International Commercial Arbitration 101

In this article, first posted to the QLS Law Talk blog on Medium, the authors share the basics of international commercial arbitration, from start to finish.

With the increasing internationalisation of business, more and more clients are engaging in cross-border commercial activities.

If your clients are involved in transactions with any foreign element, they need to be aware of the alternative dispute resolution mechanisms available to them so that they can avoid the prospect of litigation in foreign courts.

Should a final and binding determination to a dispute be required, the general global consensus is that arbitration is the most effective process due to the enforceability of arbitral awards. Transactional lawyers need to understand this, and ensure that the contracts they are drafting contain arbitration clauses. To fail to do so could mean that clients are left with no effective process to enforce their substantive rights.

What is international commercial arbitration?

Arbitration is a process by which parties agree to have their disputes determined by a neutral third party, namely an arbitrator or arbitral tribunal, in the form of a final and binding arbitral award. Parties can agree to arbitration when negotiating the terms of the contract or after a dispute has arisen. It is often far easier to agree to arbitration at the beginning of a commercial relationship as, once a dispute arises, it can be difficult for parties to agree on anything.

An arbitration is commercial when it arises out of a relationship of a commercial nature.¹ The UNCITRAL Model Law suggests the following as examples of relationships of a commercial nature:²

“any trade transaction for the supply or exchange of goods or services; distribution agreement; commercial representation or agency; factoring; leasing; construction of works; consulting; engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture and other forms of industrial or business cooperation; carriage of goods or passengers by air, sea, rail or road.”

Commercial arbitration may be international or domestic. An arbitration is international if the parties to an arbitration agreement have their places of business in different countries or if the place of arbitration or a substantial part of the obligations of the commercial relationship, is in a country outside that of the place of business of the parties.³

The legislative framework for international arbitration in Australia is the International Arbitration Act 1974 (Cth) (IAA) which is based on the UNCITRAL Model Law. The IAA provides legislative support for the conduct of arbitration proceedings and for enforcing arbitration agreements and arbitration awards.

Why choose arbitration?

There are a number of key features which make international arbitration appealing but, by far, one of the most important features is the enforceability of the arbitration award. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) provides common legislative standards for the recognition and enforcement of arbitration agreements and awards.

At the time of writing (November 2017), 157 countries are party to the New York Convention, meaning that if your client obtains an arbitration award in a ‘convention country’ (that is, a country party to the New York Convention), that award should be capable of enforcement in the courts of the 157 convention countries.

Figure 1: Status Map — Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958)⁴

Figure 2: Countries with which Australia has reciprocal arrangements for the registration of foreign judgments.

As can be seen in the images above, a comparison of the 157 jurisdictions that are party to the New York Convention against the 36 countries with which Australia has reciprocal recognition of court judgments, demonstrates why enforceability is one of the most important features of international arbitration.

Another key feature of arbitration is its confidentiality. Because arbitration is a private dispute resolution mechanism, it is generally accepted that it is also confidential. This means that if your client finds themselves in a contested legal battle, they do not need to have dirty laundry aired in court where media or any other interested member of the public can observe the proceedings. This can be a very attractive feature to protect your client’s reputation if a dispute does arise.

Another feature that has already been alluded to in the introduction is the ability to avoid litigation in a foreign jurisdiction. By choosing arbitration, parties can agree to have their disputes determined under the supervision of the law of a neutral third country and avoid encounters with unfamiliar legal systems.

How to choose arbitration

To refer disputes to arbitration, parties should include a simple arbitration clause in their agreement which refers all disputes to arbitration. The other option is for parties to agree to refer existing disputes to arbitration by way of a ‘submission agreement’.⁵ Some of the basic elements to set out in the arbitration clause or submission agreement can include:

1. selection of arbitration rules for the conduct of the arbitration
2. selection of an arbitration institute to administer the arbitral process (typically the same institute that has published the selected arbitration rules)
3. number of arbitrators — typically one or three
4. language of the arbitration; and
5. seat of the arbitration — the seat of the arbitration is the jurisdiction which oversees the process of the arbitration.

In addition to the basic elements set out above, the parties to a contract can be creative and tailor an arbitration process that is efficient and cost effective. For instance, they may decide to place limits on disclosure, hearing time and even recoverability of legal costs. Generally, the more thought given to the arbitration clause at the beginning, the better and more appropriate the dispute resolution process will be should it be needed.

A governing law clause, which may or may not adopt the same law as the law of the seat, should also be included in the contract. The governing law will be the law that applies to the substance of the dispute.

It is important to note that if your client selects arbitration as its final and binding dispute resolution process, there should not be an exclusive jurisdiction clause in the contract as that conflicts with the parties’ choice of arbitration. If a party insists on a jurisdiction clause, ensure it is a non-exclusive jurisdiction clause so that the referral to arbitration does not contradict the jurisdiction clause.

How to enforce an arbitration agreement

If your client has an arbitration agreement and another party attempts to commence court proceedings, it should be relatively straightforward to apply for a stay of that action and have the matter referred to arbitration. Section 7(2) of the IAA requires a court to stay proceedings that involve the determination of a matter that, in pursuance of the arbitration agreement, is capable of settlement by arbitration. Australian courts are known for holding parties to their bargain and will take a ‘broad, liberal and flexible approach’ to interpreting language used in a dispute resolution clause.⁶

However, pursuant to section 7(5), a court must not refer a dispute to arbitration if the arbitration agreement is null and void, inoperative or incapable of being performed.

Neither of these provisions allows the courts to exercise discretion in relation to the enforcement of an arbitration agreement.

Courts in other convention countries should have similar legislation, which would allow for an equally simple process to stay litigation where a matter should be referred to arbitration in pursuance of an arbitration agreement. To enforce an arbitration agreement overseas, consideration of the relevant arbitration laws would be required.

How to enforce an arbitral award

Similarly to the enforcement of an arbitration agreement, the process of enforcing an award in Australia should also be straightforward, with enforcement being the default position subject to certain limited exceptions. Further, in contrast to the enforcement of an arbitration agreement, the court’s power to refuse to enforce an award is discretionary. The court may only refuse to enforce an award if a party proves to the satisfaction of the court that:⁷

1. a party was under some incapacity at the time the arbitration agreement was made
2. the arbitration agreement is not valid under the law of the agreement
3. a party was not given proper notice of the arbitration proceedings or was otherwise unable to present its case
4. the award deals with a subject matter beyond the scope of the arbitration agreement
5. the composition of the arbitral tribunal was not in accordance with arbitration agreement
6. the award is not yet binding on the parties or has been set aside in the law of the country in which it was made
7. the subject matter is not capable of settlement by arbitration; or
8. to enforce the award would be contrary to public policy.

The IAA further clarifies what would be contrary to public policy by stating that the enforcement of a foreign award would be contrary to public policy if the making of the award was affected by fraud or corruption, or a breach of the rules of natural justice occurred in connection with the making of the award.

Again, foreign convention countries should have similar legislation but consideration of the particular arbitration laws of the relevant jurisdiction would be necessary when enforcing an arbitration award overseas.

When it comes to enforcement, there are a number of strategic matters that a client needs to consider with its legal advisors. Obviously the enforcement process must take place in a jurisdiction where the award debtor has sufficient assets to meet the award. In addition, the client should consider bringing freezing orders to ensure that assets are not relocated and it is often best that such applications be brought in appropriate courts and on an ex parte basis. Arbitration legislation based on the UNCITRAL Model Law will generally provide for these interim measures.

What now?

The dispute resolution provisions of contracts involving a foreign element need to be carefully considered. All too often, such clauses are given inadequate attention during the negotiation of contracts, and boilerplate jurisdiction clauses are inserted, which will destine any dispute to litigation in the nominated jurisdiction.

Parties to such contracts would be better served by nominating international arbitration as their dispute resolution mechanism in any contract with foreign entities or pursuant to which the substantial obligations are to be performed overseas. The choice of forum and process is in your client’s hands when arbitration is selected as opposed to such matters being potentially dictated by a foreign court.

This article was first published on the Queensland Law Society Law Talk blog on Medium in December 2017, and has stood the test of time as one of the most popular articles on that blog.

Footnotes
¹ Footnote to Article 1(1) of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006 (Model Law).
² Footnote to Article 1(1) of the UNCITRAL Model Law.
³ Article 1(3) of the Model Law.
⁴ United Nations Commission on International Trade Law, Status Map — Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) 2017 uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status_map.html.
⁵ Rashda Rana and Michelle Sanson, International Commercial Arbitration (Thomson Reuters, 2011) 32.
⁶ Fitzpatrick v Emerald Grain Pty Ltd [2017] WASC 206.
⁷ IAA s8.