BOARD MEMO 2022
International Commercial Arbitration – Managing the Boom in Cross-Border Disputes
In 2021 we saw an unprecedented volume of cross-border disputes, with all the major institutions that administer international arbitrations reporting record numbers of cases. This trend will almost certainly continue in 2022 and beyond, driven by high levels of M&A and other dealmaking that form new cross-border relationships, some percentage of which will not proceed as planned, and ongoing disruptions in global supply chains that compromise parties’ abilities to perform their contractual obligations.
These cross-border disputes put the spotlight on the dispute resolution clauses of underlying contracts. We regularly see counterparties’ negotiating dynamics altered by whether a dispute resolution clause provides an efficient path to obtaining and enforcing an award. Poorly drafted dispute resolution clauses make it harder for parties to enforce their contractual bargain and resolve disputes efficiently.
To ensure that their companies are well positioned to enforce their contractual rights, boards should consider whether cross-border agreements address these three factors.
1. Include international arbitration provisions in agreements for cross-border deals
National courts can be the best option for resolving a domestic dispute. In a cross-border dispute, however, a court judgment can be difficult to enforce overseas if a foreign counterparty does not voluntarily comply. International arbitration awards do not have the same enforcement risk. Awards are readily enforceable pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention, which almost 170 countries have ratified including all the major economies. The Convention provides that courts can only deny enforcement on limited grounds such as arbitrator bias or certain breaches of due process, which rarely occur. Court judgments are not governed by a treaty similar to the New York Convention and, as a result, enforcing court judgements exposes parties to local laws that may subject foreign judgments to lengthy and varied levels of review. For this reason alone, many companies consider it essential to include international arbitration clauses in contracts in cross-border deals.
2. Select a reliable seat of arbitration
The seat of arbitration is sometimes misunderstood to be a point of convenience that the parties select based on where they would like to meet to resolve a dispute. However, it has far greater importance than this. The courts at the seat of the arbitration typically are the only courts that have the authority to set aside an arbitration award. That judicial review usually will be under the procedure and limited grounds allowed by the New York Convention as described above, but it still is important to select a seat that has courts that have a well-established record of faithfully applying the Convention. The most common arbitral seats meet these criteria and include New York, London, Paris, Singapore and Hong Kong. Selecting one of these seats of arbitration helps to ensure that the arbitral process ends with an award that is readily enforceable around the world.
3. Consider requiring the confidentiality of any proceedings
Unlike litigation in national courts, where dockets and hearings typically are open to the public (including competitors and reporters), the pleadings, evidence, and the very existence of an arbitration can be kept confidential, subject to limited exceptions such as disclosures required by securities regulators. However, confidentiality is not automatic under all arbitration rules or in all arbitral seats. As a result, companies that value confidentiality, particularly those with technology, know-how or other commercial information that they would not want to become public, should consider including a confidentiality provision in any arbitration clause. Confidentiality can be agreed once a dispute arises, though if one party values confidentiality more than the other, the absence of a clause will influence negotiating dynamics.
Key takeaways for boards
We are seeing an unprecedented wave of cross-border disputes fueled by an uptick in dealmaking as well as the ongoing global supply chain crisis. To position themselves to effectively enforce cross-border agreements, companies should consider including in those agreements dispute resolution clauses that:
Provide that disputes be resolved in international arbitration rather than national courts. Arbitration results in an award that, unlike a court judgment, can be readily enforced anywhere in the world with limited review by local courts;
Select a well-established seat of arbitration such as New York, London, Paris, Singapore, or Hong Kong. In these venues, the courts reliably apply the New York Convention to protect favorable awards from being set aside; and
Require the confidentiality of any proceedings to protect commercially sensitive information and reduce reputational risk.