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Craft international arbitration clauses with care

The Ryder Cup. Multinational corporations jockeying for presence at the big event. Fleets of corporate jets. Big money whispering loudly. Thinly veiled suggestions of deals being made. Megadeals. Glamorous deals.
Click. Reality check. It’s dark. It’s late and your biological clock thinks it’s even later. You’re far from home in a foreign country and you’re scrutinizing a stack of papers in preparation for a morning meeting. It’s the third time you’ve reviewed a 72-page agreement. Thankfully, it’s blacklined to show changes. The highly negotiated business deal appears to be accurately rafted, at last. You’re up to page 62, only 10 pages to go, and relief and exhaustion come together. Not much important back here: Severability, Amendments, Arbitration, Insurance, Counterparts, Headings, Survival; not much blacklining back here either. Come to think of it, there never is. Your eyes glaze over. …
So much for the glamour of doing big deals. But don’t skip over the “boilerplate” quite so quickly. Remember, if anything goes badly in this transaction, everything you have bargained for will be in the hands of a foreign court or an internationally organized arbitration tribunal. The typical domestic arbitration clause you’re used to is inadequate. The international arbitration clause requires a clear, well-informed vision. It requires experience in international arbitration, knowledge of diverse legal traditions and the ability to discriminate which provisions will work best in the specific international context of your transaction.
There follow some real-life examples involving international arbitrations that illustrate how some of the most basic arbitration clauses can operate, starting with choice of venue. When considering the location of arbitration, document drafters often focus on geographic neutrality and a convenient venue. While these factors are significant, actual experience indicates that the two more important considerations in selecting a venue are the enforceability of the award and a favorable legal environment.
Not all countries are safe havens for an international arbitration proceeding. Many are hostile. An actual experience in a $60 million International Chamber of Commerce Inc. finance arbitration project demonstrates the issue. One party, a U.S. entity, wanted Swiss law to apply and sought a Swiss venue for the arbitration; the other parties to the transaction argued for Indian law and Indian venue. The first party knew that Swiss law is very supportive of arbitration awards and that a dispute would proceed expeditiously under Swiss law. Just as importantly, it had been counseled that Indian law is generally not supportive of international arbitration. The first party was successful and the contract specified Swiss law as the venue for arbitration. A potential nightmare had been avoided.
In contrast to the Swiss environment, Indian courts have not hesitated to interfere with the arbitration process and arbitration decisions where Indian law or Indian venue is chosen. Indian courts frequently stay arbitration disputes over litigation regarding the scope of the arbitration clauses–an issue reserved for the arbitrators in many jurisdictions. Errors of law or fact may not be beyond the powers of review by Indian courts. In other instances, awards ultimately may be upheld, but only after substantial delays and complications.
In May 1992, the Supreme Court of India held that if the parties applied Indian law to an arbitration clause, then applications to set aside an award could be heard in India even if the arbitration venue was outside India. The uncertainty caused by this decision has been the focus of considerable attention in connection with structuring of financeable infrastructure projects pursuant to Indian private investment initiatives.
The method of selection of arbitrator is another key issue. In large international transactions, most parties will refer disputes to an international arbitration tribunal. Under the terms of some agreements, each party selects its own arbitrator, who then jointly select the third. Other agreements provide that the arbitration tribunal will independently appoint the arbitrators.
In real life, clauses requiring party- appointed arbitrators put the representative arbitrator in a position to create a strategic advantage by deliberately obstructing or delaying the arbitration. Typical ploys include scheduling delays or refusing to agree on the third arbitrator. The choice of an appropriate arbitration tribunal can alleviate this problem if the tribunal has the power to appoint or schedule when the party fails to do so. Another way to avoid these potential problems is to draft provisions stipulating that all three arbitrators will be appointed by the institution governing the proceeding.
The rights and obligations defined in an arbitration clause are only as reliable as the tribunals called upon to give effect to them. Yet, with amazing regularity, international arbitration clauses contain ill-conceived provisions or often-used provisions that do not function to achieve the desired result in the international context. Drafters often reflect an ignorance of the mechanisms of international arbitration.
When negotiating an agreement, it is imperative to understand the workings of international tribunals, the context in which the arbitration will occur and the likelihood that the law of the selected venue will support the arbitration. In a recent series of international arbitrations between Venezuelan entities and U.S. domestic corporations, these choices significantly affected the cases. In one case American Arbitration Association rules applied, in the other International Chamber of Commerce rules. In one case New York law applied, in the other Venezuelan law. The arbitration clauses were tailored differently depending on the tribunal, particularly regarding how the arbitrators were chosen. Though you might not expect it, the choice of Venezuelan vs. New York law had a significant effect on the conduct and actual outcome of the arbitration.
In practice, drafters often neglect to choose a substantive law applicable to the dispute. That leaves the choice of law decision to the parties or leaves it to be selected by an arbitral tribunal. Unfortunately, this may lead to a choice of law far beyond even the imagination of the parties.
In one recent arbitration, two corporations, one based in the Netherlands and the other in New Jersey, had executed a contract to be performed in both locations. When the parties originally negotiated the agreement, they could not decide which law was to apply and intentionally left the contract silent as to the choice of applicable law. A dispute arose and the arbitration proceedings were venued in Paris. The arbitrators directed the parties to brief the issue of choice of law. One party argued for Dutch law, and the other party insisted that French law should govern. To the dismay of both parties, the arbitrators applied New Jersey law to the entire dispute. The inability of the parties to agree on the choice of law left them at the mercy of the arbitrators.
These are real-life examples worth learning from. There are no guarantees that your eyes won’t automatically glaze over when you’re reviewing documents late at night in a foreign country, but if your arbitration clause has been crafted based on experience in international arbitration, you’ll sleep easier knowing that you’ve prepared for this contingency.
(Justin P. Doyle is a partner with Nixon, Hargrave, Devans & Doyle LLP. His partner, Harry Trueheart, assisted with this article.)

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