International Arbitration in the United States
Chapter VII
William K. Slate II, President
American Arbitration Association
With Julie A. Klein and Luis M. Martinez
March 4, 1998
Introduction
The continuous evolution of worldwide investment and trade highlights the tremendous growth of international commercial transactions. Parties involved in such dealings have demanded a more globally efficient means by which to resolve any resulting disputes. The use of arbitration has proven to be an efficient alternative to litigating in foreign courts. Its many attributes include a system of dispute resolution acceptable to parties from varying cultures; a level of confidentiality not available in a judiciary system; neutrals who may be experts in the subject matter of the dispute; and a potential savings in terms of time and money.
Facilitating the use of arbitration to resolve international disputes is a global structure of treaties, supportive legislation, judicial decisions, arbitral institutions and procedures, and numerous educational initiatives exploring the diverse aspects of international dispute settlement. The American Arbitration Association’s ("AAA") response to the growing need of reliable arbitration services is evidenced by the recent establishment of its International Center for Dispute Resolution. The Center is devoted exclusively to the handling of international cases by a multilingual staff of attorneys who are well versed in the administrative rules and procedures governing such cases.
The first part of this chapter will discuss basic aspects of international arbitration in the United States, the local enforcement mechanisms for arbitration awards, and case law interpreting such procedures. The second part will address the activities of the Association’s International Center, its broad international role, procedures, capabilities, neutrals and data gleaned from operational experience.
Elements of Effective International Arbitration
Ingredients for an effective international arbitration process include a carefully drafted agreement to arbitrate -- preferably referencing an administering institution and modern rules of procedure, broad party autonomy, high quality arbitrators with the requisite experience to hear and resolve the dispute, and a judiciary whose involvement in the arbitration process will be supportive but limited. Necessarily intertwined in the arbitral process is the legal framework under which arbitrations are conducted. Importantly, the applicable national legal regime is relevant when one is seeking assistance for recognition and enforcement of arbitration agreements and awards.
The Agreement to Arbitrate
Because international arbitration is a consensual, voluntary process, parties are free to devise an arbitration agreement that suits the particular needs of their industry and type of dispute. A fundamental aspect of such party autonomy is the freedom to agree upon the arbitral procedure. This notion is set forth in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"), among other international agreements concerning arbitration, is guaranteed by many national arbitration laws, and is contained in and facilitated by the rules of many arbitration institutions. In the U.S., while the Federal Arbitration Act (the "FAA") does not expressly acknowledge a party’s right to select arbitral procedure, there is no question that U.S. courts have supported and enforced agreements to arbitrate designating procedural rules governing the arbitral process. And while the AAA’s International Arbitration Rules afford arbitrator(s) a great deal of autonomy in conducting the proceedings, the extent of the arbitrator’s authority is nonetheless subject to the terms of the parties’ agreement to arbitrate.
At the drafting stage, additional items to consider are the applicability of the arbitration agreement to future disputes, the valuable services of an administering institution, the locale of the proceedings, the applicable law and perhaps the number of arbitrators and language of the arbitration.
U.S. Courts Supportive of Arbitral Process
Careful consideration should be paid to the place or locale of the arbitration, as that decision ordinarily determines the procedural law governing the proceedings, which can affect questions of arbitrability, procedure and local court intervention. Significantly, such procedural law can operate to safeguard the fairness of the proceedings, such as a party’s right to notice, representation, an opportunity to be heard, and the independence of the arbitrator. Thus, it is important to review a particular nation’s arbitration law to ensure that the local judiciary not only limits its involvement in procedural matters that are within the purview of the arbitrator, but also supports the enforcement of arbitration agreements and awards. Choosing the U.S. as the locale for the proceedings will ensure parties of a climate most favorable to arbitration. Time and time again, the U.S. Supreme Court has upheld the enforceability of arbitration agreements.
International arbitration is a way to resolve disputes cross-culturally with a certain level of predictability in the potential outcome of the proceedings. Because national laws differ, in some cases significantly, parties are afforded some degree of security by indicating in their agreement the choice of substantive law to govern their dispute. By doing so, much of the uncertainty accompanying national substantive laws is alleviated. While in the U.S., courts had displayed an unfavorable attitude toward choice-of-law clauses in the early part of this century, it is now established that parties can choose the substantive law under which their dispute will be decided in arbitration.
In Scherk v. Alberto Culver, the U.S. Supreme Court upheld an international commercial arbitration agreement that contained a choice-of-law clause. In making this determination, the Court noted that "uncertainty [concerning the law applicable to the resolution of disputes arising out of the contract] will almost inevitably exist with respect to any contract touching two or more countries, each with its own substantive laws and conflict-of-laws rules. A contractual provision specifying in advance the forum in which disputes shall be litigated and the law to be applied is, therefore, an almost indispensable precondition to achievement of the orderliness and predictability essential to any international business transaction...."
Further, in refusing to invalidate the arbitration agreement, the Court observed that such invalidation "would not only allow the respondent to repudiate its solemn promise but would, as well, reflect a ‘parochial concept that all disputes must be resolved under our laws and in our courts...We cannot have trade and commerce in world markets and international waters exclusively on our terms, governed by our laws and resolved in our courts.’"
Arbitrator Standards
Probably the most significant aspect of a successful arbitral process is the arbitrator(s) who hears and decides the case. International arbitrators must be of the highest quality with credentials beyond reproach. While U.S. law poses no restriction on persons who may serve as an arbitrator, one essential requirement is that the arbitrator be neutral. Arbitrators are expected to be impartial and independent and to disclose any circumstance likely to give rise to justifiable doubts as to his or her impartiality or independence.
Concerning the standard of conduct expected of a "neutral" arbitrator versus a party-appointed arbitrator, U.S. international arbitration practice requires party-appointed arbitrators to be impartial and independent in the same manner as "neutral" arbitrators. In fact, Article 7 of the AAA’s International Arbitration Rules does not distinguish between the party-appointed arbitrator and the "neutral" arbitrator, and requires that "arbitrators" generally are to be impartial and independent.
Somewhat confusing may be that traditionally, common U.S. domestic arbitration practice did not require party-appointed arbitrators to satisfy the same standards of impartiality and independence that were imposed on non-party-appointed arbitrators. In the past few decades, however, the courts have even altered their view of the domestic party-appointed arrangement by concluding that the requirement that an arbitrator render a faithful, honest and disinterested opinion upon the testimony governs the conduct of all arbitrators, not merely the "so-called neutral arbitrators but party-designated arbitrators as well."
U.S. Legal Regime Supports Arbitration Process
Usual arbitration practice does not require one to seek judicial enforcement of an award, as parties ordinarily voluntarily comply with the arbitrator’s determination. For those situations in which a resisting party chooses not to comply with the award, it would be helpful to know in advance the enforcement spirit of the nation in which one may seek such judicial assistance. Overwhelmingly, U.S. courts have exhibited a pro-enforcement bias when presented with an application to confirm an arbitral award.
The U.S. is a hospitable place for the situs of an arbitration proceeding as well as for the recognition and enforcement of a foreign arbitral award. The U.S. legal framework for enforcing such awards consists of the FAA, which incorporates and implements the New York Convention and the Inter-American Convention on International Commercial Arbitration (the "Panama Convention"), and individual state arbitration acts.
The Federal Arbitration Act (FAA)
The FAA consists of three chapters: chapter one is the domestic FAA; chapter two is the New York Convention’s implementing legislation applicable only to awards and agreements falling within said Convention’s purview; and chapter three is the Panama Convention’s implementing legislation applicable only to awards within that Convention’s purview.
The domestic FAA is one method by which a party may seek to confirm an arbitral award, and the statute overall concerns arbitration agreements and awards affecting interstate or foreign commerce. Section 10 provides pertinently that arbitration awards shall be enforceable subject to the following limited grounds:
- where the award was procured by corruption, fraud, or undue means;
- where there was evident partiality or corruption in the arbitrators, or either of them;
- where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; and
- where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
New York and Panama Conventions
Conventions on the other hand, stipulate support for the use of arbitration and specify the conditions for enforcement of foreign arbitration agreements and awards. In the U.S., parties may seek to enforce a foreign arbitration award under the New York Convention, which is said to be "widely regarded as ‘the most important Convention in the field of arbitration and ... the cornerstone of current international commercial arbitration.’" The New York Convention provides for mutual recognition and enforcement of arbitral awards by contracting states, and limits the defenses that may be raised in opposition to the confirmation of an award. As of February 1998, ratifications and accessions to the New York Convention totaled 114 countries. In the U.S., applicability of the Convention to the enforcement of awards is contingent upon the following requirements:
An arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract, or agreement described in section 2 of [the FAA] ... falls under the Convention. An agreement or award arising out of such a relationship which is entirely between citizens of the United States shall be deemed not to fall under the Convention unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states...
Where applicable, the Panama Convention is another source for enforcing an arbitral award and, in many ways, is similar to the New York Convention. Specifically, the Panama Convention provides for the general enforceability of arbitration agreements and arbitral awards, subject to limited exceptions akin to those found in the New York Convention. Section 304 of the FAA implements the Convention and gives U.S. courts jurisdiction to enforce arbitral decisions or awards made in the territory of a foreign state, on the basis of reciprocity, so long as that state has also ratified or acceded to the Convention.
State Laws
Although not the norm, individual state laws also affect issues of international arbitration, but only when the FAA and the Conventions are inapplicable, particularly when the subject of the agreement or award does not affect interstate or foreign commerce. Similar to the FAA, those states’ laws that are based on the Uniform Arbitration Act generally provide for specific enforcement of arbitration agreements and for the recognition and enforcement of awards with only limited grounds for review. Further, a handful of states have enacted laws designed to address disputes involving international arbitration, although their applicability is somewhat limited.
Case Law
Because the New York and Panama Conventions apply only to arbitration agreements and awards falling within their scope, several U.S. court decisions have clarified to some extent their respective broad applicability. In Bergesen v. Joseph Muller Corp., the court concluded that the New York Convention was applicable to an award made in the State of New York between two foreign parties, a Swiss corporation and a Norwegian shipowner, and that it was to be considered as a nondomestic award within the meaning of the Convention and its implementing legislation. Several cases have followed the Bergesen opinion. It has been regarded as "a confirmation of the favorable attitude of the American courts toward international arbitration."
In a later case, Lander Co., Inc. v. MMP Investments, Inc., the Seventh Circuit Court of Appeals was presented with a question, challenging somewhat the holding in Bergesen. The Court was asked to decide whether an award issued in the U.S. resolving a dispute between two domestic parties and calling for performance in another country, could be confirmed under the New York Convention. The court concluded that the Convention applied to this case based on its reading of the Convention and the U.S. declaration of accession thereto. Convention Article I(1) provides, inter alia, that it shall apply to "arbitral awards not considered as domestic awards" in the country in which enforcement is sought. The U.S. accession declaration proclaims that the United States "will apply the Convention, on the basis of reciprocity, to the recognition and enforcement of only those awards made in the territory of another Contracting State." The court concluded that the phrase "another contracting state" means "another signatory of the Convention...as opposed to nonsignatories."
Yet another decision following Bergesen’s lead is the court’s holding in Productos Mercantiles E Industriales, S.A. v. Faberge USA. The Court found that the Panama Convention provides jurisdiction for a U.S. court to enforce an arbitral award rendered in the U.S. -- involving a foreign corporation against a domestic corporation and another foreign corporation, concerning obligations under an agreement to license trademarks in Central America.
Enforcement of Awards
Turning to the enforcement of awards, U.S. courts are highly sympathetic to parties seeking to confirm arbitration awards. Under the New York Convention public policy ground for vacating an award, the court in Parsons & Whitmore Overseas Co., Inc. v. Societe Generale (RATKA), found that the arbitrator’s refusal to delay the proceedings to accommodate the speaking schedule of a witness did not infringe the due process rights under the United States Constitution. The court observed that although U.S. courts will not enforce an award which is contrary to the public policy of this country, public policy is not to be equated with U.S. national policy or national political interests. Further, the court declared that "the Convention’s public policy defense would be narrowly construed ... that an expansive ... construction would vitiate the Convention’s basic effort to remove pre-existing obstacles to enforcement..." and that "considerations of reciprocity ... counsel courts to invoke the public policy defense with caution."
There have been times, however, when consistent with applicable law, the courts have denied enforcement of an award. Under the New York Convention, the Second Circuit Court of Appeals in Iran Aircraft Industries v. Avco Corporation, upheld the trial court’s decision refusing to enforce an award based on Article V(1)(b). At issue was Avco’s reliance on a method of proof approved by one of the tribunal judges, namely, the submission of Avco’s audited accounts receivable ledgers in lieu of submitting numerous underlying invoices, which was later rejected by the tribunal as insufficient. The court noted that because Avco was not made aware that the tribunal now required the actual invoices to substantiate its claim and was, therefore, misled, it was denied the opportunity to present its claim in a meaningful manner.
An interesting contrast is the recent decision in Generica Ltd. v. Pharmaceutical Basics Inc., in which the court held that the arbitrator’s refusal to permit continued cross-examination from a witness that the arbitrator deemed immaterial to the proceedings at issue, did not deny the party due process. The court noted that under Article V(1)(b) of the New York Convention, the lower court was required to enforce the award unless the moving party demonstrated that it was unable to present its case before the arbitrator. The court further observed that an arbitrator must provide a fundamentally fair hearing, which is one that meets ‘the minimal requirements of fairness’ -- adequate notice, a hearing on the evidence, and an impartial decision by the arbitrator.
In a decision involving the enforcement of an award under chapter one of the FAA, the court in Tempo Shain Corp. v. Bertek, Inc. found that the arbitration panel’s refusal to continue hearing certain evidence amounted to fundamental unfairness and misconduct sufficient to vacate the award under § 10(a)(3). In this case, the offered testimony was by a person who was the only individual who could have testified in rebuttal of the opposing party’s claim and in support of its claim. The court also found that the documentary evidence did not adequately address such offered, but disallowed, testimony.
Thus, the court concluded that the panel excluded evidence plainly "pertinent and material to the controversy."
International Center for Dispute Resolution
Facing a world without trade barriers, today’s businessperson must deal with the complexities of moving within a global market and the disputes that may arise. In response to the increased demand for international arbitration, a by-product of the growth in world trade, and to address the conflict management needs of the international business and legal communities, the AAA established its International Center for Dispute Resolution. The International Center for Dispute Resolution was officially opened in New York City on June 1, 1996. Although the AAA had always administered international arbitrations through its various regional offices, the creation of the International Center was a significant break with past practice. The new approach focussed the administration of all international arbitration cases in one office. A specialized handling facility, the International Center for Dispute Resolution is devoted to providing prompt, efficient and impartial international arbitration services worldwide. The International Center is staffed by multilingual attorneys supported by seasoned personnel who administer all of the AAA’s international arbitrations and mediations. The International Center’s staff provide a range of services to the international business and legal communities. In addition to their administrative duties, the attorneys spend a good deal of time responding to inquiries from the public and practitioners as to the application of all the Rules under which they administer cases. They also provide general assistance with the drafting of international arbitration clauses and information regarding the recognition and enforcement of arbitral awards worldwide.
Administrative Procedures
The International Center’s administrative procedures have been customized to serve the needs of its international clients. In recent surveys of a cross-section of professionals throughout the world, it was concluded that international commercial arbitration was considered faster and arguably less expensive than litigation. Importantly, it was recognized that speed and costs in international arbitration are areas of major concern in conflict management. The arbitral institution can play a major role in ensuring that the arbitration moves forward in an expeditious manner and that the costs are, where possible, controlled. The International Center’s administrative procedures are designed to provide the parties with a speedy and efficient adjudication of their claims while ensuring that parties are fully advised as to Rules and the exact nature of the arbitral proceedings.
Cases Heard Around the World
The administration of the cases in New York does not hinder the parties’ process in any way. Parties are still free to file their case in any of the AAA’s regional offices and the arbitration will still take place in their designated locale. At present, the International Center administers arbitration cases that are scheduled to be heard all over the world. Sweden, Mexico, Canada, France and England are some of the countries in which an AAA arbitration recently has been held. In fact, the AAA can schedule an arbitration in virtually any country that the parties may designate, either through the offices of one of the arbitrators or at any mutually acceptable location.
Initiating the Case
Once an international case is filed with the AAA, it is transferred to the International Center via overnight delivery. The AAA’s interpretation of an international case is based on the definition contained in Article 1 of the United Nations Commission on International Trade Law Model Law ("UNCITRAL"). Upon receipt by the AAA, the party is notified and the case is prepared for initiation. An initial review is conducted to ensure that an arbitral clause exists providing for institutional arbitration by the American Arbitration Association, or in the absence of a future dispute resolution clause, by the submission of an agreement calling for administration by the Association. The arbitration clause is thoroughly reviewed for any special provisions such as number of arbitrators, method of their appointment and division of fees. If the Association is not named, the claimant is advised that the case may still be initiated with the caveat that if the respondent objects, the administration is halted until the parties submit to AAA jurisdiction or the Association is granted jurisdiction pursuant to a court order. All other jurisdictional challenges are left to the arbitral tribunal pursuant to the applicable Rules and the principal of "Kompetnz-Kompetenz." "At a minimum, the doctrine means that arbitrators can determine their own jurisdiction, and do not need to request a judicial decision. After the jurisdictional hurdle has been met, the arbitration is assigned a case number and all the relevant data is logged in the Association’s customized data base and file management system. A file is created containing hard copies of all the material including the case number, caption, applicable rules, locale requested, the number of arbitrators, contacts of the parties, and the next set of dates where action is required (i.e. the dates the statement of claim is due and of the administrative conference call). Maintained is a telephone log documenting all telephone conversations relating to the case. All financial information including copies of AAA invoices, arbitrator invoices, and a log of deposits on hand and expenditures made is also maintained electronically and in the file. Additionally the arbitration clause, demand, arbitrator oath, checklist for conflicts, disclosures, compensation stipulation, arbitrator’s consent and the panel’s orders are flagged as they are received. After the file is created, the initiation letter is prepared and sent to the parties acknowledging receipt of the demand, advising the respondent of when the statement of defense and counterclaim (if applicable) are due. The letter addresses issues regarding the locale selection, the number of arbitrators and their appointment, and the date of the administrative conference call, which is usually scheduled after the pleadings have been completed. The initiation letter draws special attention to the use of mediation. The initiation letter is sent to the parties with the applicable rules. The case is then assigned to one of the attorney/case managers for administration.