Articles

THE ADVANTAGE OF ARBITRATION IN INTERNATIONAL BUSINESS DEALS

By Seymour J. Mansfield

EDITOR'S NOTE: Seymour Mansfield, a shareholder in Mansfield Tanick & Cohen, is an Executive Committee member of Lawyers Associated Worldwide, an efficient and proficient group of over sixty independent commercial law firms located around the world dedicated to providing fast and reliable access to local and international legal advice, which has become a prerequisite for business success. Mr. Mansfield has represented clients in disputes and transactions involving parties and assets worldwide, and offers a few tips to better take advantage of the global opportunities that permeate our new, flat world.

How to do business in a flat world?

In international transactions, as in domestic ones, agreements entered into, whatever their form or nature, will have twin purposes: first, they will spell out the rights, duties, commitments, and roles of the parties. Second, they must protect the parties' interests in the event of a dispute.

In international transactions, the need for due diligence is ever more crucial. A little investment before inking a contract can save millions later on. This due diligence, as will be apparent later, should include a careful review of the location of your potential business partner's assets and the judicious drafting of an arbitration clause. It starts even earlier however, with a legal due process of your interlocutor's legal environment. The former will help you determine just "what's in your contract," the latter how to protect your interests under that contract.

What's in your contract?

We are intuitively used to a so-called "Common law" system of law - but this system is limited to the United States and most of the British Commonwealth. Only this part of the world takes the very formal approach to contracting that we, both as lawyers and businesspeople are used to. To us, a deal is not a deal until both parties have signed on the bottom line. It is permissible to withdraw at any time, even after "agreeing to agree."

In contrast, in "Civil law" countries - in other words, most of the rest of the world - parties operate differently. Terms put to paper may nonetheless be binding before they are signed on, even though we might not think that they are for lack of execution by the parties. Indeed, groundwork or expressions of intent may be binding in a Civil law country's Tribunal, and must therefore be entered into cautiously. In short, your legal due diligence should start before negotiations do.

Another key difference between Civil and Common law countries - is the concept of "consideration." In the United States, a gratuitous promise is not binding. It becomes binding if the other side gives something in exchange, what the Common law calls consideration. But in Civil law countries, gratuitous promises will often be binding, and enforced in court.

The legal setting itself may be confusing. For instance, few if any countries other than the United States use juries for civil disputes. Civil law judges play a much more active role during trial and routinely question the parties or witnesses.

One way to counter this looming foreign environment, and to protect your rights under a business contract, is to rely on international arbitration as a method of dispute resolution. This is increasingly considered as the most efficient way to enforce a contract - and to collect on a favorable resolution.

How to enforce your contract - and collect?

Judicial Decision

There is no disputing that enforcement of an international contract, in case of dispute, gives rise to additional complications compared to a domestic one. This is especially true if the adjudication of the case needs to be obtained in front of a foreign court of law. Even starting a lawsuit may be difficult. There are about 350 countries in the world, but only about 65 (including the United States) are members of the Hague Convention on the Service [of civil process] Abroad. For business deals in those countries, access to the local courts is effective through the filing of a lawsuit. However, this filing will likely be complicated, costly, and time consuming. For example, service by international mail is not possible. Instead, a plaintiff must serve the opposing party through the designated governmental authority (in the U.S., the Department of Justice and specifically the U.S. Marshall) and by using specific forms adopted by the member states and labeled Request of Service Abroad of Judicial Documents. The time awarded to a defendant to answer such a lawsuit is much greater than it would be in a domestic civil action. Additionally, all papers must be translated into the recipient nation's official language, creating additional costs and difficulties.

Arbitral Adjudication

Ensuring access to a quasi judicial process, namely international arbitration, is therefore often the recommended course of action. Furthermore, also it is available in countries which are not members of the Hague Convention.

This can be achieved by including an international arbitration clause in the operative contract. This clause will set forth in advance of forum (usually neutral) and applicable law to be used in arbitration. Most importantly, the arbitration clause will be given effect in virtually all countries in the United Nations, so long as the arbitration clause is consistent with UNCITRAL's (the United Nations Commission on International Trade Law) arbitration rules.

Arbitral adjudication will not address necessarily collection issues, as only about half the UN's member-states have signed the New York Convention of the enforcement of arbitral awards. However, an UNCITRAL arbitration clause will go a long way to offer protection for transactions with parties from, or involving assets in, foreign countries.

To avail yourself of this protection, the parties to the international contract need to agree in advance to submit potential disputes to UNCITRAL arbitration. This is where careful drafting becomes ever more critical. The arbitration clause should set forth clearly and unambiguously the manner of the arbitration, including the number of arbitrators on the panel, the pool of arbitrators from which to choose and the language to be used in the proceedings, in addition to the traditional contractual terms regarding forum and choice of law.

Additional language may be advisable in the case of international contracts, and the parties may want to include a waiver of sovereignty defenses and agreements on discovery rules or the roles of juries. UNCITRAL's rules provide default provisions, but with parties that may come from different cultures generally and legal cultures in particular, it is beneficial to specifically contract for rights that you believe would be uniquely beneficial.

Enforcing an arbitral or judicial award

Another advantage of arbitration is that enforcement of and collection on judicial awards is virtually impossible. Only a handful of countries, which does not include the United States, China, Russia, the UK nor most of the world's major trading countries, have signed the Hague Convention on the enforcement of foreign judgments (referred hereinafter as the Second Hague Convention, in distinction to the Hague Convention on the Service [of civil process] Abroad). As between signatories, "[a] decision rendered in one of the Contracting States shall be entitled to recognition and enforcement in another Contracting State." As good as that sounds, it is but words on papers, as virtually no major nation has ratified the Second Hague Convention. Indeed, as the U.S. Department of Commerce bluntly concedes, the United States, the largest single national economy, "is not a party to any international convention governing the recognition and enforcement of foreign judgments." Therefore, in the United States, as in other countries, recognition and collection of a foreign judgment will depend on the local laws on that topic.

While access to arbitral adjudicative proceedings is no guarantee of collection on an award either, it provides a more solid footing. As mentioned earlier, about 150 countries (half the UN's members) have signed the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly referred to as the New York Convention. Those signatories do include China, Russia, nearly all of Western Europe, and the United States. It also includes most of Eastern Europe, among the world's emerging economies.

On its face, the New York Convention states that each signatory "shall recognize arbitral awards as binding and enforce them." However, it is a valid defense that the terms of the arbitration agreement are "not valid under the law to which the parties have subjected it or ... under the law of the country where the award was made." This is a potent defense, since any nation becomes free to decline to enforce an agreement deemed invalid under the law.

Not only is this a powerful defense, it is but one of seven express defenses permitted by the New York Convention. Others include, for example, defects in due process, or issues with the scope of the agreement or the finality of the award.

Thus, though international arbitration awards are more widely recognized and enforced in foreign jurisdictions than foreign judgments, pitfalls remain. For instance, a poorly chosen arbitration forum may leave the prevailing party with a judgment that is unenforceable in the country where the opposing party's assets are located. It follows that the place of arbitration and the negotiations of the contract at the frontend become ever more crucial.

Collectability issues can be resolved in part by:

•1) choosing a place of arbitration and an applicable law that recognize and enforce arbitral judgments; and

•2) contractually ensuring that the other party and will keep assets in the jurisdiction of the arbitral tribunal.

This process starts early, with due diligence to determine where the party's assets are located and their value, as well as the attitude of several possible legal systems toward arbitral awards and due process.

Opportunities Abound

Opportunities abound worldwide. Mansfield Tanick & Cohen, as a member of Lawyers Associated Worldwide, can draw from resources across the globe and expertise within its walls to protect its clients and enforce the terms of their deals on a global scale. We are an efficient and intricate part of the flat world.