LECTURE 9: DISPUTE SETTLEMENT IN IN

TERNATIONAL TRADE (PRIVATE)

Introduction
 Arbitration is the most common method of alternative dispute resolution in inte
rnational trade. It is a private means of dispute resolution based on the agree
ment of parties to refer their disputes to a private tribunal and to abide by its d
etermination. It is preferred to litigation for a number of reasons. Arbitration ten
ds to be speedier than litigation conducted in national courts.
 An arbitral tribunal is appointed to hear a particular dispute and will devote its f
ull attention continuously to that dispute. Courts, by contrast, have long and va
ried lists of cases demanding their attention and sometimes a case may be pr
otracted to the point where it has to be heard by a succession of judges. Altho
ugh arbitral tribunals must observe the requirements of natural justice and deci
de according to law, they can adopt flexible and expeditious procedures. Arbitr
ation allows the use of experts as adjudicators. Although arbitration can be mo
re expensive than litigation to conduct, traders stand to gain in the long run be
cause of the time saved in reaching finality. Besides, the costs of arbitration ar
e borne by the parties and not the taxpayer.
 Traders often prefer the privacy of the arbitral process to the publicity that atte
nds court proceedings. However, the greatest historical impetus for arbitration
in international trade is the fear of parties to litigate in foreign lands
International Commercial Arbitration
 International arbitration is the most common method for resolving disputes ari
sing from commercial agreements between businesses from different countrie
s.
 International arbitration is based on an agreement between the parties that if
a dispute arises on any matter under the contract,
- They will submit their dispute to an arbitral tribunal instead of going to court
- The arbitrator(s) will resolve the dispute according to certain parameters an
d according to the governing law of the contract; and
- The decision will be final and binding on the parties

 In international arbitration, the parties are free to modify the terms of the dispu
te resolution process to suit their needs.
International Commercial Arbitration
 There are two types of institutional infrastructure which support international c
ommercial arbitration. One type consists of laws which enable courts to enforc
e arbitration agreements and arbitral awards and to assist and supervise the a
rbitral process. The second type of infrastructure consists of services provided
by organisations such as the International Chamber of Commerce (ICC), the A
merican Arbitration Association (AAA), the London Court of International Arbitr
ation (LCIA) and the International Centre for Settlement of Investment Dispute
s (ICSID).

 These organisations have formulated arbitration rules which can be incorporat

ed easily into contracts by reference and provide the personnel and the facilitie
s to hold arbitration proceedings
 The ABCs of arbitration: Adjudicative, Binding a
nd Consensual.
Adjudicative: The arbitrator must
– not have a conflict of interest.
– not communicate with a party independently.
– treat the parties fairly and equally and permit each party to present its case.
– act judicially by following applicable law and procedure.
– permit each party to respond to the opposing party’s case.
– must adhere to the agreement between the parties and the scope of the mand
ate.
– render a written award with reasons within agreed time.

Binding
The Court will turn an arbitrator’s award into a judgment unless 1) one of the adjud
icative principles has been breached, 2) if there is a public policy ground not to do
so; or 3) if there is an appeal is pending.
 The ABCs of arbitration: Adjudicative, Binding a
nd Consensual.
Consensual
– Only the parties who agree to participate in the arbitration can be bound by the
arbitrator’s award. Third parties cannot be affected.

In Farah v. Sauvageau Holdings Inc., 2011 http://canlii.ca/t/fkp0k, the Ontario Supe

rior Court held that an arbitrator lacked jurisdiction over third parties.
 An arbitrator made an order restraining the respondent from disposing of his ass
ets until the case was over. The judge held that the arbitrator did not have jurisdi
ction to issue a Mareva injunction directed to persons, such as banks and emplo
yers because they were not parties to the arbitration. An arbitrator does not have
the same authority as a judge of the court. A Mareva injunction is usually obtaine
d without notice and the order is also directed to the respondent’s banks and em
ployer. When a bank or employer gets a court order for a Mareva injunction, it m
ust be respected and obeyed.
How is arbitration used in international business
?
Most international business agreements drafted by a lawyer will have dispute re
solution and governing law clauses which typically state that:

– All disputes under the agreement will be referred to arbitration

– The arbitration will be final and binding and not subject to appeal
– Where the arbitration will take place
– The language of the arbitration
– The governing law of the contract.
• Some agreements also state:
– A mandatory requirement for pre‐arbitration mediation
– Whether the arbitration will be ad hoc or institutional
– How many arbitrators there will be and how the chair will be selected
– How the arbitrators will be selected, including limitations such as nationality
– Reserve a right to sue in court for equitable remedies or injunctive relief
– The rules of procedure which will govern the arbitration
– Whether there rights of appeal from the arbitration award.
Arbitration Versus Courts Litigation
There are four basic differences. First, the arbitration agreement. Courts are ge
nerally open to all parties that have a dispute. Arbitration is only open to parties
that have agreed (usually in a contract) to arbitrate. Second, the selection of ar
bitrators. Parties in court cases do not select their own judges, but in arbitration,
they select their own arbitrators.
Third, neutrality and flexibility. Imagine a dispute between a Canadian company
from Montreal and an Indian company from New Delhi. A court dispute will prob
ably be resolved before the courts of Montreal if the Indian company is claimant
, and before the courts of New Delhi, if the Canadian company initiates the proc
eedings. In an arbitration, the parties can select, say, an Egyptian or a Swiss ar
bitrator, and the arbitration can take place somewhere in between, Italy, for exa
mple.
Fourth, international enforcement. The Canadian company will not easily be abl
e to enforce a Canadian decision in India, and vice versa for the Indian party. In
contrast, an arbitration award can be recognized by judges in most countries of
the world.
Arbitration Versus Mediation
Mediation – a process of settlement negotiation in which the parties are
assisted in reaching a resolution of all or part of their dispute by a neutr
al third party, the mediator, who is selected on the agreement of the part
ies. The mediator has no power to make any decision. S/he typically sh
uttles between the parties and tries to move the parties closer to settlem
ent.

Skilled mediators, usually senior lawyers or retired judges, have a high

settlement rate, even in complicated disputes. Mediation does not repla
ce arbitration but if the parties settle the case by direct negotiation or m
ediation, the arbitration may not be required. With rare exceptions, the
mediator cannot arbitrate the same case.
Arbitration Versus Other ADRS
Conciliation
– a process of negotiation in which the parties are assisted in resolving their dis
pute by a neutral third party, the conciliator. Conciliation is mediation by another
name.

Med‐Arb
-A process in which the same neutral attempts to mediate the dispute. If the me
diation does not result in a settlement, the same person will be the arbitrator. Th
is process is not common in Canada and USA because of the concern that if se
ttlement positions are disclosed in the mediation, it will cloud the arbitrator’s vie
w of the case. In some cultures, it is more common.
Types of Arbitration Agreement
 The major choice is between "institutional" and "ad hoc" arbitration. Institu
tional arbitration means that parties choose to conduct their arbitration pr
ocedure in accordance with the rules of, and with the assistance of, an ar
bitral institution. For example, in accordance with the rules of arbitration o
f the International Chamber of Commerce, of the Permanent Arbitration C
ourt at the Croatian Chamber of Commerce, of the Indian Council of Arbit
ration or of any other reliable arbitral institution. Most arbitration institution
s recommend their own standard clause to be included in contracts .
 In ad hoc arbitration, no institution assists the parties. Therefore, they hav
e to determine what are the rules governing the procedure, how arbitrator
s are to be appointed, where the arbitration will be held, how long it will la
st, etc. Because this is complex, the United Nations Commission on Inter
national Trade Law (UNCITRAL) developed in 1976 a special set of arbitr
ation rules, known as the UNCITRAL arbitration rules. These rules have b
een widely used all over the world and can be referred to by the parties.
However, UNCITRAL does not offer any assistance in the conduct of arbit
rations.
The agreement to arbitrate: Location, Language and
Laws
 An arbitration agreement can take two alternate forms:
– A series of clauses in the commercial agreement between the parties before
any dispute has arisen
– An agreement as to the scope, rules, presentation of documentary and oral e
vidence, hearing of witnesses after the dispute has arisen

 A sample arbitration clause in a commercial agreement looks like this. The va

riations are infinite. The clause must be suited to the case:
– “Any dispute arising out of or in connection with this contract, including any qu
estion regarding its existence, validity or termination, shall be referred to and fin
ally and exclusively resolved by arbitration under the UNICTRAL Arbitration Rul
es before a panel of three arbitrators. Each party shall select a nominee. The n
ominees will within 30 days select a Chair. The arbitration shall take place in To
ronto, Ontario. The arbitration shall be conducted in English. This agreement sh
all be governed and interpreted according to the laws of the province of Ontario
and the laws of Canada applicable therein.”
Designing the Arbitral Process
 In litigation, the parties are subject to the rules of Court. In arbitration, the part
ies may modify and streamline the dispute resolution process to save time an
d expense. Typical modifications from litigation include:
– Documents are exchanged electronically. Hard copies not required.
– Communications with the arbitrator about procedure are by email and telepho
ne. Personal attendances are rarely required except for the hearing.
– Evidence‐in‐chief is given by witness statement. Oral evidence is limited to cr
oss‐examination and re‐examination.
– Evidence can sometimes be given by Skype or live video conference.
– Oral examinations for discovery are abridged or avoided completely.
– The case can be bifurcated into liability and damages phases so that evidenc
e about damages ‐‐‐ which usually requires a forensic accountant or valuator ‐‐‐
will be limited to the issues which are still in play.

 The UNCITRAL Notes on Organizing Arbitral Proceedings are a helpful guide

to organizing an international arbitration.
Costs of Arbitration
 The costs of arbitration proceedings involve fees and travel expenses of the arbitra
tors, fees and expenses of experts appointed by the arbitral tribunal, legal fees of t
he parties' counsels and of their own experts, if any. In the case of institutional arbit
ration, the administrative costs of the arbitral institution have to be added.
 For international commercial arbitration, costs may be substantial, representing 5%
to 20% of the amounts in dispute. The transnational law issues sometimes require
that lawyers from more than one country be involved. For institutional arbitration, th
ere are advance costs at the outset of the arbitration. This covers the fees and exp
enses of the arbitrators and the administrative expenses until the end of the arbitrat
ion.
 This advance on costs, which is either fixed by reference to the amount in dispute
and based on fee scales, or on an hourly or daily basis, is normally paid in equal s
hares by the parties. If one of the parties fails to advance its share of the amount, t
he other party will have to substitute for the defaulting party's share and pay the bal
ance of the advance on costs. Generally the advance on costs will have to be paid
in full prior to the rendering of a final award. Who supports the costs of the arbitrati
on is a decision that is taken by the arbitral tribunal in its final award. The tribunal g
enerally takes its decision in the light of the outcome. In international arbitrations, t
he winning party is generally awarded full or partial reimbursements of costs.
ICC Court of Arbitration (Institutional)
 When disputants choose the ICC Court as their arbitration resource, the Tribu
nal’s Paris office provides support and panel selection services.
 There is a significant cost for this service. The arbitrators are paid on a sliding
scale based on the amount involved in the dispute.
 As the ICC Arbitration 2010 Cost Calculator shows, the cost of arbitrating a $
5million dispute before 3 arbitrators will exceed USD $300,000, not including
arbitrator travel expenses, the lawyers and expert witness fees of each party
and other disbursements. For a $20 million case, the cost increases by 150%.
About 20% is for the ICC’s case administration.
 An ICC arbitration can be conducted anywhere in the world but the case is ad
ministrated from Paris. The arbitrators approved by ICC are senior internation
ally‐respected arbitrators. Despite the high cost, the services offered by the IC
C Court of Arbitration are convenient for multiple parties of different nationaliti
es in large infrastructure, government, oil and gas or other high‐profile cases.
Ad hoc arbitrations
 In an ad hoc arbitration, the parties select the arbitrator or arbitral panel witho
ut the assistance of an arbitral body.
 Their is no case support office. All documents are filed directly with the arbitra
tor or the Chair of the arbitral panel.
 The rules of procedure are determined by the arbitration agreement before th
e dispute or they may be agreed upon after he dispute arises.
 No administration are fees payable but the arbitrators have to be paid.
 The arbitration may be held at a neutral location such as the office of a shorth
and reporter, who may charge for the room and AV equipment.
 If the parties decide to have a verbatim transcript of the evidence, there is a f
ee for the reporter and for the transcript.
 Most commercial arbitrations between private corporations are ad hoc.
 Most of them are before a single arbitrator because a 3‐arbitrator panel can b
e very expensive about $2,000 or more per hour for all three.
 A three‐arbitrator panel is common in disputes involving large amounts.
Confidentiality and loss of confidentiality in arbitr
ation
 One of the main attractions of commercial arbitration is that arbitrations are c
onfidential. Court proceedings and the decision are public and accessible.
 Some arbitration bodies report their awards but parties are not identified.
 In some public arbitrations, like NAFTA, the decisions are published.
 The Anglo‐Canadian‐American tradition of arbitration confidentiality is not rec
ognized everywhere.
 Confidentially is difficult to enforce. What do you do if the party discloses? It d
epends on whether the confidentiality is a part of the arbitration agreement an
d what damages are actually suffered as a result of the disclosure.
 Confidentiality is lost if there are court proceedings.
 In the court case, the arbitrator’s decision becomes part of the public record.
UNICTRAL Model Law and UNCITRAL Arbitrati
on Rules
 The United Nations has been very active in helping members harmonize the l
aw in commercial matters. The UN Commission on International Trade Law
(UNCITRAL) developed a model law on commercial arbitration in 1985 and a
mended it in 2006.
 The UNCITRAL Model Law (http://goo.gl/hhYcF) is designed to assist UN st
ates in modernizing their laws on arbitral procedure to take into account the fe
atures and needs of international commercial arbitration.
 All Canadian provinces have adopted the UNCITRAL Model Law.*
 There are also UNCITRAL Arbitration Rules, (approved 1976, amended 201
0) similar to Model Law intended to guide the procedure of the arbitration.
 Some agreements specify that the arbitration is to be conducted under the U
NCITRAL Arbitration Rules, which are known to international commercial arbit
ration practitioners.