The inexorable march of globalisation has seen international arbitration become a popular choice of dispute resolution, reports Polly Botsford


There will be some spectacular fireworks at the Permanent Court of Arbitration in The Hague this November, when it hears three separate proceedings being brought by the majority shareholders of Yukos Oil Company against the Russian Federation.



Widely reported to be the biggest arbitration of its kind, with the largest amount of money at stake (originally estimated at $33 billion), this tribunal comes at a time when international arbitration as a practice area is witnessing consistent growth. Each year there are more cases, involving more countries – and higher awards.



International arbitration is the main non-court method for resolving large, complex cross-border commercial disputes. Not to be confused with alternative dispute resolution (ADR) or mediation, this area is divided into two main types: arbitrations which arise out of contractual issues between companies – where they have agreed in the contract to go to arbitration – and those which arise out of a treaty, such as an investment treaty, where companies within the signatory countries agree to arbitration if there are any disputes.



The biggest growth has come in investment treaty disputes, where foreign investors have invested in countries (usually developing countries) and the state has, in some way, expropriated the investment or otherwise discriminated against the foreign investor (by imposing harsh tax penalties, for instance, or producing spurious environmental reports).



The World Bank’s International Centre for the Settlement of Investment Disputes (ICSID) has been monitoring the number of new investment treaty arbitrations coming through its door. Until 1999, the number of new cases each year was fewer than ten, but since then the number has shot up, reaching 46 in 2007. However, in both types, international arbitration has come to be seen as the preferred choice of dispute resolution for a majority of large corporations around the world, according to research undertaken by PricewaterhouseCoopers (PwC) and Queen Mary, University of London in 2006, which found that 73% of respondent corporations preferred international arbitration.



This growth is a natural by-product of a globalised world, where parties to a commercial deal come from different legal systems with different laws and, therefore, need a dispute resolution process that operates above and beyond national borders. David Brynmor Thomas, a partner in Herbert Smith’s international arbitration practice, explains: ‘It has taken off in the last 20 years because national jurisdictions are irrelevant in a world with increased international trade. If you think of an American firm supplying turbines for a power plant in India, the US supplier won’t submit to an Indian court and an Indian company will not submit to the American system. At that point, you want someone else – an independent third party, an international arbitration.’



Paul Mitchard QC, a solicitor who gained silk in January this year and is a partner at US firm Skadden, Arps, Slate, Meagher & Flom, defines the phenomenon in terms of structure rather than trade. ‘It is more about investments and co-venturing, major international construction projects, particularly in developing countries,’ he says. ‘There is often a clash of cultures between the parties, so no one wants to be in the national court of a country.’



Certainly, the supra-national cases that come before arbitrators are fascinating and complex, particularly the so-called investment treaty disputes such as the Yukos case against the Russian Federation.



The Yukos case focuses on the alleged expropriation of investments by President Putin’s Russia. The history of the case goes back to 2003, as Tim Osborne, director of GML, whose subsidiaries are bringing the proceedings, explains: ‘At that time, GML owned 60% of Yukos Oil [it had been privatised in the 1990s, making an oligarch out of Mikhail Khodorkovsky], and our shares were then worth around $20 billion.



‘We say that the Russian government took action against Yukos and manufactured wholly artificial tax claims against it, while freezing its assets, so the company couldn’t fight the tax bills. Then the Russian government took Yukos’s principal production facility, and auctioned it in an artificial auction process and sold it off at a lesser value through a new company, which in turn ended up in the hands of a state-owned company.



‘The Russians were not satisfied with this, and organised a consortium of Western banks who were owed money by Yukos and strong-armed the banks into putting Yukos into bankruptcy.’



Mr Osborne says an interim report from the receivers in March 2006 said the company was bankrupt, and Yukos’s assets were then auctioned off, with the assets going into state hands. ‘There was nothing left for the shareholders,’ he says.



The first issue to be decided by the tribunal in November is a jurisdictional one, as the Russian Federation is resisting the idea that it is bound by the Energy Charter Treaty on which the arbitrations are based – though, as Mr Osborne says: ‘They are participating in the arbitration process, which seems to suggest they are bound by it.’ If GML is successful, the matter then proceeds to a full hearing on whether or not the Russian Federation discriminated against the investors and expropriated Yukos’s assets.



A previous set of dramatic investment treaty arbitration cases derives from the Argentinian financial crisis of the late 1990s and early 2000s. This was triggered when Argentina’s government unpegged the peso from the dollar, leading to huge financial losses for a number of foreign investors, as Norah Gallagher, director of the Investment Treaty Forum at the British Institute of International and Comparative Law, explains: ‘From 2003 there were about 20 cases registered each year and there are still around 40 cases pending… It was an unprecedented situation where a government had, in effect, gone bust.’



But international arbitration is not a simple, cheap or quick alternative. Though hearings can be as short as one week, there is ‘a lot of written work before and after a hearing, so you may take just as long getting to the hearing,’ says David Brynmor Thomas at Herbert Smith. This is why, even if GML is successful in November, Mr Osborne estimates that it will be another three years before they get a decision.



But most parties say the wait is worth it. The awards are mostly monetary and they are large. In the Yukos case, Mr Osborne says: ‘We were originally claiming $30 billion, but now the price of oil is going up so Yukos would now be worth $200 billion if it had been left alone. Clearly, this will have an impact on damages.’



But would the Russians pay up? Certainly, arbitration awards are enforceable in a way that court judgments cannot be, because of courts’ limited geographical sphere of influence. Mr Thomas says: ‘An arbitration award is more enforceable internationally than a judgment in the court. For example, an English court award cannot always be enforced in the US, whereas the arbitration award can.’



International arbitration has other non-monetary advantages over national courts, such as having shorter rules. For instance, the International Center for Law and Arbitration, one of the main arbitration institutions, has rules running to only 30-odd articles. Also, as the PwC survey found, corporations prefer ‘the flexibility of the procedure, the privacy offered by the process and the ability of parties to select the arbitrators’.



For solicitors, international arbitration is a particularly healthy but also stimulating area of work. ‘You get the chance to be creative,’ explains Mr Thomas, ‘because arbitration rules are fairly outline in nature and because they are intended to deal with any country and any applicable law. You have a lot of scope to try and propose a particular format or approach.’



Mr Mitchard agrees. He believes that solicitor advocates in this area have more to offer even than barristers. ‘It requires a multinational practice, access to knowledge of overseas places, so you need to know more than one jurisdiction. Some barristers’ chambers may not be as well qualified to cope with that. I have access to people in Russia, the Far East – almost anywhere in the world.’



The upward trend in international arbitration is likely to continue, at least in the near term, according to Professor Julian Lew, barrister, arbitrator and founder of Queen Mary’s School of International Arbitration. ‘More companies are making more investments in those countries which need it,’ he says.



December’s showdown in The Hague will mark the end of one landmark year in international arbitration and, almost certainly, the beginning of another.



Polly Botsford is a freelance journalist