International Commercial Arbitration 101

This article was originally published in the December 2017 edition of Proctor.

With the increasing internationalisation of business, more clients are engaging in cross-border commercial activities.

If your clients are involved in transactions with any foreign element, they need to be aware of the alternative dispute resolution mechanisms available so that they can avoid the prospect of litigation in foreign courts. Should a final and binding determination to a dispute be required, the general global consensus is that arbitration is the most effective process due to the enforceability of arbitral awards. Transactional lawyers need to understand this, and ensure that the contracts they are drafting contain arbitration clauses. To fail to do so could mean that clients are left with no effective process to enforce their substantive rights.

What is international commercial arbitration?

Arbitration is a process by which parties agree to have their disputes determined by a neutral third party, namely an arbitrator or arbitral tribunal, in the form of a final and binding award.

An arbitration is commercial when it arises out of a relationship of a commercial nature.¹ The Model Law notes that the term ‘commercial’ should be given a wide interpretation.

An arbitration is international if the parties to an arbitration agreement have their places of business in different countries or if the place of arbitration or a substantial part of the obligations of the commercial relationship is in a country outside that of the place of business of the parties.²

The legislative framework supporting international arbitration in Australia is the International Arbitration Act 1974 (Cth) (IAA) which is based on the UNCITRAL Model Law.

Why choose arbitration?

There are a number of features which make international arbitration appealing but, by far, one of the most important features is the enforceability of the arbitration award. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) provides common legislative standards for the recognition and enforcement of arbitration agreements and awards. At the time of writing, 157 countries are party to the New York Convention, meaning that if your client obtains an arbitration award in a ‘convention country’, that award should be capable of enforcement in the courts of the 157 convention countries. This is in stark contrast to the 36 countries with which Australia has reciprocal recognition of court judgments.

Another key feature of arbitration is confidentiality. Because arbitration is a private dispute resolution mechanism, it is generally accepted that it is confidential. This means that if your client finds themselves in a contested legal battle, they do not need to have dirty laundry aired in court where media or anybody can observe the proceedings.

Another feature is the ability to avoid litigation in a foreign jurisdiction. By choosing arbitration, parties can agree to have their disputes determined under the supervision of the law of a neutral third country and avoid encounters with unfamiliar legal systems.

How to choose arbitration

Parties can refer disputes to arbitration by including a simple arbitration clause in their agreement. Another option is for parties to agree to refer existing disputes to arbitration. Some of the basic elements to set out in the arbitration clause can include:

(a) selection of arbitration rules for the conduct of the arbitration

(b) selection of an arbitration institute to administer the arbitral process

(c) number of arbitrators – typically one or three

(d) language of the arbitration

(e) seat of the arbitration – the seat of the arbitration is the jurisdiction which oversees the process of the arbitration.

In addition to the basic elements set out above, the parties to a contract can be creative and tailor an arbitration process that is efficient and cost effective.  For instance, they may decide to place limits on disclosure, hearing time and even recoverability of legal costs.  Generally, the more thought that is given to the arbitration clause at the beginning, the better and more appropriate the dispute resolution process will be should it be needed.In addition to the basic elements set out above, the parties to a contract can be creative and tailor an arbitration process that is efficient and cost effective.  For instance, they may decide to place limits on disclosure, hearing time and even recoverability of legal costs.  Generally, the more thought that is given to the arbitration clause at the beginning, the better and more appropriate the dispute resolution process will be should it be needed.

How to enforce an arbitration agreement

If your client has an arbitration agreement and another party attempts to commence court proceedings, it should be relatively straightforward to apply for a stay of that action and have the matter referred to arbitration.  Australian courts are known for holding parties to their bargain and will take a ‘broad, liberal and flexible approach’ to interpreting language used in a dispute resolution clause.³

How to enforce an arbitral award

The process of enforcing an award in Australia should also be straightforward, with enforcement being the default position subject to certain limited exceptions.  The court may only refuse to enforce an award if a party proves to the satisfaction of the court that:⁴

(a) a party was under some incapacity at the time the arbitration agreement was made;

(b) the arbitration agreement is not valid under the law of the agreement;

(c) a party was not given proper notice of the arbitration proceedings or was otherwise unable to present its case;

(d) the award deals with a subject matter beyond the scope of the arbitration agreement;

(e) the composition of the arbitral tribunal was not in accordance with arbitration agreement;

(f) the award is not yet binding on the parties or has been set aside in the law of the country in which it was made;

(g) the subject matter is not capable of settlement by arbitration; or

(h) to enforce the award would be contrary to public policy.

The IAA further clarifies what would be contrary to public policy by stating that the enforcement of a foreign award would be contrary to public policy if the making of the award was affected by fraud or corruption, or a breach of the rules of natural justice occurred in connection with the making of the award.

When it comes to enforcement, there are a number of strategic matters that a client needs to consider with its legal advisors. Obviously the enforcement process must take place in a jurisdiction where the award debtor has sufficient assets to meet the award. In addition to this, the client should consider bringing freezing orders to ensure that assets are not relocated and it is often best that such applications be brought in appropriate courts and on an ex parte basis. Arbitration legislation based on the UNCITRAL Model Law will generally provide for these interim measures.

What now?

The dispute resolution provisions of contracts involving a foreign element need to be carefully considered. All too often, such clauses are given inadequate attention during the negotiation of contracts, and boilerplate jurisdiction clauses are inserted, which will destine any dispute to litigation in the nominated jurisdiction. Parties to such contracts would be better served by nominating international arbitration as their dispute resolution mechanism.

The choice of forum and process is in your client’s hands when arbitration is selected as opposed to such matters being potentially dictated by a foreign court.

¹ _{Footnote to Article 1(1) of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006 (Model Law).}
² _{Article 1(3) of the Model Law.}
³ _{Fitzpatrick v Emerald Grain Pty Ltd [2017] WASC 206.}
⁴ _{IAA s 8.}