Picture this: an international arbitration, millions of dollars at stake; an expert is called to give evidence on damages right at the end of the hearing. This is what he says happened: ‘Everyone had flown miles to come to the arbitration. I was the last witness. One of the counsel stood up and said that he had an ex-parte order from a local court that if I didn’t stop my evidence immediately I would be in contempt of court. When the arbitrator tried to intervene to find a practical solution he was told that if the arbitration continued, his party would issue contempt of court proceedings and the punishment could be a fine or criminal penalties. And that was that.’
This is a true story of what can happen when local laws and a court in a particular seat of arbitration ‘get involved’ in the arbitration itself. The expert in question was Howard Rosen, a senior managing director at FTI Consulting, the business advisory firm, who has given damages testimony at numerous arbitrations. He says: ‘For me, this demonstrates some very real dangers when choosing a seat in international commercial disputes.’
Alongside the potential threat of local interference, there are less obvious differences that need to be considered when choosing a seat and specific rules by which the arbitration will be framed. Very often, however, general counsel is picking up disputes from contracts written a decade previously and will not have control over the seat or the rules.
What matters at that point are the specific characteristics of the seat and rules with which they have been landed. It also means focusing on the appointment of the arbitrator and which individual would be best for the party and for the particular dispute. As international arbitration continues to grow as a method of dispute resolution, inside knowledge on all these issues is critical.
When parties to an international contract are considering the arbitration clause these days they have a plethora of seats to choose from. Where once a party opted for London, Paris, New York or Stockholm, nowadays it must consider and negotiate on arbitration centres in a wide range of cities and jurisdictions: such as Shanghai, Hong Kong, Singapore, Dubai, Qatar and Russia.
In a 2010 survey, Queen Mary’s (part of the University of London) School of International Arbitration and law firm White & Case talked to general counsel at some of the world’s largest international corporations about their preferred seat and rules. They found that the seat of London was still predominant by quite a wide margin: it was the choice of 32% of general counsel, which does not sound so high until you find out that the next most popular (Geneva) only scored 9%.
Practitioners are not surprised by this and cite the language factor (commentators estimate that around three-quarters of arbitrations are in English). It may also be that the international contract being negotiated is subject to English law and therefore an English law seat is logical.
London is also where many arbitration practitioners learn their trade, says Professor Loukas Mistelis, director at Queen Mary’s international arbitration school: ‘England has been educating students from all over the world in international arbitration since the early 1980s. There are 2,000 students in London alone at the moment in postgraduate study and these include foreign lawyers who have studied in the UK and know about the UK system. So when they practise they are more likely to advise clients to choose to arbitrate here.’
London also has a proven track record when it comes to arbitration, together with a reputation for neutrality. But this can also be said of many of the so-called ‘developed’ seats (that is, seats in cities in developed countries, such as Paris, New York, Geneva and Stockholm). Perhaps the real distinctions are to be found more between developed seats and developing country seats.
Most seats in developed countries have arbitration-friendly laws and courts; understand the demands of international business disputes; and have become homogenised in their approach. Contrast this with the issues that some firms have encountered in arbitrations held in China, for example. Paul Mitchard QC, head of the asian litigation and arbitration group at Skadden, Arps, Slate, Meagher and Flom, explains: ‘At the moment, law firms have some difficulty in recommending that their clients adopt CIETAC [China International Economic and Trade Arbitration Commission] arbitration clauses in international contracts. For some years, there have been real concerns about lack of transparency and in finding out the overall experience of parties, other than anecdotally, in what are confidential proceedings. Though this is changing, there is still a lack of knowledge about awards, particularly the potential for bias, and the level of detail.’
Mitchard believes some concerns have been addressed by the CIETAC Arbitration Rules 2012, which came into force this month: ‘For example, the tendency to want to merge mediation and arbitration in their procedures was an issue, as the arbitrator would also act as mediator. This may be a good idea in theory, but the problem is that, to make mediation work most effectively and to bring forward settlement, you may well have to disclose prejudicial information to the arbitrator in his role as mediator, which may show weaknesses in your party’s case. In practice, you would not do this because, if the mediation fails, the tribunal is aware of these weaknesses. So the mediation element of the process becomes less effective. Under the new rules the parties can jointly opt not to involve the tribunal in the mediation and instead agree to CIETAC conducting it. However, it is not clear who exactly will act as mediator in these circumstances, so the effectiveness of the amendment remains to be seen.’
As evidenced by the contempt of court example, however, the greatest problem in less tried-and-tested seats is the interplay between an international arbitration and local laws. Parties need advice: first, on the ability of local laws to interfere with the arbitration; and second, on whether that interference is a good thing or not.
In the UK, interference by the commercial court is a real risk and happens quite a lot but is seen, on the whole, as a good thing. One example is in obtaining injunctions to prevent a party from transferring assets to avoid enforcement, as Michael Davison, head of the international arbitration practice at Hogan Lovells, explains: ‘Quite often in a dispute, one of the party’s assets are held offshore in a shell company, so you are concerned about whether you will get your award, because as soon the arbitration starts they may transfer out the assets. The arbitral panel can make an order not to transfer the assets, but they can’t punish a party. So you may need to go to the local court to get an injunction to stop the transfer. This is why the London seat is good - because [there is] a reputation for making these types of things possible.’
Interference in courts in other jurisdictions (no lawyer will name names, of course) can be very harmful to the success of an arbitration. Practitioners relate stories of witnesses being arrested by the local court; of lawyers for the party being arrested for practising law in that jurisdiction as a method for ambushing the arbitration; of documents and computers being confiscated by customs; and of courts interfering with the appointment of the arbitrators to play for time to the benefit of one party.
Khawar Qureshi QC, counsel in international arbitration and public international law matters, and chairman of TheCityUK Dispute Resolution and Legal Services Group (which raises the profile of London as a centre of legal excellence), comments: ‘Users and commentators have pointed to issues such as security problems in a particular jurisdiction, blatant and apparent bias on the part of judiciary and party-appointed arbitrators, and the failure of [local] courts to support arbitration - and these are important factors in determining the location of seat.’
But the seat may also be determined during tough contract negotiations; arbitration practitioners express frustration that clauses are too easily traded off at the negotiation stage and so parties end up with difficult arbitrations. Matthew Saunders, joint head of the international arbitration group at DLA Piper, says: ‘Sometimes the issue is not given any thought at all and is the last thing to be negotiated. However, at other times we are brought in to give advice. In these circumstances we often reach agreement with our counterparts on the other side because it is in everyone’s interests that an appropriate seat and rules are chosen.’
Because there are now so many seats to choose from, there is increased competition between them. The Hong Kong International Arbitration Centre has recently changed its rules to make them more attractive to parties in disputes. Witness also the campaign by justice secretary Kenneth Clarke to sell UK legal services, including arbitration, abroad (particularly to the Russians on a recent trip to St Petersburg). In New York there is a concerted effort to improve conditions for arbitrations, including the provision of permanent facilities (as have recently been provided in Singapore with the Maxwell Chambers). Also, institutions are setting up shop in different seats to improve access (the London Court of International Arbitration [LCIA] opened its doors in India, for instance). This should be good news for users in delivering greater cost-effectiveness and faster procedures.
However, practitioners maintain these kinds of issues are not foremost in clients’ minds and what still matters most are proven neutrality, reputation and the prospect of local court interference. So a seat can offer whizzy procedures, cheap rates and logistical solutions, but if there is a concern about fairness, then it will not be popular. Also, parties want to choose somewhere which is not either of their home nations: a US and Russian party will choose London because it is not the national jurisdiction of either party. Mitchard says: ‘Most of all, you don’t want to be in the national courts of the other party because of a perception of the lack of neutrality.’
By contrast, certain deals will simply dictate the seat. If you want to do business in China, you are going to have to defer to the CIETAC rules and one of the regional seats such as Beijing or Shanghai, as Mitchard explains: ‘So many enterprises in China, being state-owned, may well insist that the contract stipulate that arbitration must be in China.’ And the choice of seat is developing along regional lines, as Mitchard adds: ‘In Asia, as a rough rule of thumb, an Indonesian or Indian party may typically choose Singapore, a Chinese party will often want Hong Kong.’
Alongside the seat of arbitration lies the choice of which institution to adopt and therefore by which rules to abide. Sometimes, parties will choose the rules which follow the seat: if you are in London you might follow the LCIA rules, if you are in New York, the American Arbitration Association or International Centre for Dispute Resolution rules. Yet the ICC remains the most popular and has the most widely used rules globally because of their familiarity and safe reputation; it is against the ICC rules that most other rules are measured.
What parties need to weigh up is flexibility versus predictability, says Tim Hill, head of the projects (engineering and construction) group at Hogan Lovells in Asia: ‘It depends on the degree to which you want the process to be controlled or influenced by the regulatory body. For instance, under the ICC rules, the court of the ICC takes an active role in the management of the arbitration. Compare that with the LCIA rules, where it is "light touch" so the arbitral tribunal has principal responsibility for proceedings and there is no oversight.’
One key part of this will be disclosure and the extent to which a party will have to disclose documents which may not support its case. These days, in a huge number of disputes, the IBA’s [International Bar Association] Rules on the Taking of Evidence are adopted, as they are a middle path between US-style disclosure (of the entire ‘kitchen sink’) and other jurisdictions where there is hardly any tradition of disclosure at all. Another element may be time limits and deadlines by which, for instance, arbitrators must be appointed or documents disclosed. The rules are constantly updated to keep the various institutions attractive to their potential users.
But which institution and rules are adopted may also be dictated simply by the negotiating power of the parties, in the same way as seats. This is why the rules of CIETAC or HKIAC may be chosen by a Chinese or Asian party and the rules of DIAC (Dubai International Arbitration Centre) or GCC Commercial Arbitration Centre by a Middle Eastern party.
Though the rules of the chosen institution provide a framework within which the arbitral panel will operate, there is also some flexibility, as Paula Hodges, co-head of international arbitration at Herbert Smith, explains: ‘There is still flexibility within the rules adopted by the parties to tailor the procedure to suit resolution of the particular issues in dispute. In many international arbitrations with parties, counsel and arbitrators from different jurisdictions, a melange of procedures from common law and civil law traditions are brought together to form a bespoke procedure for the arbitration, whether that takes the form of restricted disclosure following the IBA Rules, exchange of memorials consisting of both legal submissions, and evidence or limited time for cross-examination.’
The other element of the arbitration process in which parties can play a role is the appointment of their nominated arbitrator, and by dint of that, a 50% say in the choice of the third panel member. The power of the parties to appoint their arbitrator is one of the cornerstones of the success of international arbitration. They can find an arbitrator who has expertise in their sector, experience in a particular seat and knowledge of the opposing party; indeed, a whole host of informational tools which may improve the party’s chances at the arbitration. Also to be considered is the approach an arbitrator might take in various procedural issues, such as discovery or preferring written witness testimony to extensive cross-examination. And parties seek out arbitrators who are authoritative: ‘You want someone who can exert control and who will take a stand and chop out unnecessary parts of proceedings,’ says Mitchard.
In summary, Mitchard adds: ‘Clients need specialist expertise, because they need knowledge of private international law and enforcement issues, and to be given practical knowledge of the powers of the courts in each seat and the nuances that can arise between them. For instance, until recently, India did not recognise China, and therefore Hong Kong, as countries to which the New York Convention enforcement treaty applied, so a party successful in an arbitration in Hong Kong but where the assets were in India, could have had problems in enforcing an award.’
An understanding of the cultural and political context of a particular seat is also important. This sensibility led DLA Piper to pursue a strategy of deploying its own lawyers with local knowledge in an arbitration as opposed to a ‘fly-in, fly-out’ policy of using arbitration experts from somewhere else. Saunders explains: ‘We try to get people based with the client and with the dispute. For instance, we spent two years defending the government of Georgia. Many firms would have just flown a team in, but we did it with our own colleagues in Tbilisi. These were litigators but were people who understood the legal and political world of Georgia and could put the dispute in its cultural, business and political, as well as legal, context. The lawyers on the ground could then tap into our arbitration specialists when they needed to.’
In the longer term, as the growth of international arbitration continues, many of the nuances of different seats and rules may well fall away as the practice becomes standardised by repeated use and a wider pool of experienced arbitrators becomes available. In the meantime, the contest for the most popular seat and widely recognised rules will continue as the arbitration market widens.
Polly Botsford is a freelance journalist