Overview and Benefits of International Arbitration

What is arbitration?

Arbitration is a method of dispute resolution based on consent. To commence an arbitration, parties must agree for their disputes to be resolved through arbitration: a party cannot decide unilaterally.

Typically the parties will include arbitration in the dispute resolution provision of their contract but they can also enter into a stand-alone agreement to arbitrate. Either way, the agreement is referred to as an ‘arbitration agreement’.

The arbitration process is often confidential (subject to certain exceptions including via related public court proceedings). Arbitration disputes are typically heard by either a sole arbitrator or a panel of three arbitrators, known as the ‘tribunal’. In a tribunal of three arbitrators, each party usually nominates an arbitrator with a chair/president appointed jointly by the party-appointed arbitrators or by the arbitral institution that the parties have chosen to administer the arbitral proceedings.

Why is arbitration useful in an international context?

Arbitration is often favoured for international disputes because it provides a neutral forum of dispute resolution for parties from different jurisdictions and avoids forcing one party to submit to the national courts of a counter-party.

This neutrality may be reinforced by the choice of a ‘seat’ of the arbitration and of a set of procedural rules from an arbitral institution. Common arbitral seats are London, Paris, Geneva, New York, Singapore and Hong Kong. Well-regarded arbitral institutions include the London Court of International Arbitration (LCIA), the International Chamber of Commerce (ICC) based in Paris, the Hong Kong International Arbitration Centre (HKIAC) and the Singapore International Arbitration Centre (SIAC). Parties may also choose to have an ‘ad-hoc‘ arbitration without any administering arbitral institution.

Below we outline the key features of international arbitration.

1. Arbitration agreement. In many cases, the arbitration agreement will take the form of a dispute resolution clause within a written contract, which will require that parties refer any disputes arising out of or in connection with that contract to arbitration. See here for information on drafting an arbitration agreement . See here for information on drafting an arbitration agreement.

In the context of investment treaty arbitration, which we cover in more detail here, the terms of the relevant international treaty will provide that disputes will be resolved through arbitration.

2. The law of the arbitration agreement. The law of the arbitration agreement itself may or may not be different from the governing law of the overall contract. Issues relating to the interpretation or validity of the arbitration agreement will be subject to the law of the arbitration agreement.
3. The governing law of the contract. The governing or substantive law is the law which is applied to the substantive issues in dispute. This is usually the governing law of the relevant contract.
4. Parties to the arbitration. International arbitration can be between two or more private parties (e.g. companies in a dispute arising out of a cross-border commercial contract) or, in an investment treaty arbitration, between a private investor and the state where the investment was made.
5. Tribunal. The one- or three-person tribunal will decide the outcome of the dispute in accordance with the governing law of the contract. The tribunal usually hands down its decision, known as the ‘award’, following an oral hearing where each party presents its case and cross-examines any witnesses and experts from the counter-party.
6. Seat. The ‘seat’ is the legal place of the arbitration, which is usually expressly identified in the arbitration agreement as a city (e.g. London, Paris, Hamburg, Madrid). The seat can be different from both the governing law of the contract and the geographical location where any physical hearing takes place. The seat of the arbitration dictates which laws, being the laws of the jurisdiction of the seat, will govern the procedure of the arbitration. This gives a ‘nationality’ to the proceedings and the award. For example, an arbitration seated in London would be subject to applicable rules of English law and the jurisdiction of the English courts. The law of seat will fill any gap where the procedural rules (discussed below) are silent.
7. The procedural rules: institutional or ‘ad hoc‘. The procedural rules govern the conduct of the arbitration in conjunction with the law of the ‘seat’ of the arbitration (discussed above). The parties must agree whether to apply the rules of an arbitral institution or ad hoc rules. If the parties choose the rules of an arbitral institution, that institution will also administer the arbitration (i.e. assist with the constitution of the tribunal and the running of the proceedings). Alternatively, parties may agree their own ad hoc rules and proceed without an administering arbitration.
8. Disputes which may not be arbitrated. There are certain limited types of disputes that parties may not agree to resolve by arbitration. This varies according to the applicable law, but may include issues of public or third party interests, or which are governed by specific statutory regimes.
9. Enforcement. The ‘nationality’ of the award is important when it comes to issues of enforcement. This is because enforcement of an award is simplified if the country of the seat has ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (known as the “New York Convention“) – an international treaty which provides for reciprocal enforcement of awards in over 170 countries and is the cornerstone of the global enforcement of arbitral awards.

Arbitration has a number of key benefits for parties.

1. Neutrality. By choosing a ‘seat’ located in an impartial and pro-arbitration jurisdiction, the parties have the ability to choose a neutral forum to resolve their disputes according to the governing law of their choice.
2. Certainty. A well-drafted, valid arbitration agreement within a contract can help parties avoid complex ‘satellite’ disputes, including when a party attempts to disrupt an arbitration by seeking to bring a claim in a local court.
3. Flexibility. Parties can agree to a procedure which is most suitable to the nature of their contract and the dispute (either by reference to the rules of an arbitral institution or ad hoc rules) and the tribunal can give directions which are tailored to the case.
4. Parallel court action. Resolving a dispute by arbitration does not necessarily prevent a party from also seeking assistance from the courts. Absent any agreement to the contrary, a party may apply to a court for interim relief, for example, an injunction, while pursuing an arbitration. Exactly what powers a court will have in relation to arbitration proceedings will vary depending on the law of the seat.
5. Emergency arbitration. Emergency arbitration is a mechanism by which parties may obtain urgent interim relief from an arbitrator before the tribunal for the main arbitration has been formally constituted. Most arbitration institutions expressly provide for emergency arbitration in their rules. Emergency arbitrators are often appointed within 24 to 60 hours and generally have wide powers to order relief.
6. Ease of enforcement. The New York Convention is the cornerstone of the enforcement of arbitral awards across the world. In short, the New York Convention allows an award rendered in one of the 170+ signatory states to be enforced in any of the other signatory states as if it were a local court judgment. This avoids the often complicated, lengthy and costly process of enforcing a judgment of a court one state in the court of another state.
7. Choice of arbitrator(s). Parties can select a preferred arbitrator, based on certain criteria including the arbitrator’s experience, expertise and language skills.
8. Confidentiality and privacy. Arbitration is typically confidential. This means that, subject to certain exceptions, the existence and details of the proceedings, any documents produced or submitted, any hearing, and any orders or awards are confidential. The law of the seat will confirm the status of the arbitration proceedings, including any circumstances which may disapply any presumption of confidentiality. In addition, the institutional rules may comment on the confidentiality of proceedings (for example, Rule 22(3) of the 2021 ICC Arbitration Rules confirms that “upon the request of any party, the arbitral tribunal may make orders concerning the confidentiality of the arbitration proceedings…”).
9. Cost. As above, arbitration offers flexibility and the ability to tailor the procedure of a dispute to the parties’ needs. Parties can agree to dispense with unnecessary steps, such as a hearing and/or disclosure (known as ‘document production’ in arbitration), as desired. Appeals are also limited and there are several options to hasten or shorten proceedings (see points 10 and 11 below respectively). These options can offer significant time- and cost-savings.
10. Finality. There are typically very limited grounds to challenge or appeal an arbitral award. The grounds available depend on the law of the seat. These usually include procedural impropriety in theory, but that is rarely raised as a basis for challenge in practice and is not an opportunity to ‘re-open’ the case. Occasionally, an appeal may be made on a point of law. However, the bar is very high and parties may agree to exclude this ground of appeal in the arbitration agreement.
11. Speed. For years, parties to arbitration have said that they wanted faster proceedings and arbitration has adapted accordingly. Several of the major arbitral institutions have introduced special rules for expedited arbitrations to allow the process to be accelerated. For example, under the 2021 ICC Arbitration Rules, a streamlined procedure (with reduced fees) is available, on an opt-out basis, for disputes not exceeding US$3 million. Parties can also choose to opt into the expedited procedure for disputes above that level. Institutions have also taken steps to encourage tribunals to render awards more quickly

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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