Importance of International Arbitration in International Business - Essay Example

?Importance of International Arbitration in International Business Introduction International arbitration is one of the most important means of solving international business rows especially amongst investors and the countries they invest in the current economic and legal world. Recent surveys found that organizations across all divisions refer as many business disputes to international arbitration as they do to litigation or court processes (Price water house Coopers and Queen Mary and University of London 2008, p.8). International arbitration in international businesses is always based on the agreement amongst parties that whenever a dispute arises on any matter in the business contract, the parties must submit the dispute to a tribunal appointed to arbitrate on the matter rather than resort to litigation. The decisions of these arbitration tribunals are always binding and final, and it is important to note that in international arbitration of disputes, the parties are allowed to modify the terms of the dispute resolution in line with their needs. The question that then rises is how international arbitration works in international businesses. In most international business agreements, there are dispute resolution clauses that state how all disputes within the agreement can be referred to for arbitration and includes such modalities such as the language of the arbitration and the governing law of contract. Other agreements pertaining to international arbitration may also have a mandatory requirement foe a pre-arbitration mediation and whether the international arbitration will be ad hoc or institutional, the mode of selection of the arbitrators, limitations and whether there is the right of appeal from the arbitration award. International arbitration as used in the solution of international commercial disputes is often a viable method but has a few disadvantages in challenging and enforcement of the award owing to the great influence of local courts in the states. The conventions that govern international arbitrations such as the New York Convention amongst others do not help the situation, as they are mostly silent on challenging and enforcement of awards (Kronke 2010, p.255). This causes hurdles in enforcement of awards that parties may refuse due to arguments based on sovereignty and public policy. International Arbitration in International Businesses It is important to note that arbitration is always adjudicative, binding and consensual in nature (Mann and Roberts 2013, p.60). Adjudicative nature of arbitration infers that the arbitrator must not have a conflict of interest in the matter at hand and must not communicate to any party in the dispute independently. The arbitrator must also treat all the parties to the dispute fairly and equally as well as permit the parties to respond to each other’s case judicially and adhere to the agreement between the parties and the scope of their mandate. The arbitration must be binding in the sense that the courts are able to transform an arbitrator’s award into a valid judgment that is executionable unless an adjudicative principle has been breached, there is a public policy ground not to do so or there is a pending appeal. It should also be consensual in that only parties who have agreed to participate in the arbitration are bound by the arbitrator’s award and third parties cannot be affected, while the agreement to arbitrate must show the location, language and the governing law as well as the rules of arbitration. The arbitration agreement can be in a series of clauses in the commercial agreement between the parties concerned even before a dispute arises, or an agreement as to the scope, rules and other matters such as the presentation of documentary or oral evidence. International arbitration in international businesses is important as they help in the resolution of businesses across borders or businesses situated in multiple jurisdictions. The degree of risk that is posed on businesses operating internationally require that businesses adopt arbitration strategies that meet their business needs taking care to avoid those situations that may not favour their business missions and objectives. International arbitration therefore helps in mitigating risks for businesses, as it is a forum for resolving disputes in the international market. The international arbitration tribunals are usually neutral and independent and they have well established institutional mechanisms that ensure fair and effective decisions that in most instances are acceptable to every party to the dispute. International arbitration helps in solving disputes that may be technical in nature that may require complex structures and procedures that occur due to the international nature of the businesses involved or the different jurisdictions of the parties involved. There are certain factors that dictate how international arbitration is conducted and include the legal effect of the arbitration, the governing law, the use of an administering institution or proceeding ad hoc, reliefs sought and complex issues of transactions. The choice of the place to arbitrate is an important provision for the arbitration agreement and most parties always choose a neutral site for the arbitration or those areas that have statutory provisions and developed body of case law on arbitration and its awards. Accompanying these factors that dictate international arbitration are some general principles of international commercial arbitration that all businesses in the international arena adopt in dispute resolution. The principle of Neutral situs dictates that the parties select a final and binding commercial arbitration place or locality of the arbitration tribunal. The other principle is the Neutral law dictates that the same considerations that govern the choice of situs apply in the interpretation of contract and the substantive issues of the international business aspect to arbitrate against. As a rule, the New York Convention will require that due process is followed in the enforcement of an award of the arbitration process. Advantages of International Arbitration to International Businesses As already discussed previously, international arbitration has become an important way of resolution of disputes in international businesses. International arbitration in international businesses have the advantage of allowing the resolution of a multi-national disputes involving multiple partners in a single forum as contrasted to litigation that may require the parties to handle the matters in different courts simultaneously. This implies that international arbitration is flexible as compared to litigation because it has flexible and tailored rules of procedure that help in faster resolution of disputes. The fact that it offers a neutral forum for the resolution of disputes that addresses the reluctance of parties to involve or submit to foreign jurisdictions that have foreign political and economic structures (Grantham 1996, 173-221). The advantage of commercial sensitivity offered by international arbitration is advantageous in the sense that unlike court proceedings which are always open to the public in most jurisdictions, arbitration is always private and closed to members of the public (Lew and Mistelis 2007, p.133). Most jurisdictions and their arbitration tribunals provide for privacy of international arbitration, for example Article 19 (4) of the London Court of International Arbitration (“LCIA”) Rules provide that all meetings and hearings of the arbitration will be private unless the arbitration Tribunal directs contrary. To achieve the commercial sensitivity advantage, parties ensure confidentiality of the proceedings either through agreeing to keep the existence and nature of the facts on the arbitration confidential through the inclusion of a confidentiality clause (Friedland 2007, pp.76-78). In England, although confidentiality clauses is not provided under the Arbitration act of 1996, the parties to the dispute are usually subject to an implied duty to be confidential in the arbitration proceedings as was held in Ali Shipping Corporation v. Shipyard Trogir, [1999] 1 W.L.R. 314 (C.A.). From the foregoing agreement, confidentiality of arbitration in order to guard the commercial sensitivity of transactions can be managed through international arbitration of international business disputes. However, there has been varied opinion on confidentiality, and these have previously been addressed in the case of Esso Australia Resources Ltd v. Plowman [1994-1995] 183 CLR 10 , where the court considered the general principle of confidentiality in arbitration proceedings. In this case the court held that there is an implied undertaking that confidentiality can only be qualified and disclosure can be made when necessary (Smit 2000, pp.567-583). International arbitration has the advantage in that it can be used to resolve disputes that are technical in nature as it provides tools and modes of managing the business risks posed by disputes that may be technical in nature owing to their international nature. This is achievable through proper selection of the decision makers or arbitrators as well as the experts who are qualified in the arbitration. A variety of experts that are utilized in international arbitration include technical, legal, industry and quantum experts that allow those who use international arbitration and its clients have informed decisions. The parties to the dispute are also able to have access to free, an open discussion with the experts that ensures that the decision arrived at is consensual, and acceptable to all the parties involved (Zrilic, Brekoulakis and Mistelis 2012, p.29). International arbitration used in international businesses has the advantage of managing lengthy and costly legal proceedings that help in addressing uncertainty over the financial obligations of the business (Mcilwrath and Savage 2010, p.99). Lengthy proceedings always cause financial uncertainty that may have a negative impact on the future finances, share prices and future business opportunities. For example, allegations of fraud brought forward to an arbitration tribunal or that of corruption against a business entity may lead to a massive reduction of its profits arising from destroyed reputation. The fact that international arbitration is always final and creates a binding and enforceable as provided by the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). In addition(b) the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention) mean that these proceedings are always less lengthy and less costly as opposed to litigation. Therefore, parties can take advantage of the procedural flexibility that international arbitration offers to reduce the cost and length of the arbitration proceedings that has immense advantages. Parties to an arbitration dispute must therefore endeavour to limit the cost and length of time in arbitration proceedings from the moment of drafting to the moment of the selection of the arbitration tribunal to handle the matter. International arbitration as used in international businesses has the advantage of the ease of enforceability in that there is the political and economic will to enforce the arbitral awards. A survey conducted by PricewaterhouseCoopers and Queen Mary, University of London (2008: 8) found that there was a compliance rate of about 97% and about 86% of full settlement of disputes. This has been made possible by the adoption and enforcement of the New York Convention and the ICSID Convention that requires State parties to implement ICSID arbitral honours as if they were ultimate rulings of local courts. Disadvantages of International Arbitration in International Businesses International arbitration in international businesses has the disadvantage of its inability or inadequacy in the resolution of disputes involving multiple contracts that usually have complex transactions in them. This is because certain risks associated with other disputes not being covered by the scope of preferred dispute resolution mechanism are likely to arise (Gusy, Hosking and Schwarz 2011, p.154). After a dispute has arisen and there is need to arbitrate on it, at times it may be difficult to mitigate the risks of multiple proceedings arising out of multiple contracts that contain complex transactions. However, this can be solved through the consolidation of both the proceedings and the award of the arbitration tribunal. The consolidation is only permissible with the express or implied consent of the parties to the arbitration proceedings as provided by Section 35 of the English Arbitration Act 1996. The strong judicial tendency to uphold arbitration awards at times acts as a disadvantage to international businesses in that they cannot be set aside on grounds of invalidity except in extreme cases that are usually based on exceptions. In Premium Nafta Products Ltd. v. Fiji Shipping Company Ltd [2007] 2 All ER, the courts have held that business persons are assumed to want to determine a dispute through a single tribunal and therefore if the agreement is invalid due to a serious fraud or wrongdoing, the agreement is binding and valid. This means that international businesses and contracts are subjected to arbitration for a faster and efficient adjudication of business issues. Therefore the finality of the awards that takes away the decision making powers of the parties as well as their rights denies the parties right to appeal that may subject them to the whims of a single arbitrator. International arbitration has potentially higher fees due to the professional fees incurred as compared to court cases in some instances. This calls for those concerned to agree on the professional fees well in advance before the arbitration process is embarked on. Another disadvantage is that there are at time problems or disputes in the selection of the arbitrator or the institution to carry it out in the international business environment. There are also international challenges that accompany international arbitration and these present practical challenges that are associated with international business dealings. This is caused by the requirement of international arbitration that parties comprehend the foreign or international jurisdictions that are to handle the matter. Other challenges may be due to linguistic differences amongst the parties concerned that may complicate or draw out the arbitration proceedings. A potential complication of international arbitration is derived from the fact that in certain situations, there may be the potential need to seek the intervention of courts of law to enforce the awards especially when the coercive power of the court may be required (Heilbron 2008, p.127). The difficulties may require that the courts intervene mostly in ad hoc arbitration where the parties fail to designate a third party to resolve the difficulties. This problem is also compounded by the fact that arbitral tribunals lack the imperium or the coercive power that implies that their procedural orders are less effective as compared to that of courts of law and there may be need for separate orders to enforce them. The net effect of this is that the court procedures may complicate the procedure and pose a problem to international intervention. The inability by arbitrators to consolidate or join third parties in the dispute is a big drawback to international arbitration (Mistelis and Lew 2006, p.352). Due to the consensual nature of arbitration, the arbitrators are unable to consolidate actions without the consent of the parties and may be a big problem especially in disputes where the same parties relate to different contracts that are subject to different arbitration agreement. It is also noteworthy that privity of the arbitration agreement bars the arbitrators from sanctioning joinder of parties before an arbitration agreement is signed. International arbitration also has got the disadvantage of failing to grant immediate interim relief and may take a considerably longer time to constitute a tribunal or for it to render a decision thus making the concerned parties to incur losses related to time wastage. International arbitration in international business at times restricts discovery and testimony and do not create a precedent while parties cannot be forced to arbitrate on absent contractual obligations. Conclusion In international business where maintaining relationship is important, there are many advantages in providing for arbitration of disputes when conducting business with foreign partners. International arbitration has become an important aspect of every society and it offers decisions that are of variable quality that though may suffer from legal coherence still offer the best in international arbitration. Interstate arbitration as entrusted in international tribunals offer confidential decisions that held give commercial sense to the parties concerned in the dispute. International arbitration can therefore be used in the management of international business disputes that may occur across borders. International arbitration is the most effective way of managing business risks as well as overcoming them in the international business arena. International arbitration has remained one of the most acceptable way of solving business disputes in the international business arena in that it offers confidential solutions to business interests between investors and foreign governments. Therefore, it can be authoritatively stated that international trade will be dependent on arbitration and this will be dependent on arbitrators as well as agreements on arbitration. This cannot be achieved unless there is training to arbitrators who must be mindful of the objectives of the parties and their desires to achieve their needs. It also requires sound knowledge on the matters of arbitration in terms of the relevant local and international law on international commercial arbitrations.  Concerning the non-coherence of legislation and national courts, it is important that a framework is made that caters for the enforcement of awards by arbitration tribunals possibly under a viable United Nations convention. Therefore, with the growing importance and positive uptake of international commercial arbitration as a method of resolving disputes, there is need to address those who utilize it due to the massive financial implications of disputes. This would allow the solution of disputes in a neutral and private manner that shows predictability, cost effectiveness and operational commercial arbitration system. References Friedland, P. D. 2007. Arbitration clauses for international contracts. Huntington, NY, Juris. Grantham, W. 1996. The arbitrability of international intellectual property disputes. Berkeley Journal of International Law. 14, 173-221. Gusy, M. F., Hosking, J. M., & Schwarz, F. T. 2011. A guide to the ICDR international arbitration rules. Oxford, Oxford University Press. Heilbron, H. 2008. A practical guide to international arbitration in London. London, Informa. Kronke, H. 2010. Recognition and enforcement of foreign arbitral awards: a global commentary on the New York Convention. 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The American Review of International Arbitration. 11, 567-583. Zrilic, J., Brekoulakis, S. L., & Mistelis, L. A. (2012). 2012 international arbitration survey: current and preferred practices in the arbitral process. [Online] Available at: http://www.whitecase.com/files/Uploads/Documents/Arbitration/Queen-Mary-University-London-International-Arbitration-Survey-2012.pdf Read More