In this article, we discuss questions frequently asked by Japanese and other clients about specifying international arbitration in their English-language contract dispute resolution clauses: what are the pros and cons of arbitration compared with litigation?; what is the seat (or place) of arbitration and which seats are popular (and why)?; and what is the role of arbitral institutions and which institutions are popular (and why)?  Below we address each of these questions.

 

What are the Pros and Cons of Arbitration Compared with Litigation?

 In a prior article, we introduced threshold factors that companies should consider when deciding whether to include arbitration or litigation in their contract’s dispute resolution clause.  A key factor in this respect is whether the companies come from different jurisdictions and their contract thus involves a cross-border commercial transaction (or transactions), in which case the companies might prefer a neutral international arbitral institution rather than the courts of their counterparties’ countries to resolve any dispute that arises.

 In this regard, arbitration offers companies the ability to compromise when negotiating their dispute resolution clause and the opportunity to be heard by an impartial tribunal in the event of a dispute.  Of course, the courts of the contract parties’ home countries might well be independent and fair.  Nonetheless, companies may have a lingering perception that their counterparties’ courts could be biased (or are otherwise inconvenient), and the alternative of international arbitration gives companies the possibility of easing this concern.    

 Perhaps the most widely acknowledged advantage of arbitration over litigation concerns the international enforceability of arbitral awards (a very important issue when a party that loses an arbitration fails to comply voluntarily with the award and the other party must seek to enforce the award).  This advantage is due principally to the 1958 Convention on the Recognition and Enforceability of Foreign Arbitral Awards (commonly called the New York Convention), a treaty signed by more than 160 countries that provides for relatively efficient procedures to recognize and enforce arbitral awards issued in cross-border disputes, as well as limited, exclusive grounds to refuse such recognition and enforcement. 

 As such, the New York Convention constitutes an international treaty framework that facilitates the enforcement of arbitral awards on a genuinely global scale (New York Convention countries comprise over 80 percent of the world’s countries), and it has done so with impressive success for decades.  Currently, there is no practical equivalent to the New York Convention for cross-border court judgments, which makes their enforcement around the world more uncertain and difficult.¹  Thus, while enforcing a cross-border arbitral award is not an effortless task, generally it is easier and more predictable than seeking to enforce a court judgment across international borders. 

 In addition, whereas litigation typically is subject to prescribed, detailed procedural rules, arbitration offers parties greater flexibility to determine the arbitral process in accordance with their preferences and needs, including as to the arbitration schedule, number of party submissions, extent of document disclosure, and oral hearing(s).  Significantly, parties also can have input on selecting the arbitrator(s): where the tribunal consists of one arbitrator (usually in smaller disputes), the parties can attempt to agree on this individual, failing which the arbitral institution (or national court) will decide; and where the tribunal consists of three arbitrators (usually for larger disputes), each party can choose one arbitrator, with the two co-arbitrators selecting the third arbitrator, failing which again the arbitral institution (or national court) will decide.  A particular advantage here is that, in arbitration, it is possible for parties to choose arbitrators who are familiar with international commercial disputes and who may have certain kinds of experience or skills which make them well suited to adjudicate the dispute in question.  In litigation, judges often are randomly assigned to cases and may not have a great deal of experience in handling cross-border disputes.

 Arbitration affords companies other benefits as well.  While litigation is a public procedure, arbitration is a private process that usually allows parties to keep confidential the fact of their dispute and commercial, technical, or other information about the dispute.  A party also may commence an international arbitration simply by sending the other party (or the arbitral institution) the initial complaint (called a request); in cross-border litigation, sending a complaint likely will be subject to time-consuming requirements of the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (Hague Service Convention).

 There are, however, some downsides in international arbitration as compared with cross-border litigation.  Although it is easy to commence an arbitration, as noted above, it can take several months for the tribunal to be constituted (especially if there are three arbitrators), whereas in litigation the judge typically will be assigned quickly.  The fee to file a complaint in court generally is lower than the fees charged by arbitral institutions to file a request for arbitration.  In addition, while parties do not pay judges’ salaries, in arbitration parties are responsible for paying the fees of arbitrators (as well as certain expenses of the arbitration such as renting hearing rooms).   

 As regards costs more broadly, it used to be said that arbitration was a cheaper and faster method of resolving a dispute than litigation.  Today, however, most informed practitioners (including this author) would take a more nuanced perspective.  Arbitration can sometimes offer parties the prospect of a relatively speedy resolution of their dispute (for example, if they agree to use “expedited procedures” that are now common in many international arbitral rules), but arbitration is not necessarily faster than litigation.  Similarly, arbitration may allow parties the opportunity to tailor their dispute resolution process so as to lessen costs (for example, by setting limits on the length of submissions or the scope of document disclosure).  The reality, however, is that in a dispute – whether arbitration or litigation – parties often wish to afford themselves as much procedural latitude as they think necessary in order to prevail, and this effort rarely accords with the goal of reducing costs.  In short, whether arbitration or litigation is a less or more expensive, faster or slower process will largely depend, case by case, on the nature of the dispute and the behavior of parties and their counsel.

 

What Is the Arbitral Seat and Which Seats are Popular (and Why)?

 As noted previously, if companies agree on arbitration to resolve any disputes that arise from their contract, they should always identify in their dispute resolution clause the seat of the arbitration and the designated institutional arbitration rules.  In this section we will discuss the importance of the seat selection and popular seats.

 In a dispute resolution clause, if companies provide that Tokyo, Japan will be the arbitral seat, this means that Tokyo, Japan is the legal place of arbitration.  In turn, “legal place” refers to the country: (i) where the arbitral award is deemed to have been issued under the New York Convention, (ii) whose national arbitral legislation will apply to the arbitration; and (iii) whose courts will have supervisory authority over the arbitration.  In other words, “seat” is a legal term of art, and it does not mean the physical place where the arbitration is held.  That said, in most arbitrations the hearing(s) will be conducted in the designated seat.

 The significance of the seat turns on its characteristics as defined above.  First, as already explained, the New York Convention establishes an international treaty framework that facilitates the enforcement of foreign arbitral awards in over 160 countries.  Accordingly, in order to be able to take advantage of the New York Convention’s provisions to enforce foreign arbitral awards in those countries, the seat needs to be a New York Convention signatory.  Companies that are negotiating their contract’s dispute resolution clause will thus want to confirm that their seat is a New York Convention signatory and, if possible, avoid designating a seat that is not a signatory (e.g., Taiwan in East Asia, Turkmenistan in Central Asia, and Suriname in South America, as well as Libya, Equatorial Guinea, Ethiopia, Namibia, and a number of other companies in Africa; a map of the New York Convention signatories and non-signatories can be found at here.

 Second, because the New York Convention generally is not considered to be self-executing (that is, after being signed by a country the New York Convention is not automatically applicable but needs that country to enact domestic legislation to implement its provisions), it is very important that the seat has adopted modern national arbitral legislation.  Such legislation will have incorporated the New York Convention’s standards of review for foreign arbitral awards in enforcement actions, as well as in any actions seeking to set aside arbitral awards made in the seat itself.  Further, such legislation also will contain terms setting out, among other things, basic requirements for the fair conduct of the arbitral process and arbitrator powers.   

 Further, while modern national arbitration legislation provides that courts are to dismiss or stay any actions before them that are subject to valid arbitration agreements and refer the matter to arbitration, such legislation often also sets out the appropriate scope of national courts’ authority to act in support of arbitrations when either parties or arbitral tribunals so request.  For instance, sometimes parties in an arbitration need a court’s assistance in providing interim (or temporary) relief measures, for example to prevent a party from removing assets from a bank account or to compel a party to continue to perform certain of its contractual obligations.  In addition, parties or tribunals also may benefit from the court’s help in the taking of evidence, for example, in compelling a witness to appear at an arbitral hearing. 

 Notably, however, modern national arbitration legislation typically also will make clear that such court actions must be expressly specified in the legislation itself, and that national courts are not to take other actions concerning arbitrations that the legislation does not expressly permit.  As such, this legislation seeks to ensure that courts do not interfere with the arbitral proceedings or outcome.  In short, a good seat will have not only modern arbitration legislation.  A good seat also will have courts that understand their role in supporting, but not inappropriately interfering with, arbitrations in accordance with that legislation.

 Which arbitral seats, then, are especially well regarded?  Surveys of participants in international arbitration have repeatedly found that the five preferred seats are London, Paris, Singapore, Hong Kong, and Geneva, followed by New York and Stockholm (São Paulo comes in eighth place).²  Survey respondents report that their preferences are based on these seats’ “general reputation” and, more particularly, their “formal legal infrastructure,” including their national arbitration legislation, the impartiality of the seats’ judiciaries, and their record of enforcing arbitral awards.  According to the survey’s authors: these latter reasons “suggest that, by looking at the systemic legal traits of a seat, arbitration users will prefer a certain seat if the local legal apparatus provides them with sufficient assurances that they will be treated neutrally and impartially by its courts and that their recourse to arbitration will be unhindered.”³

 In addition to formal legal infrastructure, companies negotiating which seat to include in their contract’s dispute resolution clause also may wish to consider other factors, such as geographic location.  For example, if the commercial transaction at issue relates to Southeast Asia, Singapore may be suitable.  If the contract parties are Japanese and American, a Europe-based seat such as Paris or London might offer an attractive (and perhaps roughly equidistant) option.  Besides geographic location, when considering their choice of arbitral seat companies also may wish to avoid certain countries with burdensome visa or immigration requirements.

 In recent years, China has endeavored to provide an environment for arbitration that accords with international expectations and standards.  For example, China, a New York Convention signatory, has tried to ensure that its judiciary refuses enforcement of foreign arbitral awards based only on the limited, exclusive grounds stipulated in the Convention with a system of judicial review.  Under this system, if a lower court decides not to enforce a foreign arbitral award, that decision must be submitted for review by higher courts all the way up to the country’s supreme court.  Nonetheless, challenges remain.  For instance, many countries where arbitrations are seated do not restrict which institutional arbitral rules may be used (e.g., the Singapore International Arbitration Centre rules for an arbitration seated in Japan).  Under China’s arbitration law, however, there remains uncertainty whether non-Chinese arbitral institutions are permitted to administer arbitrations seated in China, meaning that companies which select Beijing, Shanghai, or another location in China as their seat would need to conduct any arbitration under the rules of a Chinese institution.  This is a constraint on party autonomy generally and also may influence aspects of the arbitral procedure (e.g., restrict parties’ choice of arbitrators or require the parties to conduct the arbitral proceedings in Chinese).

 

What Is the Role of Arbitral Institutions and Which Institutions are Popular (and Why)?

 As noted, in addition to specifying the seat companies should identify the designated institutional arbitration rules in their dispute resolution clause.  

 To be clear at the outset, arbitral institutions do not evaluate the merits of parties’ disputes or adjudicate arbitrations; this role belongs to the arbitrator(s).  Rather, arbitral institutions provide parties with rules that, among other things, set out instructions for commencing the arbitration, procedures for the selection of arbitrators, and broad guidelines about the conduct of the arbitral proceedings.  Many institutional rules also offer parties the possibility of using expedited procedures if they wish to resolve their dispute more quickly, as well as appointing a so-called “emergency” arbitrator if there is an urgent need for an interim decision-maker at the very beginning of an arbitration before the tribunal has been constituted.  Further, arbitral institutions generally have trained staff who can answer questions and otherwise assist parties.  Some institutions also exercise a “quality-control” function by reviewing draft arbitral awards before they are delivered to parties to check points of form and correct any internal inconsistences (the institutions, however, do not review whether the tribunal’s decisions on the substantive merits of the dispute are correct or not). 

 Overall, while each arbitral institution has its own set of rules, the rules among various institutions have become quite similar in recent years.  Many arbitral institutions have endeavored to update their rules relatively often, and one institution will take note of any upgrades in the rules of another institution and then adopt those changes in its own revised rules.  In this way, there has been a process of harmonization and improvement in institutional arbitral rules.

 Which arbitral institutions are particularly favored by uses of international arbitration?  In the same surveys as discussed above, respondents have repeatedly ranked the Paris-based International Chamber of Commerce and the London-based London Court of International Arbitration most highly.  In recent years, these two institutions have been followed by the Singapore International Arbitration Centre and the Hong Kong International Arbitration Centre.  In the most recent survey, the Arbitration Institute of the Stockholm Chamber of Commerce came next, followed by the International Centre for Dispute Resolution-American Arbitration Association in New York.⁴  The respondents indicated that their assessment was based especially on the “general reputation” of the institutions (and respondents’ prior experience with the institutions), the efficiency of the institutions’ administration and staff, the neutrality and “internationalism” of the institutions, and the institutions’ access to a qualified pool of arbitrator candidates.⁵ 

 Of course, there are other capable, experienced arbitral institutions that companies may select.  Among these are the Swiss Chambers’ Arbitration Institution, the Vienna International Arbitral Centre, the Korea Commercial Arbitration Board, and the Japan Commercial Arbitration Association. 

 

Concluding Thoughts

 The choice between arbitration and litigation, along with selection of the arbitral seat and institutional rules, will of course always be subject to the bargaining in which companies engage when they negotiate the dispute resolution clause of their contract.  Thus, companies may not be able fully to control whether arbitration or litigation is chosen, or what seat and arbitral institution are selected.  Nonetheless, assuming companies will have some latitude to negotiate and influence these matters in their cross-border transactions, the foregoing is meant to offer guidance about certain of the potential benefits of international arbitration, as well as basic criteria that can help guide companies when selecting the seat of arbitration and arbitral institution.

 

Comparison Table of Pros and Cons of Cross-Border Litigation, International Arbitration, and International Mediation⁶

Cross-Border Litigation International Arbitration International Mediation

Pros

- Procedural certainty

- Reasonable court fee and no additional fees for judges

- Effective power to sanction misbehavior by litigation parties and compel action by third parties (i.e., individuals or entities not party to the litigation)

- Summary judgment (e.g., in US)

- International enforceability of awards

- Flexible and usually confidential procedure

- Ability to select arbitrators with certain experience or skills

- Easy service of process

- Often flexible and fair allocation of legal costs

- Relatively low-cost, low-risk, and simple alternative to litigation or arbitration

- May allow parties to craft settlement based on commercial and legal concerns

- Confidential process

- May help parties maintain business relationship

Cons

- Uncertain international enforceability of judgments

- Lack of judicial neutrality in some countries

- Usually not confidential process

- Slow service of process

- Localized procedural rules

- Institutional fee and arbitrator fees

- Time required to constitute arbitral tribunal

- Relative lack of power to sanction misbehavior by parties

- Lack of power to compel action by third parties

- Non-binding process unless and until parties agree to settle dispute

- Some delay and cost if no settlement achieved

- Some risk of information disclosure to counterparty

 

 

Click here for Japanese translation article.


¹ In 2019, a treaty, the Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters, was concluded with the goal of easing the cross-border enforcement of court judgments.  At present, however, only one country has signed this convention and it has not yet come into force.
² 2018 International Arbitration Survey: The Evolution of International Arbitration, Queen Mary/University of London and White & Case, p. 9.  The same seven seats occupied the top spots in a 2015 survey, and five of the seven also were among the leaders in a 2010 survey.  The 2018 survey results were based on responses from nearly 1000 individuals around the world, including private practitioners, full-time arbitrators, and in-house counsel.
³ Id., p. 10.
⁴ Id., p. 13.  Readers will observe that the leading arbitral institutions are located in the top-ranked seats of arbitration.  It bears mentioning, however, that the seat and institution are entirely distinct.  Thus, in their dispute resolution clause parties generally may choose a seat of arbitration in one jurisdiction (e.g., Singapore) and an arbitral institution from a different jurisdiction (e.g., the International Chamber of Commerce).  As discussed above, however, China is an exception in this respect.
⁵ Id., p. 14.
⁶ For discussion of international mediation, please see (https://zelojapan.com/en/4740).

 

The information provided in this article does not, and is not intended to, constitute legal advice and is for general informational purposes only. Readers of this article should contact an attorney to obtain advice with respect to any particular legal matter.