Arbitration and Supply Chains

International arbitration has many key attributes which lend themselves to the global nature of supply chains.

Confidentiality

Supply chain disputes can span numerous sectors and industries, some of which inevitably involve highly sensitive and confidential information and data. For example, a supply chain dispute in the Life Sciences and Healthcare sector may concern the supply chain of a new cutting-edge pharmaceutical product or healthcare device.

As arbitration is conducted privately, the existence and details of an arbitration, as well as any evidence produced, and written and oral submissions, are by default generally protected by confidentiality. Hearings are typically not open to the public. The parties can choose to release either no information or selected information to the market (over and above that which a company may be required to report). The ability to do this is a big attraction of arbitration and helps parties protect their commercially sensitive and confidential information.

By contrast, court hearings are typically conducted in the public eye and therefore open to public scrutiny and press interest. Although it is possible to protect some documents within a confidentiality ring, the principles of open justice prevail and the courts rarely allow a full hearing to take place behind closed doors.

Procedural flexibility

There is substantial flexibility in the arbitration procedure which parties can utilise. For instance:

• for a smaller claim, the ICC and other institutions have fast track procedures which can lead to expedited proceedings and final determination in a matter of months;
• for any dispute, the parties have a greater ability to shape the arbitral proceedings, unlike in court proceedings. For example, tribunals are generally open to innovative ways of expert evidence being provided and tested. This may be particularly useful for technical supply chain disputes;
• the possibility of identifying and nominating an arbitrator is seen by most parties as a significant benefit; and
• parties may still apply to court in certain situations for interim relief.

When choosing an arbitral institution, parties should look at the scalability of the rules to cater for both minor and significant disputes across the supply chain.

Multi-jurisdictional disputes and a ‘neutral forum’

Often supply chain processes are collaborative in nature and the parties can come from a range of jurisdictions. Arbitration allows multinational disputes to be resolved in a single forum. In addition, parties will often prefer to go to a neutral forum, which arbitration offers, as opposed to one party’s local court.

Worldwide enforcement

Many jurisdictions have in place regimes for the reciprocal enforcement of arbitral awards. For example, most states (over 170) have signed up to the New York Convention, which provides a relatively straightforward enforcement process. There is nothing comparable in terms of scale and effectiveness in the international court system.

For more information on the enforcement of awards, see Arbitration in Practice, Award: enforcement.

Specialist knowledge

Supply chain processes are often highly-technical and have multiple moving parts. Parties can select an arbitrator with particular industry expertise who will have a good understanding of the substance and context of the dispute, as well as the technical evidence presented to them.

By contrast, the court system does not allow the parties to appoint a specific judge and there is no guarantee that the person appointed will have any or sufficient relevant expertise.

For more information on the arbitrator selection process see Arbitration in Practice, Selection and Appointment of Arbitrator(s).

Supply chain disputes that are particularly well suited to arbitration include disputes:

• as to whether contractual milestones or timeframes have been met;
• where there are multiple contracts involving different parties, and a dispute procedure is required that is consistent across the chain;
• that involve multiple jurisdictions, such as in globally integrated supply chains;
• which are highly technical and complex;
• which involve long-term commitments with significant investments; and
• arising from the purported termination of agreements within the supply chain.

This was an ICC arbitration brought by a leading semi-conductor test equipment supplier, Advantest Corporation, through its subsidiaries Advantest America Inc. and Advantest Test Solutions Inc. (collectively referred to as “Advantest”). The arbitration was brought against AEM Holdings Ltd, Lattice Innovation Inc. and Samer Kabbani (collectively referred to as “AEM”).

Advantest alleged that Kabbani, while working full-time as a Vice President at Advantest Test Solutions Inc., was serving as CEO and principal owner of Lattice at the same time. Kabbani inserted Lattice into the Advantest supply chain without disclosing his interest or his involvement in Lattice, and arranged for a sub-supplier to become an exclusive supplier of Lattice, allowing Lattice to gatekeep Advantest’s access to the sub-supplier. AEM then hired Kabbani as Chief Technology Officer and purchased Lattice.

Advantest commenced arbitral proceedings against AEM in order to protect its IP, secure its supply chain and ensure continuity for its customers.

The case settled. As part of the settlement, AEM must pay $20 million to Advantest and immediately terminate any exclusivity provisions between Lattice and its supplier. Advantest has also preserved its rights in relation to the ownership and infringement of its IP.

This case demonstrates (i) the international applicability and scope of arbitral proceedings and (ii) the ability of parties to take control of the narrative and to release limited details to the press.

This was an ICC arbitration brought by a Brazilian renewable energy company against a Chinese supplier of solar modules. Focus Futura Participações S.A. (“Focus”) and Risen Energy Co. Ltd (“Risen”) signed two supply agreements for the supply of solar modules. Risen allegedly took advantage of market conditions in an attempt to extort Focus to agree to unreasonable price (and other) modifications to a contract. This involved conducting extended negotiations which Focus asserted were made in bad faith and manipulating the conditions and timing of the services. In an attempt to remain liquid, the parent company of Focus was forced to sell its assets, including Focus.

The arbitrators ruled in favour of Focus, finding that Risen had materially breached both of the agreements by failing to meet its obligations and attempting to renegotiate in bad faith. The tribunal ordered Risen to pay Focus over $57,000,000 in direct damages, plus interest.

Risen has applied to the New York Federal Court to vacate the arbitration award. This is being challenged by Focus.

These materials are written and provided for general information purposes only. They are not intended and should not be used as a substitute for taking legal advice. Specific legal advice should be taken before acting on any of the topics covered.

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