In addition, of course, the lawyers' fees must be taken into account. They usually make up the majority of the costs of the proceedings - unless elaborate expert opinions have to be prepared.

If one compares the total costs of arbitration proceedings with the total costs of a court case (including lawyers' fees), which is conducted through several instances, recourse to arbitration often pays off. Especially in cases with low amounts in dispute, which usually do not go to the 2nd instance, court proceedings may possibly be cheaper.

 

What Are The Benefits Of International Arbitration Over Litigation?

The primary benefits of using international arbitration to resolve a dispute rather than traditional court litigation include:


Choice Of Arbitral Tribunal

The choice of arbitral institution, arbitrators and place of arbitration is an essential advantage over state jurisdiction and therefore deserves the utmost care. Reputation of the institution, professional specialisation and costs are important criteria.

For cost reasons, a sole arbitrator is often recommended - unless the amount in dispute or the complexity of the proceedings are particularly high. In that case, a panel of several - usually three - arbitrators should be chosen.

It is important to determine the qualifications of the arbitrators in advance in order to arrive at an award that is acceptable and fair to the parties involved. For example, it may be advisable to select an arbitrator who belongs to a certain professional group, who works in a certain industry or who has the necessary language and intercultural skills, especially in the case of international problems.

 

Alternatives To Arbitration

The most important out-of-court alternatives to arbitration are to obtain an arbitrator's report or to conduct a mediation procedure. If the parties are only in dispute over the determination of factual issues, it is a good idea to obtain an arbitration award. In this way, the parties receive a binding clarification of the issue in dispute which, in principle, cannot be challenged in court at a later date.

In mediation, the parties - unlike in arbitration - work out a solution to their conflict independently and on their own responsibility. They are supported by a mediator who acts as a neutral third party. The power of decision lies solely with the parties involved. In contrast to the arbitrator, the mediator has neither coercive nor decision-making power.