Demystifying international arbitration

This year features as an important one for arbitration in the UK with Scotland hosting the largest international arbitration gathering in the world between 18 to 21 September. The International Council for Commercial Arbitration (ICCA), accredited as an NGO by the United Nations, is holding its bi-annual conference in Edinburgh, a little over ten years after the installation of a modern regime for governing arbitrations in Scotland in the form of the Arbitration (Scotland) Act 2010.

But away from the focus such a prestigious conference will bring, what questions need to be asked by businesses of themselves about arbitration?

We can agree that formal dispute resolution processes are slow, often messy and can attract unwelcomed scrutiny in this social media age. Finding effective ways to resolve disputes, with their inevitable burden on management time, is a worthwhile goal for any business. Negotiation and mediation have their place as cost effective and quick means for overcoming differences but sometimes a formal (and enforceable) decision is required. That’s where arbitration has a key role to play.

Arbitration has been likened to private sector litigation. It is the referral by disputants to a decision maker who pronounces a legally binding decision. Rather than using the traditional court model with its inherent resource constraints, parties can determine their own procedure and choose their decision maker. This often leads to quicker outcomes.

The arbitration clause

Most arbitrations arise where businesses provide in their contracts for disputes to be resolved by arbitration. Having this in place ensures that the jurisdiction of the courts are ousted and the dispute will be dealt with in a way that is agreed by both parties. While it is possible to agree to arbitration after a dispute has arisen, in practice this can be difficult, once positions become entrenched. So the key take away is to provide for arbitration in the contract.

The arbitration clause in the contract needs to cover certain essentials to ensure it works. Choices need to be made on number of arbitrators, typically one or three (but never an even number), and how they are appointed after a dispute arises. Parties can choose to apply arbitral rules from a number of internationally recognised centres that offer appointment and administrative services. Picking the seat (venue) of the arbitration is very important because that choice determines what procedural law applies to the way the arbitration is run (as distinct from the governing law of the contract which determines the substantive rights and duties of the parties). The importance of getting the arbitration clause right cannot be understated as not doing so can lead to adverse or unexpected outcomes and in the worst cases litigation on whether there is an effective clause compelling arbitration.

So why arbitration?

Because it’s not tied to the courts of any jurisdiction, international arbitration is geographically flexible meaning that businesses wherever they are based can agree the place of arbitration and the governing law most suitable to them. This can break deadlock in cross border commerce ensuring that both parties have confidence in a neutral venue and are not stuck with the national courts of their counterparty. International arbitration offers real flexibility in choice with businesses picking the decision makers, the law, the venue and the rules of engagement, tailoring the dispute to parties’ needs rather than accepting inflexible rules.

Arbitrations are confidential. This means that they are conducted behind closed doors with sensitive commercial information not subject to public scrutiny. Unlike court judgments, the scope to challenge arbitral awards is limited. This offers the business community finality and certainty with the confidence that they can obtain a final binding decision that allows them to move forward in their endeavours without the risk of being tied up in appeal for years.

Successful parties in arbitrations will also benefit from higher cost recoveries awarded to them than those achievable in litigation. From an international perspective, arbitral awards are more readily enforceable abroad than national court judgements. Enforcement of judgments is also something that has become more challenging post-Brexit. In contrast, the arbitration enforcement landscape remains unchanged with over 140 nations signed up to the 1958 New York Convention making it easier to have your ‘win’ recognised and enforced in foreign jurisdictions. This allows for easier transition from award to payment.

While litigation has an important role to play for emergency applications to prevent a wrong (or the continuation of a wrong) from taking place, the benefits of international arbitration are clear. For Scotland the introduction of the Arbitration (Scotland) Act 2010 brought legislation into line with modern arbitration practices, strengthening its position as a place for businesses to come to resolve their disputes.

Promotion of arbitration in Scotland and international arbitrations being seated in Scotland is at the heart of the Scottish Arbitration Centre’s mandate. There is an increasing tendency for arbitrations to be used by businesses, particularly in cross border disputes. That direction of travel will only increase following the spotlight ICCA will provide in Edinburgh this year.

Brodies, an official sponsor of ICCA 2020, is home to Scotland’s leading and largest dispute resolution and litigation team in Scotland who are experts in international arbitration and all other aspects of dispute resolution.