With the New York Convention as standard-bearer, arbitration is making moves to supplant the more traditional forms of international litigation. Andrea Dahlberg and James Freeman report
International arbitration is increasingly preferred to litigation for resolving international commercial disputes. Globalisation has been a key factor in bringing this about.
In a world of cross-border trade and investment arbitration allows parties to stay out of national courts, which they often perceive to be corrupt, inefficient or biased against parties of a different nationality.
However, the critical advantage of arbitration derives from the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the so-called ’New York Convention’, which has been referred to by one top arbitrator as “perhaps the most effective instance of international legislation in the history of commercial law”.
The convention requires a contracting state to enforce an arbitral award rendered in another, subject to limited defences. There are 145 contracting states, including practically all of the world’s major economies.
For court judgments, the Brussels Regulation is an effective enforcement scheme within the EU, but no comparable scheme exists for enforcing judgments worldwide. Consequently, arbitral awards are usually more enforceable, and therefore more effective, than court judgments.
Flit from lit
International arbitration clauses are common in the construction, projects, insurance, shipping, energy and IT sectors. We are now seeing recognition of the enforcement advantage of arbitration in emerging markets work in the financial sector, particularly in transactions involving complex financial products. Arbitration is becoming the market standard in financial transactions in Asia, for example.
The arbitration boom has led to its use in ever-more complex transactions. For sophisticated clients the model clauses provided by arbitral institutions are usually too simple for the transactions they are involved in, but institutions are responding to this. The International Chamber of Commerce is the latest to publish revised rules, including provisions for the consolidation of claims and joinder of parties. Even with the new rules, however, complex transactions are likely to require bespoke clauses.
Winning the world over
Globalisation is also driving competition between arbitral centres. Many parties in Asia and the Middle East, for example, now require the seat of the arbitration to be in their region rather than in the more traditional centres in Europe or the US. Singapore and the United Arab Emirates (UAE), in particular, have established world-class facilities and rules to enhance their attractiveness as arbitral centres.
This competition is provoking a response to some of the criticisms made of arbitration in recent years by users. These include rising costs, increasingly litigious procedures and delays caused by overbooked arbitrators.
Local court interference is one risk associated with international arbitration, but there are encouraging signs of acceptance of arbitration by courts in some jurisdictions, such as Russia and the UAE. Russian courts have had a reputation for misusing the exception in the New York Convention that allows enforcement to be refused on grounds of public policy, but there are signs that they are now defining the exception more narrowly. Meanwhile, the past year has seen the first two occasions on when UAE courts have enforced awards under the New York Convention.
However, serious problems remain in some major economies. India, for example, has ratified the New York Convention, but will only enforce the arbitral awards of countries that have ’registered’ with it, despite this not being a requirement of the convention. And there are no known cases of an arbitral award being enforced in Saudi Arabia, despite its being a party to the New York Convention.
Increased investment in emerging market jurisdictions is also driving the growth of investment treaty arbitration claims against states. In the past year 32 new arbitration cases were registered at the International Centre for Settlement of Investment Disputes (Icsid), representing a 20 per cent increase on the year before. South America is the region with the most claims against states.
Icsid procedures are being updated to keep pace with the demands of users. This year an Icsid tribunal ruled that it had jurisdiction to hear a mass claim by more than 60,000 Italian bondholders against Argentina in the first collective action in investment arbitration.
Problems in the eurozone are also causing creditors to consider the possibility of bringing investment treaty arbitration against European states.
The potential for arbitration to grow is immense. More work is needed to address complaints, but there are signs that courts in key emerging economies are respecting arbitral agreements and awards.
Andrea Dahlberg is global arbitration practice manager and James Freeman is a senior associate at Allen & Overy