Out-Law / Your Daily Need-To-Know

International arbitration

Out-Law Guide | 27 Aug 2007 | 3:00 pm | 4 min. read

This guide was last updated in July 2011.

Arbitration is a system of formal dispute resolution by one or more impartial people for a final and binding decision. The arbitral tribunal can be made up of legal or industry experts of the parties' own choosing, using procedures which they can influence.

International arbitration is conducted all over the world against very different legal and cultural backgrounds and can provide for the quick, practical and economical settlement of cross-border disputes.

In some industries, and for some companies, arbitration has become the chosen method for the resolution of international disputes. Arbitration is particularly common in construction, engineering, oil, gas, shipping, commodities and insurance contracts. Inserting an arbitration clause into commercial agreements enables businesses to opt to have disputes which arise in connection with the contract to be decided by an arbitral tribunal rather than through litigation in the courts.

Each jurisdiction will have its own arbitration laws, but with the existence of international conventions such as the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the New York Convention (7-page / 1MB PDF)  and international organisations which provide arbitration rules and procedures to suit international disputes, there is a greater ease of recognition and enforcement of arbitral awards.

Features of international arbitration and some of its advantages

Final & binding: arbitral awards are more likely to be final than those of the judgements of courts of first instance, which will often be subject to appeal. Although arbitral awards may also be challenged, in either the country where the award is granted or where enforcement is sought, the grounds of challenge available against arbitral awards are limited.

Enforcement: arbitral awards can have much greater and easier international recognition than the judgements of national courts. To date, 145 countries have signed the New York Convention. The Convention facilitates the enforcement of awards in all the states which have signed it - if the award is made in a signatory state it will be recognised in all the other signatory states. There are several other arbitration conventions between two or more countries that may also help enforcement. Bilateral investment treaties (BITs) may also be relevant.

Equal footing: in their arbitration agreement, parties can specify various important features of the arbitration. These include first and foremost the 'seat' of the arbitration, which in turn will determine among other things the procedural rules which will apply. Parties can also specify other features such as the language used, and the number of arbitrators. If a dispute arises the parties may agree the identity of the arbitrator between them or, if a panel of three arbitrators is to be used, may each nominate one of the arbitrators with the third appointed by those arbitrators. Arbitration may take place in any country, in any language and with arbitrators of any nationality. With this flexibility, it is generally possible to structure a neutral procedure offering no undue advantages to any party.

Expertise: as noted above, often in an arbitration the parties will be able to nominate the people of their choice as arbitrators provided they are independent. This enables the parties to choose arbitrators who have a particular competence or specialism in the relevant field, who need not necessarily be members of the legal profession.

Speed, time and costs: arbitration was once thought to be a speedier, less costly dispute resolution method than litigation, but the complex international disputes referred to arbitration can often take a great deal of time and money to resolve. The limited scope for challenging arbitral awards as compared with court judgements does however mean that the parties will not subsequently become tangled in a prolonged and costly series of appeals.

Confidentiality: arbitration hearings are usually held in private. Confidentiality is often a reason why arbitration is chosen as the method of dispute resolution, although in some jurisdictions there is no implied duty of confidentiality.

Institutional or ad hoc arbitration: parties using arbitration have a choice between having the arbitration administered, for a fee, by an institutional body such as the International Chamber of Commerce (ICC), or proceeding on an 'ad hoc' basis outside of an institutional framework. In an institutional arbitration, the parties will use the rules of that institution. In an ad hoc arbitration the parties can adopt the UNCITRAL arbitration rules or a set of institutional rules or draw up their own procedural rules. In ad hoc cases, the arbitration will be administered by the parties themselves and - once they have been appointed - the arbitrators. However, if problems arise in setting the arbitration in motion or appointing the arbitrators, the parties may need the assistance of a state court or that of an institution.

Costs: it is usually the arbitral tribunal which decides which of the parties are to meet the costs of the arbitration and in what proportion, including for the fees and expenses of the arbitrators and any tribunal-appointed experts. However, the precise rules on costs will depend on the governing rules of the arbitration and any agreement made by the parties beforehand.

When may arbitration be appropriate?

  • where the parties are looking for a neutral forum because the courts which otherwise may have jurisdiction may not be viewed as being totally independent;
  • where the relevant country's legal system is underdeveloped or ill-suited to deal with the dispute;
  • where the parties want the dispute to be resolved by an expert relevant to the dispute;
  • where litigation through the courts may be lengthy and costly;
  • where the parties want to have some control over the procedure for resolving the dispute;
  • where the decision will not be made in the same place that the debtor's assets are to be found;
  • where a final and binding decision is required with a minimum, or no, right of appeal;
  • where confidentiality is required.

Although arbitration is usually appropriate in most circumstances, some disputes may be inappropriate for a referral to arbitration - for example, if one of the parties is likely to be deliberately obstructive, because a particular country's legal system is restrictive or the subject-matter of the dispute is not one which can be referred to arbitration according to the relevant national laws.