The Principles and Practice of International Commercial Arbitration PDF

P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 CHAPTER ONE Introduction to International Commercial Arbitration1 A. PURPOSE Arbitration is a private sy...

P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 CHAPTER ONE Introduction to International Commercial Arbitration1 A. PURPOSE Arbitration is a private system of adjudication. Parties who arbitrate have decided to resolve their disputes outside of any judicial system. In most instances, arbitration involves a final and binding decision, producing an award that is enforceable in a national court. The decision-makers (the arbi- trators), usually one or three, are generally chosen by the parties. Parties also decide whether the arbitration will be administered by an international arbitral institution, or will be ad hoc, which means no institution is involved. The rules that apply are the rules of the arbitral institution, or other rules chosen by the parties. In addition to choosing the arbitrators and the rules, parties can choose the place of arbitration and the language of arbitra- tion. Arbitration thus gives the parties substantial autonomy and control over the process that will be used to resolve their disputes. This is particularly important in international commercial arbitration because parties do not want to be subject to the jurisdiction of the other party’s court system. Each party fears the other party’s “home court advantage.” Arbitration offers a more neutral forum, where each side believes it will have a fair hearing. Moreover, the flexibility of being able to tailor the dispute resolution process to the needs of the parties, and the opportunity to select arbitrators who are knowledgeable in the subject matter of the dispute, make arbitration partic- ularly attractive. Today, international commercial arbitration has become the norm for dispute resolution in most international business transac- tions. 1 This chapter presents a brief overview of some of the basic characteristics of arbitration and how it works. Specific points mentioned in this chapter will be developed in greater detail in subsequent chapters. 1 P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 2 INTRODUCTION TO INTERNATIONAL COMMERCIAL ARBITRATION B. DEFINING CHARACTERISTICS 1. Consent The parties’ consent provides the underpinning for the power of the arbi- trators to decide the dispute. The parties’ consent also limits an arbitrator’s power because an arbitrator can only decide issues within the scope of the parties’ agreement. Arbitrators are also expected to apply rules, procedures, and laws chosen by the parties. Normally, the parties express their consent to submit any future dispute to arbitration in a written agreement that is a clause in the commercial contract between them.2 If they do not have an arbitration clause in their contract, however, they can still enter into an agreement after a dispute has arisen. This is known as a submission agreement.3 2. Non-Governmental Decision-Makers Arbitrators are private citizens. They do not belong to any government hier- archy. Compared with judges, they will probably weigh less heavily any questions of public policy or public interest, since they see their primary responsibility as deciding the one dispute they were chosen by the parties to decide. Also, unlike some judges, arbitrators tend to be very thoughtful of the parties, and considerate in their interactions with them. Arbitrators are chosen by the parties, and, of course, they would like to be chosen again. It is in their interest to be perceived as even-tempered, thoughtful, fair-minded, and reasonable. Arbitrators do not have to be lawyers. In some industries, the techni- cal skills of architects and engineers cause them to be chosen as arbitra- tors. When there are three arbitrators, quite often each party will choose one arbitrator, and the third, who will be the chair, will be chosen by the two party-appointed arbitrators. International arbitrators are, however, all expected to be independent and impartial. They can be challenged, either before the arbitral institution or a court, if there is evidence that they are not independent and impartial. 3. A Final and Binding Award One of the reasons parties choose to arbitrate is that arbitration results in a final and binding award that generally cannot be appealed to a higher- level court. Although there are occasional opportunities to appeal in some jurisdictions,4 for the most part, a party can challenge an award only if there 2 Sometimes this clause is referred to by the French term, “clause compromissoire,” which is a clause agreeing to submit future contract disputes to arbitration. 3 This agreement is sometimes referred to by the French term, “compromis,” which is an agreement to submit an existing dispute to arbitration. 4 Under the English Arbitration Act, for example, in certain limited circumstances, unless the parties have agreed otherwise, a party to an arbitral proceeding may appeal to the court on a question of law. English Arbitration Act of 1996, art. 69(1). P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 C. ADVANTAGES OF ARBITRATION 3 is some defect in the process. A party can try to vacate the award in the court of the country where the arbitration was held (the seat of the arbitration). However, under most arbitration laws, the only grounds for setting aside an award will be quite narrow, such as a defect in the procedure, or an instance where the arbitrators exceeded their powers and decided an issue that was not before them. Once the arbitrators render an award, the losing party may voluntarily comply with the terms of the award. If it does not, the prevailing party will try to have the award recognized and enforced by a court in a jurisdiction where the losing party has assets. In the enforcing court, the losing party can also challenge the award, but again, only on very narrow grounds. Basically, the award cannot be challenged on the merits, that is, even if the arbitrators made mistakes of law or mistakes of fact, these are not grounds for non- enforcement, and the award will still be enforced. Once a party’s award is recognized in the enforcing jurisdiction, it is generally considered to have the same legal effect as a court judgment, and can be enforced in the same way that a judgment would be enforced in that jurisdiction. C. ADVANTAGES OF ARBITRATION The benefits of international commercial arbitration are substantial. An empirical study of why parties choose international arbitration to resolve disputes found that the two most significant reasons were (1) the neutrality of the forum (that is, being able to stay out of the other party’s court) and (2) the likelihood of obtaining enforcement,5 by virtue of the New York Conven- tion, a treaty to which over 140 countries are parties.6 An arbitration award is generally easier to enforce internationally than a national court judgment because under the New York Convention, courts are required to enforce an award unless there are serious procedural irregularities, or problems that go to the integrity of the process. The New York Convention is considered to have a pro-enforcement bias, and most courts will interpret the permissible grounds for non-enforcement quite narrowly, leading to the enforcement of the vast majority of awards. Other advantages include the ability to keep the procedure and the result- ing award confidential. Confidentiality is provided in some institutional rules, and can be expanded (to cover witnesses and experts, for example) by the parties’ agreement to require those individuals to be bound by a 5 See Christian Bühring-Uhle, A Survey on Arbitration and Settlement in International Business Disputes, in Christopher R. Drahozal & Richard W. Naimark, Towards a Science of International Arbitration, p. 31 (2005). 6 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, UN DOC/E/CONF.26/8/Rev.1 (“New York Convention”). Available at www.uncitral.org. See also Appendix A. United Nations Convention on the Recogni- tion and Enforcement of Foreign Arbitral Awards. P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 4 INTRODUCTION TO INTERNATIONAL COMMERCIAL ARBITRATION confidentiality agreement. Many companies want confidential procedures because they do not want information disclosed about their company and its business operations, or the kinds of disputes it is engaged in, nor do they want a potentially negative outcome of a dispute to become public. Parties also like being able to choose arbitrators with particular subject matter expertise. In addition, they like the fact that there is less discovery in arbitration, thereby generally resulting in a shorter process than in a full scale litigation, or at least shorter than is found in U.S.-style litigation. The lack of opportunity for multiple appeals of the decision on the merits is also an attractive aspect. For business people, there is great value in finishing a dispute so they can get on with their business. While one advantage that has been touted in the past is that arbitration is less expensive than litigation, many companies today do not think that advantage actually exists.7 As international arbitrations have grown in num- ber and in the amount of money at stake,8 parties have increasingly incor- porated many litigation tactics into arbitration. These tactics tend to raise the costs, create delays, and increase the adversarial nature of the process. Nonetheless, even if the arbitration process has begun to resemble litigation in a number of ways, parties tend to find that arbitration is still worth the cost, because of the other advantages it provides. D. DISADVANTAGES OF ARBITRATION To an extent, some of the disadvantages of arbitration are the same as the advantages, just viewed from a different perspective. For example, less dis- covery may be generally viewed as an advantage. Nonetheless, certain kinds of disputes, which typically involve extensive discovery, such as antitrust dis- putes, are increasingly arbitrated. These kinds of disputes often require the aggrieved party to prove a violation that it can only prove if it has sufficient access to documents under the control of the offending party. Less discovery in this kind of case means less of a chance for a claimant to meet its burden of proof. Moreover, the lack of any right of appeal may be a benefit in terms of ending the dispute, but if an arbitrator has rendered a decision that is clearly wrong on the law or the facts, the lack of ability to bring an appeal can be frustrating to a party. For this reason, some parties in the United States 7 See Bühring-Uhle, supra note 5, at 33 (“More than half (51%) of the respondents thought that the cost advantage did not exist.... ”). 8 For example, between April 2005 and April 2007, the top ten largest interna- tional arbitration awards ranged from U.S $133 million to U.S. $2.13 billion. The American Lawyer/Focus Europe Summer 2007. Available at www.law.com/jsp/article. jsp?id=1181639133576. P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 E. THE REGULATORY FRAMEWORK 5 have written into their arbitration agreements a right to a judicial appeal on the merits of an arbitration award. The federal circuit courts are divided on whether this is permitted under the Federal Arbitration Act. The issue will be decided by the U.S. Supreme Court in the term beginning in October 2007.9 Another disadvantage is that arbitrators have no coercive powers – that is, they do not have the power to make someone do something by being able to penalize them if they do not. A court, for example, can impose a fine for contempt if someone does not comply with a court order. Arbitrators, on the other hand, cannot impose penalties, although they can draw adverse inferences if a party does not comply with an order of the tribunal. However, with respect to non-parties, arbitrators generally have no power at all. Thus, it may be necessary at times for the parties or the tribunal to seek court assistance when coercive powers are necessary to ensure compliance with the orders of the tribunal. Moreover, in multiparty disputes, an arbitral tribunal frequently does not have the power to join all relevant parties, even though all may be involved in some aspect of the same dispute. Because the tribunal’s power derives from the consent of the parties, if a party has not agreed to arbitrate, usually it cannot be joined in the arbitration. A tribunal generally does not have the right to consolidate similar claims of different parties, even if it would be more efficient for all concerned to do so. Finally, it could be viewed as a disadvantage that the pool of experienced international arbitrators lacks both gender and ethnic diversity. Although some institutions and a few individual members of this group have made efforts to broaden that pool, on the whole there has been little change. E. THE REGULATORY FRAMEWORK The various laws, rules, and guidelines governing the arbitral process will be dealt with extensively in later chapters, but a brief overview is in order. One way to envision the regulatory framework of arbitration is in the form of an inverted pyramid. The point is facing down, and at that point is the arbitration agreement, which affects only the parties to it. This agreement is the underpinning for the regulatory framework governing the private 9 See Hall Street Assoc. v. Mattel, Inc., 196 Fed. Appx. 476 (9th Cir. 2006), cert. granted, (U.S. May 29, 2007) (No. 06-989). Question presented: “Did the Ninth Circuit Court of Appeals err when it held, in conflict with several other federal Courts of Appeals, that the Federal Arbitration Act (“FAA”) precludes a federal court from enforcing the parties’ clearly expressed agreement providing for more expansive judicial review of an arbitration award than the narrow standard of review otherwise provided for in the FAA?” P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 6 INTRODUCTION TO INTERNATIONAL COMMERCIAL ARBITRATION dispute resolution process. If the arbitration agreement is not valid, then the framework becomes irrelevant, because there is no legal basis for arbi- tration. On the pyramid above the arbitration agreement, the framework expands in terms of scope and applicability beyond the immediate parties. At one step above are the arbitration rules chosen by the parties. These rules, which apply to the arbitrations of all the parties who choose them, may be varied in a particular case by the arbitration agreement. Frequently, a rule will contain a provision that says, “unless otherwise agreed in writing by the parties.” This means that the rule is not mandatory, but rather a default rule that will apply if the parties have not reached their own agreement on the particular topic.10 Therefore, if the parties have agreed on a particular matter, their agreement will trump the arbitration rules, unless the particular rule is considered mandatory by the institution. At the next level of the pyramid are the national laws. Both the arbi- tration law of the seat of the arbitration (the lex arbitri) and substantive laws will come into play, and they are likely to be different national laws. Many countries have adopted as their arbitration law the UNCITRAL Model Law on International Commercial Arbitration.11 The Model Law is meant to work in conjunction with the various arbitration rules, not to conflict with them. Thus, the Model Law also has many provisions that are essen- tially default provisions: that is, they apply “unless the parties have agreed otherwise.” If the parties have chosen arbitration rules that provide for a pro- cess or rule that is different from the Model Law, normally the arbitration rules will govern, because they represent the parties’ choice of how to carry out the arbitration, that is, they indicate how the parties have “otherwise agreed.” 10 See, e.g., LCIA Rules, art. 17.1 (“The initial language of the arbitration shall be the language of the Arbitration Agreement, unless the parties have agreed in writing oth- erwise.... ”) 11 UNCITRAL is the United Nations Commission on International Trade Law. Its man- date is to further the progressive harmonization and unification of the law of inter- national trade. The following countries, territories, or states within the United States have adopted the UNCITRAL Model Law on International Commercial Arbitration: Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Belarus, Bulgaria, Cambodia, Canada, Chile, in China: Hong Kong Special Administrative Region, Macau Spe- cial Administrative Region; Croatia, Cyprus, Denmark, Egypt, Germany, Greece, Guatemala, Hungary, India, Iran (Islamic Republic of), Ireland, Japan, Jordan, Kenya, Lithuania, Madagascar, Malta, Mexico, New Zealand, Nicaragua, Nigeria, Norway, Oman, Paraguay, Peru, the Philippines, Poland, Republic of Korea, Russian Federation, Singapore, Spain, Sri Lanka, Thailand, Tunisia, Turkey, Ukraine, within the United Kingdom of Great Britain and Northern Ireland: Scotland; in Bermuda, overseas terri- tory of the United Kingdom of Great Britain and Northern Ireland; within the United States of America: California, Connecticut, Illinois, Louisiana, Oregon and Texas; Zambia, and Zimbabwe. Available at http://www.uncitral.org/uncitral/en/uncitral texts/arbitration/1985Model arbitration status.html. See Appendix B for text of 1985 UNCITRAL Model Law. P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 E. THE REGULATORY FRAMEWORK 7 The substantive law chosen by the parties is the national law that will be used to interpret the contract, to determine the merits of the dispute, and to decide any other substantive issues. If the parties have not chosen a substan- tive law, then the tribunal will determine the applicable substantive law. At the next step above the national laws in the regulatory pyramid is inter- national arbitration practice, which tends to be utilized to various degrees in all arbitrations. This includes various practices that have developed in inter- national arbitration, some of which have been codified as additional rules or guidelines. There are for example, rules that have been developed by the Inter- national Bar Association on the Taking of Evidence (see Appendix E), and on Rules of Ethics (see Appendix F). The IBA has also produced Guidelines on Conflicts of Interest in International Arbitration (see Appendix G). The American Arbitration Association and the American Bar Association have also produced a Code of Ethics for Arbitrators (see Appendix H). UNCI- TRAL has produced Notes on Organizing Arbitral Proceedings, “to assist arbitration practitioners by providing an annotated list of matters on which an arbitral tribunal may wish to formulate decisions during the course of arbitral proceedings.... ”12 Although the Notes do not impose any obliga- tion on the parties or the tribunal, they potentially contribute to harmonizing arbitration practice. Arbitrators and parties may agree that some of these international prac- tices will be followed, or arbitrators may simply use them as guidelines. Inter- national arbitrators are a relatively small group, and international practices – both those that are codified by various international organizations and those that are merely known and shared in the arbitration community as good practices – tend to create a relatively coherent system of procedures. Finally, at the top of the inverted pyramid are any pertinent international treaties. International Treaties International Arbitration Practice National Laws Arbitration Rules Arbitration Agreement For most international commercial arbitrations, the New York Convention will be the relevant treaty because it governs the enforcement of both arbi- tration agreements and awards, and because so many countries are parties to the Convention.13 In addition to the New York Convention, three other 12 Available at www.uncitral.org. 13 See supra, text accompanying note 6. P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 8 INTRODUCTION TO INTERNATIONAL COMMERCIAL ARBITRATION important conventions are the Inter-American Convention on International Commercial Arbitration (the Panama Convention),14 the European Conven- tion on International Commercial Arbitration,15 and the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the “Washington Convention” or the “ICSID Convention”).16 The Panama Convention, which has been ratified or adopted by fourteen South or Central American countries and by the United States and Mexico, is similar in intent and effect to the New York Convention. It has been influential in making arbitration much more acceptable in Latin American countries. The European Convention supplements the New York Convention in the contracting states. It provides for a number of general issues concerning party’s rights in arbitration, and also provides specific limited reasons for when the setting aside of an award under the national law of one Contracting State can constitute a ground for refusing to recognize or enforce an award in another Contracting State.17 The European Convention’s effect on awards that have been set aside will be discussed more fully in Chapter 10.18 The Washington Convention on the Settlement of Investment Disputes between States and Nationals of other States is also known as the ICSID Convention because the Convention created the International Center for the Settlement of Investment Disputes (ICSID). The ICSID Convention was promoted by the World Bank, which wanted to encourage investors to make investments in developing countries. Historically, investors could not bring any kind of action against a government, and had to depend upon their own government to take up their cases against a foreign government. The ICSID Convention provides the opportunity for the country and the investor to arbitrate any dispute directly, either pursuant to an arbitration agreement in a state contract, or by virtue of a bilateral investment treaty that includes a clause whereby the state consents to arbitrate with investors covered by the treaty. The ICSID Convention, and treaty arbitrations generally, will be discussed more fully in Chapter 11. Thus, as seen above, the regulatory framework for international com- mercial arbitration includes private agreements, agreed-upon rules, and international practice, as well as national laws and international conven- tions. Although parties have substantial autonomy to control the arbitration 14 O.A.S. Ser. A20 (S.E.P.E.F.), 14 I. L. M. 336 (1975). 15 484 U.N.T.S. 349 (1961). 16 575 U.N.T.S. 159, T.I.A.S. 6090, 17 U.S.T.1270 (1965). 17 European Convention on International Commercial Arbitration (1961), 484 U.N.T.S. 349, art. IX. Not all EU countries are parties to the Convention, and some distinctly non-European countries are parties, such as Cuba and Burkina Faso. List of countries available at http://untreaty.un.org/sample/EnglishInternetBible/partI/ chapterXXII/treaty2.htm. 18 See infra, Chapter 10, Section 10(D)(5)(f). P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 F. INSTITUTIONAL ARBITRATION V. AD HOC ARBITRATION 9 process, the supplementation and reinforcement of the process by both national and international laws help ensure that the process functions in a fair and effective manner. The regulatory framework also gives parties con- fidence that they will have a reasonable method of recourse when problems develop in their international business transactions. F. INSTITUTIONAL ARBITRATION V. AD HOC ARBITRATION One of the choices parties must make when they decide to arbitrate is whether they want their arbitration to be administered by an arbitral institution, or whether they want the arbitration to be ad hoc.19 There are advantages and disadvantages for each choice. With an institutional arbitration, the advan- tages are that the institution performs important administrative functions. It makes sure the arbitrators are appointed in a timely way, that the arbi- tration moves along in a reasonable manner, and that fees and expenses are paid in advance. From the arbitrators’ point of view, it is an advantage not to have to deal with the parties about fees, because that subject is handled by the arbitral institution. Moreover, the arbitration rules of the institution are time-tested and are usually quite effective to deal with most situations that arise. Another advantage is that an award rendered under the auspices of a well-known institution may have more credibility in the international com- munity and the courts. This may encourage the losing party not to challenge an award. With an ad hoc arbitration, there is no administering institution. One advantage, therefore, is that the parties are not paying the fees and expenses of the administering institution. The parties also have more opportunity to craft a procedure that is very carefully tailored to the particular kind of dispute. They may draft their own rules, or they may choose to use the UNCITRAL Arbitration Rules, which are frequently used in ad hoc arbitra- tions.20 (UNCITRAL itself does not administer arbitrations and is not an arbitral institution.) Ad hoc arbitrations are sometimes particularly useful when one of the parties is a state, and there may be a need for more flexibil- ity in the proceedings. It can be decided, for example, that neither party is the respondent, since both sides have claims against each other. Then each party will simply have the burden of proof of the claims it raises against the other party. An ad hoc proceeding can be disadvantageous, however, if either of the parties engages in deliberate obstruction of the process. In that 19 Ad hoc arbitration is not an option in China. See Jingzhou Tao & Clarisse von Wunschheim, Article 16 and 18 of the PRC Arbitration Law – The Great Wall of China for Foreign Arbitration Institutions, 23 Arb. Int. 309, 324 (2007). 20 Available at www.uncitral.org/pdf/english/texts/arbitration/arb-rules/arb-rules.pdf. P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 10 INTRODUCTION TO INTERNATIONAL COMMERCIAL ARBITRATION situation, without an administering institution, the parties may have to seek the assistance of the court to move the arbitration forward. G. ARBITRAL INSTITUTIONS As international commercial arbitration has grown and expanded with the growth of international business,21 arbitral institutions have also grown and changed. The American Arbitration Association, for example, has created an international division – the International Centre for Dispute Resolution (ICDR) – just to deal with international disputes. Many arbitral institutions have updated their rules to present an international arbitration-friendly for- mat, and to improve their ability to deal with certain issues, so that court assistance will not be needed as often. For example, the ICDR has added a rule that improves the institution’s ability to respond promptly to a claimant’s need for emergency relief, which may occur even before the tribunal has been formed.22 If emergency relief is not available in some form at an early stage, a party has no choice but to seek relief from a court. Institutions vary in cost and quality of administration. Many companies prefer to work with the older, better established institutions, even if the cost may be somewhat higher. Parties are concerned that if they go with a brand new arbitral institution, that institution might not be in business a few years down the road when a dispute might arise. Listed below is a brief description of a few of the major international arbitration institutions. 1. The International Chamber of Commerce (ICC) International Court of Arbitration The ICC International Court of Arbitration is one of the better-known and most prestigious arbitral institutions. The International Court of Arbitration is not a court in the ordinary sense of the word; it is not part of any judicial system. Rather, the Court of Arbitration is the administrative body that is responsible for overseeing the arbitration process. Its members consist of legal professionals from all over the world. In addition, the ICC has a Secretariat, which is a permanent, professional administrative staff. A few features distinguish the ICC as an arbitral institution. First, every ICC arbitral award is scrutinized by the Court of Arbitration, meaning the 21 The international caseload of major arbitral institutions nearly doubled between 1993 and 2003, and, during the same period, more than tripled before the American Arbi- tration Association and its International Centre for Dispute Resolution. See Christo- pher R. Drahozal & Richard W. Naimark, Towards a Science of International Arbitration: Collected Empirical Research, 341, app.1 (2005). 22 See ICDR Rules of Arbitration, Article 37, Emergency Measures of Protection. Avail- able at www.adr.org/sp.asp?id=28144. P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 G. ARBITRAL INSTITUTIONS 11 award is not provided to the parties until it has been reviewed by the Court. While the Court does not have the power to change the award, if it finds anything amiss, it sends the award back to the arbitrators with its comments. Second, another requirement of the ICC is that at the outset of the arbitra- tion, the parties are asked to complete and sign a document called the “Terms of Reference,” which lists all the issues in dispute, all the parties, the place of arbitration, the rules, and sometimes other information pertaining to dis- covery or scheduling. This ensures that everyone knows at the beginning of the process what the parameters of the arbitration will be. In addition, practitioners before the ICC like the fact that the actual case administrators, who are part of the Secretariat staff, are lawyers. Although the seat of the ICC International Court of Arbitration is in Paris, it administers arbitrations all over the world.23 2. The American Arbitration Association’s (AAA) International Centre for Dispute Resolution (ICDR) The ICDR has greatly expanded the number of arbitrations it handles yearly. The number of international arbitration cases filed with the AAA or the ICDR in the ten-year period from 1993 to 2003 more than tripled, from 207 to 646.24 Moreover, the ICDR has opened offices in other countries: Dublin, Ireland, in 2001, Mexico City in 2006, and Singapore in 2006. In Mexico, the ICDR has a cooperative agreement with the Mediation and Arbitration Commission of the Mexico City National Chamber of Com- merce (CANACO). In Singapore, the ICDR is entering a joint venture with the Singapore International Arbitration Centre (SIAC) to establish a dispute resolution center. This step is expected to help make Singapore a leading arbitration center in Asia. The ICDR has reached cooperative agreements with arbitral institutions in at least forty-three countries.25 3. The London Court of International Arbitration (LCIA) The LCIA is also not a “court” in the judicial sense, but rather the respon- sible supervising body of the arbitration institution. The LCIA Court is the final authority for the proper application of the LCIA Rules. It also has the responsibility of appointing tribunals, determining challenges to arbitra- tors, and controlling costs. The LCIA is the oldest international arbitration institution, having been founded in the late nineteenth century. Its Secre- tariat is headed by a Registrar, and is responsible for the administration of 23 In 2004, the place of arbitration for various ICC arbitrations included forty–nine different countries. See Yves Derain & Eric Schwartz, A Guide to the ICC Rules of Arbitration, 427, app. 6 (2d ed. 2005). 24 See Drahozl & Naimark, supra note 21. 25 See www.adr.org/icdr (Use the “search” feature for specific information about the various ICDR offices worldwide). P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 12 INTRODUCTION TO INTERNATIONAL COMMERCIAL ARBITRATION disputes referred to the LCIA. Although the LCIA is headquartered in Lon- don, the institution will administer cases and apply its rules at any location the parties choose. In the last two years, its international caseload increased by 31%.26 4. Other Arbitral Institutions A number of other arbitral centers actively conduct international arbitra- tions. The Arbitration Institute of the Stockholm Chamber of Commerce (SCC) became particularly well-known for handling East–West arbitra- tions. The China International Economic Trade Arbitration Commission (CIETAC), adopted new arbitration rules in 2005, and is moving toward a more mainstream approach to international arbitration. The World Intellec- tual Property Organization (WIPO) Arbitration and Mediation Center has rules on mediation and arbitration that are considered particularly appro- priate for technology, entertainment, and other disputes involving intellec- tual property. International arbitrations are handled by institutions in Hong Kong, Switzerland, Vienna, Cairo, Germany, Venezuela, Mexico, and many other cities and countries. In addition, there are some specialized arbitral institutions such as the Grain and Feed Trade Association (GAFTA), the London Maritime Arbitration Association (LMAA), the Federation of Oils, Seeds, and Fats Association (FOSFA), and the London Metal Exchange (LME), all of which have industry-based rules and procedures for resolv- ing disputes of their members. H. ARBITRATIONS INVOLVING STATES 1. ICSID Arbitrations State or State-owned entities are generally immune from suits by individuals or companies. However, if the state or state entity engages in a commercial deal, and particularly if it enters into an arbitration agreement, normally it will be considered to have waived immunity. Moreover, it may be obliged to arbitrate under the provisions of a bilateral investment treaty. For Contract- ing States who agree to arbitration under the ICSID Rules of Arbitration, any resulting award is not appealable to a court, and national laws are not applicable to the process. The award can, however, under the ICSID Rules, be reviewed by an ad hoc committee of three arbitrators, and, if annulled, will have to be arbitrated again by yet another tribunal. A monetary award is enforceable in a Contracting State as though it were a final judgment in the court of that state. Treaty arbitrations will be discussed further in Chapter 11. 26 See LCIA website at www.lcia.org. P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 I. OTHER DISPUTE RESOLUTION METHODS 13 2. The Permanent Court of Arbitration The Permanent Court of Arbitration (PCA), located in the Hague, provides a variety of arbitration, conciliation, and fact-finding services. It is primarily known for arbitrating disputes between states and state entities, including disputes arising out of various treaties. However, international commercial arbitration can also be conducted by the PCA. The organization also plays an important role under the UNCITRAL Rules of Arbitration. When parties to an ad hoc arbitration have not agreed on selecting an arbitrator, or an appointing authority, either party may request the Secretary-General of the PCA to designate an appointing authority.27 In addition, the Editorial Staff of the International Council for Commercial Arbitration (ICCA) is located on the premises of the PCA in the Peace Palace. ICCA publishes the Year- book Commercial Arbitration, the International Handbook on Commercial Arbitration and the ICCA Congress Series, which are important sources of arbitration cases, laws and practice, and scholarly papers in the field. I. OTHER DISPUTE RESOLUTION METHODS There are other dispute resolution methods, outside of litigation and arbi- tration, that may be used to try to resolve international disputes. These other methods, which are often non-binding, are sometimes combined with arbi- tration. For example, parties may agree that they will first try to resolve their dispute by negotiation, and if unsuccessful, they will engage in mediation. If that does not work, then they will commence binding arbitration. The other dispute resolution mechanisms are sometimes referred to under the term of “alternative dispute resolution” or “ADR.” However, the term ADR does not mean the same thing to all people. In Europe and much of the rest of the world, ADR refers to dispute resolution methods that exclude both litigation and arbitration. Although many of these methods are nonbind- ing, such as mediation and conciliation, some kinds of ADR can be binding, such as expert determination and baseball arbitration. In the United States, on the other hand, ADR is understood to mean all kinds of dispute resolution methods other than litigation, so the term ADR would include arbitration. Parties should be clear when they discuss resolving disputes by ADR that they understand what the other party means by ADR. A few of the different kinds of ADR are listed below. 1. Mediation Mediation differs from arbitration because it is nonbinding. An arbitral insti- tution is likely to have rules for mediation as well as rules for arbitration. A 27 UNCITRAL Arbitration Rules, art. 6(2). P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 14 INTRODUCTION TO INTERNATIONAL COMMERCIAL ARBITRATION mediator will try to make sure each party understands the other’s point of view, will meet with each party privately and listen to their respective view- points, stress common interests, and try to help them reach a settlement. Mediation is confidential. There is usually a provision in the chosen rules that no disclosure made during the mediation can be used at the next level of the dispute, whether arbitration or litigation. If the rules do not provide for this, then there should be an agreement in writing to the effect that anything disclosed in the mediation process cannot be used at the next level, except to the extent it comes in through documents not created for the mediation. Mediation can occur at any time in the dispute. If parties get to a point in litigation, or in arbitration, where they want to settle, and need some help, they can get a mediator. Mediators are also sometimes used in the negotiation stage of a contract, when negotiations have reached an impasse, but both parties actually want the deal to go through. Because mediators try to understand and reconcile the interests of the parties, mediation is sometimes referred to as an interest-based procedure, while arbitration is referred to as a rights-based procedure. 2. Conciliation What is the difference between conciliation and mediation? Often, the terms are used interchangeably. Technically, however, there is a difference. A con- ciliator listens to the two parties, hears their different positions, and then sets forth a proposed settlement agreement, representing what she believes to be a fair compromise of the dispute. If the proposal does not resolve the dispute, the conciliator may offer another proposal. Although mediators try to get the parties to come up with a settlement agreement themselves, they may also, at the parties’ request, make a specific proposal, similar to what conciliators would do. 3. Neutral Evaluation An institution can arrange for a neutral party, or the parties can find and agree upon a neutral party, who will listen to each side, and then give a non- binding opinion about an issue of fact, an issue of law, or perhaps a technical issue. 4. Expert Determination When an issue in the arbitration involves a highly technical question, parties can agree that an expert may determine that question. Frequently, the deci- sion of the expert is binding, but parties can agree to use an expert under rules that permit a nonbinding opinion.28 28 See, e.g., ICC Rules for Expertise, art.12 (3). (“Unless otherwise agreed by all of the parties, the findings of the expert shall not be binding on the parties.”) P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 J. CONCLUSION 15 5. Mini-Trials A number of arbitral institutions have rules for mini-trials. In a mini-trial, usually there is a panel composed of one neutral decision-maker and one executive from each of the companies involved in the dispute. The executives should be at a high level in the company, have decision-making authority, and should not be employees who were personally involved in the issues leading to the dispute. A mini-trial usually lasts only one or two days, there is limited exchange of documents, each side puts forth its best case, and the panel (the neutral and the two executives) tries to reach a settlement. The proceedings are generally confidential, so that disclosures at the mini-trial generally cannot be used at a subsequent trial or arbitration. The proceeding is non-binding, but serves the purpose of letting high-level executives know what is at stake, and provides them the opportunity to resolve the dispute at an early stage to avoid expensive arbitration or litigation. 6. Last Offer Arbitration (Baseball Arbitration) This is a technique within an arbitration to try to bring both parties closer together in terms of what the amount awarded should be. Each party states its best offer as to the amount it thinks should be awarded, and the arbitrator only has the ability to choose either one proposal or the other. Thus, each side has an incentive to be reasonable, because to the extent one side is too extreme, the other side’s number will be chosen. This is sometimes called “baseball arbitration” because it has on occasion been used in establishing players’ contracts in Major League Baseball in the United States. The methods described above are dispute resolution mechanisms that can be used either in conjunction with an arbitration, or independently. Good lawyers will always try to help a client explore ways of resolving disputes that might avoid the lengthy and costly procedures of either arbitration or litigation. J. CONCLUSION Any dispute resolution method has its problems and its downsides. Inter- national commercial arbitration is sometimes referred to as the “least inef- fective” method of resolving international disputes. But many participants express a more positive view. Ingeborg Schwenzer, a professor and arbitra- tor in Switzerland, finds the atmosphere in arbitration to be very different from litigation – “more professional, less nasty.”29 David Wagoner, a U.S. arbitrator, says that what he likes about arbitration is that “you can take the 29 Interview with Ingeborg Schwenzer, March 2007. Notes of the interview are on file with the author. P1: SBT 9780521866668c01 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 13:48 16 INTRODUCTION TO INTERNATIONAL COMMERCIAL ARBITRATION best practices from civil and common law, use them in arbitration, and keep improving the process.”30 Certainly, the goal in international arbitration is to permit people from different countries and cultures to resolve their differ- ences in ways that leave all parties feeling that the private system of dispute resolution serves a shared sense of justice. 30 Interview with David Wagoner, March 2007. Notes of the interview are on file with the author. P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 CHAPTER TWO The Arbitration Agreement A. FUNCTION AND PURPOSE When parties agree to arbitrate their disputes, they give up the right to have those disputes decided by a national court. Instead, they agree that their disputes will be resolved privately, outside of any court system. The arbitra- tion agreement thus constitutes the relinquishment of an important right – to have the dispute resolved judicially – and creates other rights. The rights it creates are the rights to establish the process for resolving the dispute. In their arbitration agreement, the parties can select the rules that will govern the procedure, the location of the arbitration, the language of the arbitra- tion, the law governing the arbitration, and frequently, the decision-makers, whom the parties may choose because of their particular expertise in the subject matter of the parties’ dispute. The parties’ arbitration agreement gives the arbitrators the power to decide the dispute, and defines the scope of that power. In essence, the parties create their own private system of justice. 1. Arbitration Clauses and Submission Agreements The parties’ arbitration agreement is frequently contained in a clause or clauses that are embedded in the parties’ commercial contract. The agreement to arbitrate is thus entered into before any dispute has arisen, and is intended to provide a method of resolution in the event that a dispute will arise. However, if there is no arbitration clause in the parties’ contract, and a dispute arises, at that time the parties can nonetheless enter into an agreement to arbitrate, if both sides agree. Such an agreement is generally referred to as a submission agreement. However, submission agreements are much less common than arbitration clauses in contracts, because once a dispute arises, the parties often cannot agree on anything. For that reason, it is generally better for the parties to agree to arbitrate at the beginning of the relationship, when they are still on good terms. 17 P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 18 THE ARBITRATION AGREEMENT 2. Separability Even though the arbitration clause is most often contained within the con- tract between the parties, under most laws and rules it is nonetheless consid- ered a separate agreement. It thus may continue to be valid, even if the main agreement – that is, the contract where the arbitration agreement is found – may be potentially invalid. In most jurisdictions, this doctrine of separability permits the arbitrators to hear and decide the dispute even if one side claims, for example, that the contract is terminated, or never existed in the first place, or is invalid because it was fraudulently induced. Such claims would not deprive the arbitrators of jurisdiction because they pertain to the main contract and not specifically to the arbitration clause.1 Because the arbitra- tion clause is considered a separate and distinct agreement, it is not impacted by claims of invalidity of the main contract, and still confers jurisdiction on the arbitrators to decide the dispute.2 The separability doctrine is embodied in numerous arbitration laws and rules.3 B. VALIDITY In light of the important rights that are extinguished when the parties agree to arbitrate, the question of the arbitration agreement’s validity is critical. Arbi- tration is a creature of consent, and that consent should be freely, knowingly, and competently given.4 Therefore, to establish that parties have actually consented, many national laws, as well as the New York Convention, require that an arbitration agreement be in writing.5 In addition, the Convention 1 When such claims are directed at the arbitration clause itself, the question of the arbi- trators’ jurisdiction is more murky, and may in some countries have to be resolved by the national court rather than by the arbitrator. See, e.g., Prima Paint Co. v. Flood & Conklin Manufacturing Corp., 388 U.S. 395, 404–405 (1967) (“[I]f the claim is fraud in the inducement of the arbitration clause itself... the federal court may pro- ceed to adjudicate it.”); Harbour Assurance Co. (UK) Ltd. v. Kansa General Interna- tional Assurance Co. Ltd. [1993 ] 3 All ER 897, QB 701 (English Court of Appeal) (“[A]n arbitrator [could] determine a dispute over the initial validity or invalidity of the written contract provided that the arbitration clause itself was not directly impeached.”). 2 The arbitrators’ ability to determine their own jurisdiction, known as the competence- competence doctrine, is discussed infra, Chapter 5(a)(2). 3 See, e.g., UNCITRAL Model Law, art. 16; English Arbitration Act, § 30; UNCITRAL Rules, art. 21(1); LCIA Rules, art. 23(1). See also Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 445 (2006) (“[A]s a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.”). 4 United Steelworkers v. Warrior & Gulf Navig. Co., 363 U.S. 574, 582 (1960) (“... [A] party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.”). 5 See, e.g., New York Convention, art. II, UNCITRAL Model Law, art. 7(Option 1, as amended); Swiss PILA, art. 178(1); English Arbitration Act, § 5; French Code of Civil Procedure, art. 1443; U.S. Federal Arbitration Act, § 2. P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 B. VALIDITY 19 requires that in some circumstances, the written agreement be signed by both parties.6 The issue of whether the agreement was in writing, signed, and therefore valid, is likely to arise when one party seeks to renege on its agreement to arbi- trate. Although the party may have agreed to arbitrate, after a dispute arises it may decide that it would rather go to court, and will therefore commence litigation. In addition, the issue of the arbitration agreement’s applicability to specific parties may arise when one party asserts that it never signed the agreement, or when a nonsignatory tries to enforce the agreement against a signatory. In these situations, a party may call upon the court for assistance. International arbitration agreements are enforceable under the New York Convention. Even though the title of the Convention does not mention agree- ments – it is called the Convention on the Recognition and Enforcement of Foreign Arbitral Awards – nonetheless, the Convention deals with arbitra- tion agreements in Article II. In accordance with Article II, Contracting States must recognize arbitration agreements in writing. If the court is seized of a matter that is in fact the subject matter of a binding arbitration agreement, the court must stay the proceedings and refer the parties to arbitration.7 NEW YORK CONVENTION Article II 1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration. 2. The term “agreement in writing” shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams. 3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed. 6 See New York Convention, art. II(2). 7 See Albert Van Jan den Berg, The New York Arbitration Convention of 1958, at 129 (1981) (“If the court refers the parties to arbitration... it implies automatically that the court proceedings are stayed.”). See also Domenico Di Pietro & Martin Platte, Enforcement of International Arbitration Awards, at 66 (2001) (explaining that “refer the parties to arbitration” in Article II(3) of the New York Convention “means that the Court becomes incompetent to entertain the case and must stay proceedings.”). P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 20 THE ARBITRATION AGREEMENT From Article II, a number of the requirements for the validity of an arbi- tration agreement are derived. Paragraph one provides that to be enforced, the agreement must be in writing, the dispute which arises must be “in respect of a defined legal relationship,” and the subject matter must be capable of being settled by arbitration. Paragraph two defines “agreement in writing,” including, in some circumstances, a signature requirement by the parties. Paragraph three requires the court to refer the parties to arbitration, unless the agreement is null and void, inoperative, or incapable of being performed. These requirements will be discussed below. 1. The Writing Requirement Today, contracts are frequently entered into orally or by emails or faxes, without much attention to formalities. In many countries, such contracts are valid. If an arbitration agreement is valid under the pertinent national law, should it not be enforceable under the New York Convention? In some cases, courts have strictly upheld the writing requirement, invalidating arbi- tration agreements even though parties may have appeared to have reached agreement by conduct or trade practice. When this happens, the Conven- tion becomes a less effective means of enforcing parties’ arbitration agree- ments. Although an amendment to make the writing requirement less rigid may be in order, it is difficult to amend an international convention that has more than 140 adherents, and impossible to ensure that it would be amended uniformly. However, there are some other ways, which will be dis- cussed in the subsections immediately following, of trying to ensure that the purpose of the Convention – to provide for prompt enforcement of arbi- tration agreements and awards – is not undermined by an insistence upon formalities that appears inconsistent with the realities of today’s transac- tions. First, it is necessary to understand what the Convention requires with respect to a writing. While Article II(1) sets forth the writing requirement, Article II(2) defines what “in writing” means. The writing requirement may be met either by a clause in the contract or a separate agreement to arbitrate (a submission agreement), “signed by the parties,” or it can be satisfied by an exchange of letters or telegrams.8 A number of interpretive issues are presented by the language of paragraph 2. First, does the signature require- ment apply both to the contract containing the clause, as well as to the submission agreement, or only to the submission agreement? Second, does the signature requirement also apply to the exchange of letters or telegrams? Different courts have taken different positions. The U.S. Fifth Circuit Court of Appeals has suggested that only the separate agreement must be signed, 8 New York Convention, art. II(2). P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 B. VALIDITY 21 and not the contract containing the arbitration clause.9 On the other hand, the U.S. Second and Third Circuits have disagreed with this interpretation,10 stating that the signature requirement applies to both. With respect to the exchange of letters and telegrams, a Swiss court has held that if the par- ties expressed their intention to enter into an arbitration agreement by an exchange of documents, signatures were not necessary.11 Similarly, the U.S. Third Circuit has held that the arbitral agreement “may be unsigned if it is exchanged in a series of letters.”12 It is generally the rule today in most jurisdictions that both the contract containing the arbitration clause, or the submission agreement, must be signed, but there is no signature requirement for the exchange of documents.13 Courts differ, however, on how strictly they will interpret the Conven- tion’s writing requirement to invalidate an arbitration agreement. Some are quite strict in following the letter of the law: the arbitration agreement is only valid if it is in a contract or in a separate agreement signed by the parties, or in an exchange of documents.14 In some instances, courts have strictly required express written acceptance, even if denying validity appeared con- trary to principles of good faith.15 The question of the arbitration agreement’s validity normally arises when one party is trying to enforce an agreement to arbitrate. However, the issue may come up again at the award enforce- ment stage, when one party tries to prevent enforcement by asserting that the agreement to arbitrate was invalid.16 9 See Sphere Drake Ins. PLC v. Marine Towing 16 F.3d 666, 667–69 (1994), cert. denied, Marine Towing v. Sphere Drake Ins. P.L.C., 513 U.S. 871 (1994). 10 See, e.g., Kahn Lucas Lancaster, Inc. v. Lark International Ltd., 186 F.3d 210, 217– 18 (2d Cir. 1999); Standard Bent Glass Corp. v. Glassrobots OY, 333 F.3d 440, 449 (2003). 11 Compagnie de Navigation et Transports S.A. v. MSC (Mediterranean Shipping Company) S.A (Swiss Federal Tribunal, 16 January 1995), Yearbook Commercial Arbitration XXI (1996). 12 Standard Bent Glass Corp. v. Glassrobots OY, 333 F.3d 440, 449 (2003). 13 With respect to an arbitral clause in a contract, the clause itself does not have to be separately signed. It is sufficient for the parties to sign the contract as a whole. See van den Berg, supra note 7, at 192 (1981). 14 See, e.g., the Netherlands, Court of First Instance of Dordrecht, North American Soc- cer League Marketing, Inc. (USA) v. Admiral International Marketing and Trading BV (Netherlands) and Frisol Eurosport BV (Netherlands), 18 August, 1982, (Yearbook Commercial Arbitration X at 490 (1985)); Germany, Brandenburg Court of Appeal, 13 June, 2002 (No 8, Sch 2/01); Spain, Supreme Court, Delta Cereales Espana SL (Spain) v. Barredo Hermanos SA, 6 October, 1998 (Yearbook Commercial Arbitra- tion XXVI, at 854 (2001)). 15 See, e.g., Italy, Supreme Court, Robobar Limited (UK) v. Finncold SAS (Italy) 28 Oct. 1993, Yearbook Commercial Arbitration XX at 739 (1995) (formal requirements cannot be derogated from, even where contesting arbitration agreement’s validity is contrary to good faith). 16 See discussion infra, in Chapter 10(D). P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 22 THE ARBITRATION AGREEMENT Perhaps the most common situation that produces a divergent judicial response is when there is clearly a contract, but the arbitration clause within that contract does not meet the form requirements of the Convention. For example, assume that parties reach an oral agreement by telephone. One of the parties sends a written confirmation, which contains an arbitration clause. The other party performs under the contract, for example, it ships goods, but it never sends a written response to the first party’s written con- firmation. Most courts would have no difficulty finding that a contract was formed. But quite a few would say that the arbitration clause was not valid.17 There was no “exchange” of documents, because only one document was sent. Some commentators believe that tacitly concluded agreements to arbi- trate are simply not enforceable under the New York Convention.18 On the other hand, some courts will find a way to interpret such an arbi- tration agreement as valid, frequently by using domestic law. Assuming the agreement falls under the Convention, Article II should supersede domestic law regarding the proper form of an arbitration agreement.19 However, State courts have not always viewed the Convention as superseding their domes- tic law.20 Moreover, even when a court applies the New York Convention, its interpretation may be influenced by its national law. For example, the domestic law could affect a national court’s interpretation to the extent that a judge perceives the Convention to be silent, ambiguous, or out of date. As commentators have noted, “Many national courts... interpret[] Article II(2) in the light of Article 7(2) of the Model Law and their more liberal national arbitration laws.”21 Nonetheless, although acceptance of a more lenient definition of “agree- ment in writing” under national law makes sense in terms of the purpose and language of the Convention and in terms of accommodating more modern means of communication than letters and telegrams, there still are courts that will not enforce an award if the underlying agreement does not meet Arti- cle II(2) requirements.22 Thus, different courts, interpreting the Convention differently, can cause a nonuniform application of the Convention. To promote harmonious interpretation by amending an international con- vention when there are at least 142 Contracting States would be difficult, if not impossible. The likelihood would be that some states would amend and others would not, thereby increasing rather than diminishing harmonization. 17 See Frey et al. v. Cucaro e Figli, Italy, Yearbook Commercial Arbitration I, at 193 (1976) (Of four contracts that were performed, court only enforced arbitration agree- ments in two, because only two were signed and returned). 18 See Di Pietro & Platt, supra note 7, at 75–78. 19 See Van den Berg, supra note 7, at 170. 20 See, e.g., France, Court of Appeal, Paris, Société Abilio Rodriguez v. Société Vigelor (1990) (Rev. Arb. 1990), at 691. 21 DiPietro & Platte, supra note 7, at 82. 22 See id., at 76–77. P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 B. VALIDITY 23 In order to encourage courts to apply a less rigid interpretation of Article II of the Convention, the United Nations Commission on International Trade Law (UNCITRAL) began in 1999 to consider “the means through which modernization of the New York Convention could be sought.”23 Two of the more propitious means that UNCITRAL considered were (1) to develop declarations addressing the interpretation of the New York Convention that would reflect a broad understanding of the form requirement and would permit the application of more lenient national law, and (2) to revise Article 7 of the UNCITRAL Model Law on Arbitration. These two steps are related, as will be discussed in the next two sections. a. Recommended Interpretation of Articles II and VII In July 2006, UNCITRAL adopted recommendations regarding the inter- pretation of Articles II(2) and VII(1) of the Convention, as well as revised provisions on the form of the arbitration agreement in Article 7 of the UNCI- TRAL Model Law on Arbitration. The recommendation as to Article II is that it should be applied “recognizing that the circumstances described therein are not exhaustive.”24 UNCITRAL is suggesting that there can be addi- tional bases for meeting the writing requirement outside of those specified in the Convention (presumably, bases found in domestic law), and that courts should apply the Article II writing requirement less rigidly. UNCITRAL has also recommended that Article VII(1), which by its terms only applies to arbitration awards, be interpreted to apply to arbitration agreements as well.25 Article VII(1) provides as follows: The provisions of the present Convention shall not... deprive any inter- ested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon.26 Article VII(1) is sometimes referred to as “the more favorable right” pro- vision because it permits a party who is attempting to enforce an award (“the award creditor”) to take advantage of any more favorable law in the enforcing jurisdiction, thereby making enforcement easier. The UNCITRAL recommendation is as follows: [UNCITRAL] [r]ecommends that article VII, paragraph (1), of the Convention... should be applied to allow any interested party to avail 23 See Note by the Secretariat, Article II(2) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), A/CN.9/WG.II/WP.139, at 3, para. 2. 24 Report of the Working Group on Arbitration and Conciliation on the work of its forty- fourth session (New York, 23–27 January, 2006) Annex III, A/CN.9/592. Available at www.uncitral.org. 25 See id. 26 New York Convention, art. VII(1). P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 24 THE ARBITRATION AGREEMENT itself of rights it may have, under the law or treaties of the country where an arbitration agreement is sought to be relied upon, to seek recognition of the validity of such an arbitration agreement.27 If Article VII(1) is read to apply not just to awards but also to agreements, it would provide a party with “a more favorable right” to enforcement of its agreement, based on the local law in the court that was ruling on the agree- ment’s validity. In other words, to the extent that any local laws would be more favorable to a party than the Convention with respect to enforcement of the arbitration agreement, the party would be entitled to the protection of those laws.28 Thus, if the jurisdiction of the court considering the agreement had adopted a modern version of a writing requirement, the court would not have to strictly enforce the Convention’s requirement of a writing. This, of course, leads to the second step taken by UNCITRAL in July 2006 – to amend Article 7 of the Model Law on Arbitration. An amended Article 7 would provide states in Model Law jurisdictions with a modern statute on the writing requirement. That statute would make it easier for an arbitration agreement to be valid under a domestic “writing” requirement. Then, for courts in a Model Law jurisdiction that were willing to interpret the more favorable right provision of Article VII as applicable to arbitration agreements, the arbitration agreement would be more easily enforced. It would not be undermined by the formalistic requirements of Article II of the Convention. b. Amendment to Article 7 of UNCITRAL Model Law UNCITRAL amended Article 7 of the Model Law on International Com- mercial Arbitration to try to align the Model Law with current practices in international trade.29 The UNCITRAL amendment, of course, will not be the law anywhere until it is adopted by one of the more than fifty countries, states, administrative regions, or territories that have already adopted the 27 See Report, supra note 24. 28 Interpreting Article VII(1) to apply to arbitration agreements as well as awards is not a new idea. Albert Jan van den Berg, in his classic work on the New York Conven- tion, suggested in 1981 that “[t]he omission of an express mention of the arbitration agreement in Article VII(1) must be deemed unintentional as the provisions concerning the agreement were inserted in the Convention at a very late stage of the New York Conference of 1958... [I]t would seem contrary to the pro-enforcement bias of the Convention that the [most favorable right] provision, which aims at making enforce- ment of awards possible in the greatest number of cases possible, would not apply also to the enforcement of the arbitration agreement.” (The New York Arbitration Convention of 1958, at 86–87.) 29 See Press Release, UNCITRAL website, UNIS/L/102, 7 July, 2006. (“The main achieve- ments of the [UNCITRAL 39th annual] session were the... adoption of revised leg- islative provisions on interim measures of protection and the form of the arbitration agreement.”). The text is available on the UNCITRAL website, www.UNCITRAL.org. P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 B. VALIDITY 25 Model Law, or unless the Model Law, as amended, is adopted by a new jurisdiction.30 UNCITRAL does not expect that its proposed law will be adopted uniformly, because it provides alternative versions of the amend- ment. However, even if not adopted uniformly, the UNCITRAL amendment should help provide guidelines for interpreting what constitutes a valid arbi- tration agreement for purposes of today’s international transactions. Article 7 of the Model Law is entitled “Definition and form of arbitra- tion agreement.” UNCITRAL provides two different versions of amended Article 7 that a country can adopt. Option 1 requires an arbitral agreement to be in writing, and spells out what a writing means, but Option 2 does not require a writing. Option 1 defines an agreement “in writing” as one having its content recorded in any form, even if the arbitration agreement or contract was concluded orally.31 There is no signature requirement. Thus, so long as there is some record of the arbitration agreement, the agreement is valid. This should take care of the situation where the parties reached an agree- ment over the telephone, and only one confirmation was sent. Even though the other party might have responded by shipping goods, and not by sending back a written form, under the Model Law’s amended Article 7, section 3, the confirmation would appear to be a record that would satisfy the writing requirement. Thus, this section may in some situations make tacitly con- cluded arbitration agreements valid. Option 2, on the other hand, defines an arbitration agreement as “an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.”32 If a country has adopted the “no writing” requirement of Option 2, an enforcing court in that country should be able to enforce an oral arbitration agreement under the New York Convention, assuming that the court applies the “more favorable right” provision of Article VII(1) to arbitration agreements. Further, the UNCITRAL Working Group wanted to clarify that the term “writing” included “modern means of communication that might not be considered, in some countries, as meeting the writing requirement.”33 Article 7(4) provides that the writing requirement is met by an electronic commu- nication, so long as the information can be used for subsequent reference. 30 For list of jurisdictions that have adopted the UNCITRAL Model Law on Interna- tional Commercial Arbitration, see Chapter 1, note 11. See also UNCITRAL website at www.UNCITRAL.org. 31 UNCITRAL Model Law, art. 7(3) (amended 2006) available at www.UNCITRAL.org. See also Appendix. 32 UNCITRAL Model Law, art. 7, option 2 (amended 2006), available at www. UNCITRAL.org. 33 Report of the Working Group on Arbitration and Conciliation on the work of its forty-fourth session (New York, 23–27 January, 2006), A/CN.9/592, at 10, para. 50. P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 26 THE ARBITRATION AGREEMENT Article 7 4. The requirement that an arbitration agreement be in writing is met by an electronic communication if the information contained therein is accessible so as to be useable for subsequent reference; “electronic communication” means any communication that the parties make by means of data messages; “data message” means information gen- erated, sent, received or stored by electronic, magnetic, optical or similar means, including, but not limited to, electronic data inter- change (EDI), electronic mail, telegram, telex or telecopy.34 Electronic communication is defined in the same way that it is defined in the United Nations Convention on the Use of Electronic Communications in International Contracts.35 The definition of “data message” is also identical to that of the UNCITRAL Model Law on Electronic Commerce.36 Although the New York Convention provides that an agreement in writing can be contained in an exchange of “letters or telegrams,”37 in our modern times, other means of communication, such as faxes and emails, are also used to form contracts. While most courts have rather broadly accepted newer modes of communication,38 there has been some resistance.39 By making the definition of “writing” in amended Article 7 consistent with both its Conven- tion on Electronic Commerce and its Model Law on Electronic Commerce, UNCITRAL is attempting to create an internationally accepted definition of “writing” that includes electronic commerce, and to bring the Model Law’s concept of writing in line with the most modern international practices. Moreover, by eliminating the signature requirement, amended Article 7 removes a formality that has caused some courts to deny enforcement of 34 UNCITRAL Model Law on Commercial Arbitration, art. 7(4) (amended 2006). 35 Available at www.UNCITRAL.org As of August, 2007, this Convention was not yet effective in any country. 36 The UNCITRAL Model Law on Electronic Commerce, adopted in 1996, attempts to facilitate use of electronic commerce, in part by developing functional electronic equiv- alents or terms such as “writing” or “signature.” Available at www.UNCITRAL.org. 37 New York Convention, art. II(2). 38 See, e.g., Chloe Z Fishing Co. Inc., v. Odyssey re (London) Limited, 109 F. Supp. 2d 1236 (D. C. CA 2000) (“[T]he Court finds that Article II section 2 of the Convention could not have intended to exclude all other forms of written communications regularly utilized to conduct commerce in the various signatory nations by failing to provide an exhaustive list of “letters” or “telegrams.”). See also Di Pietro & Platt, supra note 7, at 72 (“[T]here is common agreement that writing now does not only mean what it meant in 1958.”). 39 An exchange of emails was found not to satisfy the Convention’s writing requirement by the Norwegian Court of Appeal. See Decision of the Halogaland Court of Appeal, 16 August, 1999, Yearbook Commercial Arbitration XXVII, at 519 (2002). P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 B. VALIDITY 27 arbitral agreements. An unsigned contract containing an arbitration clause, or an unsigned submission agreement, would be enforceable under the New York Convention, assuming the enforcing country had adopted both sec- tion 7 of the amended Model Law and UNCITRAL’s recommended interpre- tation of Article VII(1), which applies the “more favorable right” provision to arbitration agreements. c. U.N. Convention on Use of Electronic Communications UNCITRAL is also trying to use the United Nations Convention on the Use of Electronic Communications in International Contracts (CUECIC) to update other, less modern conventions. Article 20 of CUECIC specifically ref- erences other conventions, including the New York Convention. It further states that the CUECIC provisions apply to the use of electronic commu- nications in connection with the formation or performance of a contract covered by the other conventions (unless a Contracting State opts out of this obligation.)40 The Explanatory Note by the Secretariat states that Article 20 is not meant to amend any convention, or to provide an authentic inter- pretation.41 Rather, the drafters intended this article, combined with scope provisions in Article 1 (making the Convention applicable to international contracts), “to provide a domestic solution for a problem originating in international instruments. They are based on the recognition that domestic courts already interpret international commercial law instruments.”42 Thus, UNCITRAL is trying to develop a uniform approach for domestic courts to use in applying older conventions to modern practices. A court could use the definition of a “writing” from the CUECIC to update the New York Conven- tion’s definition of “writing,” because it provides an international definition of electronic commerce that would satisfy a writing requirement. If a coun- try was not a party to CUECIC (and so far CUECIC is not in force in any jurisdiction),43 courts could nonetheless refer to it as guidance, or refer to the Model Law on Arbitration, the Model Law on Electronic Commerce, or all three, to note that there is a widely accepted international definition of writ- ing that includes electronic communication. These various texts demonstrate UNCITRAL’s efforts to encourage an interpretation of the New York 40 CUECIC, art. 20(2). 41 Explanatory note by the UNCITRAL Secretariat on the United Nations Convention on the Use of Electronic communications in International Contracts, available as an attachment to the Convention’s text on the UNCITRAL website, at 91, para. 289 http://www.uncitral.org/pdf/english/texts/electcom/06-57452 Ebook.pdf. 42 Id., at 92, para. 290. 43 As of August 2007, CUECIC was not in force in any country. See www.UNCITRAL. org. P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 28 THE ARBITRATION AGREEMENT Convention’s writing requirement that would reflect actual practices and be more uniform across national borders. d. Other Article 7 Issues Two other issues in connection with the writing requirement are dealt with in the amended Article 7 of the Model Law. These same issues are included in existing Article 7 and are not substantially different in the amended version. Section 5 provides that if parties have exchanged statements of claim and defense in which one party alleges an arbitration agreement and the other party does not deny it, then the writing requirement is met. This prevents parties from trying to assert a technical defense at a later point after the parties have essentially admitted there was an agreement to arbitrate. Finally, in Section 6, a reference in a contract to another document con- taining an arbitration clause satisfies the writing requirement as long as the reference makes the clause in the other document part of the contract. This is an area that comes up regularly in practice, but is not dealt with specifically in the New York Convention. As a result, courts in different jurisdictions have reached different conclusions about when an arbitration agreement can be incorporated by reference, and how it must be done. Section 6 simply requires that the reference in a contract must establish that the arbitration clause becomes part of the contract. e. Effect of the More Favorable Right Provision There is clearly a trend today to support prompt enforcement of arbitration agreements and awards. In recommending that the “more favorable right” provision be applied to arbitration agreements as well as to awards, UNCI- TRAL is recommending a solution already followed by some courts.44 When a party can take advantage of domestic laws in the enforcing court that are not as limited as the writing requirement of Article II of the Convention, the parties’ expectations will more likely be met. A more modern approach to the writing requirement means that parties who agreed to arbitrate are much less likely to be thwarted because of a failure to meet formalistic requirements. Parties can benefit from the application of the more favorable right pro- vision in Article VII(1) of the Convention even if they are not in a Model Law State. A party bringing an enforcement action in any State that has more 44 See Supreme Court, Germany, 25 May, 1970, Yearbook Commercial Arbitration 1977, at 237 (“European Convention, being of younger date than the New York Convention, prevails.” Under European Convention, “any arbitration agreement con- cluded in form authorized by [local] laws suffices.”); The Netherlands, Court of Appeal, The Hague, Owerri Commercial Inc. (Panama) v. Dielle Srl. (Italy), Yearbook Com- mercial Arbitration XIX 703 (1993) (Arbitration clause valid under English law, therefore valid under the New York Convention). P1: SBT 9780521866668c02 CUUS131/Moses 978 0 521 86666 8 March 27, 2008 14:46 B. VALIDITY 29 favorable laws regarding the writing requirement of an arbitration agreement will benefit. In the United States, a claimant would benefit from the adoption by the U.S. Congress of a law known as E-Sign. ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT 45 (“E-SIGN”) Notwithstanding any statute, regulation, or other rule of law... with respect to any transaction in or affecting interstate or foreign com- merce – (1) a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and (2) a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signa- ture or electronic record was used in its formation. Two circuit courts in the United States46 have found that E-Sign provides that an email agreement to arbitrate is enforceable under the Federal Arbitra- tion Act (“FAA”) because it satisfies the FAA’s “written provision” require- ment.47 Although to date, research has not revealed a U.S. case interpreting E-Sign in relation to the New York Convention’s writing requirement, there is little doubt that a U.S. court would apply E-Sign and find that an arbitra- tion agreement could not be denied legal effect or validity simply because it was in electronic form.48 45 15 U.S.C. 7001(a). 46 Campbell v. General Dynamics Government Systems Corporation, 407 F.3d 546 (1st Cir. 2005); Specht v. Netscape Communications Corp., 306 F.3d 17, 26