International Arbitration Explained
International arbitration resolves disputes between companies or individuals from different countries.
Offering an unbiased way to resolve cross-border disputes, international arbitration is often more agreeable than using one party’s national court. However, getting to grips with international arbitration can be difficult.
In this extensive international arbitration guide, we provide a handy overview of international arbitration, including what it is and the benefits it offers to resolve commercial disputes.
What is international arbitration?
- Neutral tribunal: International disputes are resolved by impartial arbitrators (without either side having a home advantage).
- Binding decision: The arbitrator’s decision, known as an award, is legally binding and enforceable in many countries.
- Confidential proceedings: The details of the international dispute and the proceedings are kept private.
- Control: Parties have control over procedural aspects, including the choice of rules, location, and arbitrators.
- Alternative to national courts: Arbitration is conducted outside of national court systems.
Key features of international arbitration
Here are some of the terminology and legal phrases you will hear when considering commercial arbitration to settle an international dispute:
International Arbitration requires an arbitration agreement
All parties agree on various aspects of the arbitration process, such as the procedure to follow, the selection of arbitrators, the legal jurisdiction, the language to be used, the criteria for the award, and any other relevant details.
These terms are then outlined in an arbitration agreement before the process begins.
The process is overseen by arbitrators
These tend to be experts or lawyers with significant experience relevant to the international dispute. The disputing parties can select the arbitrator.
When there is a panel of arbitrators, each party can choose one each. If three arbitrators are appointed, each party may nominate one each, with a relevant arbitral institution (e.g. the International Chamber of Commerce) choosing the third.
An arbitral institution is selected
An arbitral institution is an organisation that provides administrative and support services for the arbitration process.
These institutions facilitate the resolution of disputes by offering a structured framework and set of rules under which arbitration is conducted.
A legal seat is chosen
When parties agree to arbitration, they decide on a ‘legal seat’, which is a city like London, Hong Kong, or Berlin. The seat determines the procedural laws that will apply, but it is not necessarily where the arbitration will physically take place.
Likewise, the chosen legal seat does not mean that the final award will reflect the laws of the location.
A legislative framework is agreed
The procedural rules chosen by the parties will govern the arbitration. However, the chosen seat will have laws to address anything not covered in the agreement.
Most countries base their arbitration laws on the agreed international law of arbitration. This framework is comprised of treaties, conventions, model laws, and national legislation that collectively ensure the recognition, enforcement, and proper conduct of international arbitration.
A hearing will be held in international arbitration
Both parties present their case and provide evidence to support their position at the arbitration hearing. In some cases, attendance isn’t necessary, and they can submit their cases on paper.
The arbitrators will issue an arbitration award
An international arbitration award provides a conclusive resolution to cross-border disputes, with a high degree of enforceability across different legal systems.
How does international arbitration work?
There are two types of arbitration: institutional and ad hoc.
Both types offer distinct advantages and cater to different needs based on the nature of the dispute and the preferences of the parties involved.
Institutional arbitration:
- Administered by a specific arbitral institution (e.g., ICC, LCIA, DIAC, DIFC).
- Follows the arbitral institution’s set rules and procedures.
- The arbitral institution is specified in an arbitration clause or agreed upon when a dispute arises.
Ad hoc arbitration:
- Not administered by an arbitral institution.
- Parties determine the number of arbitrators, who they are, the applicable law, and procedures.
- More flexible, quicker, and less expensive than institutional arbitration.
- Parties can still appoint an arbitrator from an institution or follow established rules (e.g., UNCITRAL Arbitration Rules).
International arbitration agreement
The decision in international commercial arbitration is called an ‘award’.
This verdict, made by the arbitrator or tribunal, resolves the international dispute between the parties and is legally binding.
Key aspects of an international arbitration agreement include:
- Final decision: the arbitration agreement concludes the arbitration process by addressing all the issues in dispute.
- Applicable law: Arbitrators might make their awards according to an agreed national law. However, if the parties agree, arbitrators can make their ruling according to what they perceive to be fair, regardless of any national laws.
- Binding and enforceable: The arbitration agreement is legally binding on the parties, and it can be enforced in many countries under international treaties.
- Written form: The award is usually documented in writing, detailing the decision and the reasoning behind it.
- Content: The arbitration agreement includes the arbitrators’ findings, the relief or compensation awarded, and instructions on implementation.
- Limited grounds for appeal: There are generally very limited grounds on which the arbitration agreement can be challenged or appealed.
The advantages of international arbitration
By understanding the benefits of international arbitration, parties can make informed decisions about whether the dispute resolution method is right for their specific needs.
The key benefits of international arbitration include:
- Neutrality and impartial decision-making
Arbitrators are selected for their impartiality, ensuring no party has an undue advantage. This neutrality helps build trust in the process and ensures that decisions are made based on the merits of the case rather than any external influences. - Choice and flexibility in dispute resolution
Unlike litigation, both parties have significant input on how, where, and by whom their dispute is resolved. Two of the most critical elements of choice refer to the arbitrators and the seat, but other factors are also set out in the arbitration agreement. - Expertise in relevant subject matter
Arbitrators often possess specialised knowledge and experience relevant to the dispute. This expertise allows them to understand complex issues and technical details that might be outside the purview of generalist judges in national courts, leading to more informed and appropriate decisions. - Legally binding and enforceable awards
Arbitration awards are legally binding and can be enforced in many countries due to international treaties. This means parties have a reliable mechanism to ensure compliance with the award, reducing the risk of non-compliance. - Finality with limited appeal options
Arbitration awards are final and binding, with limited grounds for appeal. This finality provides certainty and closure for the parties, allowing them to move forward without the risk of prolonged legal battles and costly appeals. - Broad enforceability across jurisdictions
Ease of enforcement is another crucial advantage of arbitration. Over 160 countries are bound by the international New York Convention treaty, which ensures the reciprocal enforcement of arbitration awards. - Confidentiality and protection of sensitive information
Arbitration proceedings are private, and the details of the dispute are not disclosed to the public. This confidentiality is crucial for businesses that wish to protect sensitive information, trade secrets, and their reputation. - Increased efficiency and speed
Arbitration can be faster than traditional court litigation, as it avoids many of the procedural delays and backlog issues common in national courts. - Overall cost-effectiveness of dispute resolution
While the cost of commercial arbitration can vary, it is often more cost-effective than lengthy and complex court litigation. The streamlined procedures, quicker resolution, and avoidance of extensive legal fees contribute to the overall cost savings. - Certainty in participation and process
In litigation, it is not unusual for a third party to join the process, and disputes are sometimes consolidated before being heard. While still possible, it is more challenging to do this with arbitration and all parties must agree before any other parties, or related disputes can be added. - Simplicity and clear procedures
Arbitration tends to be a more straightforward process than going to court. The parties agree to the rules beforehand, so everyone understands what will happen and when.
The disadvantages of international arbitration
Despite the clear benefits, you should also weigh up the disadvantages when deciding whether to use international arbitration as your dispute resolution method.
Here are 4 common disadvantages associated with international arbitration.
- Limited appeal options
Arbitration awards are final and binding with very limited grounds for appeal. Given the finality, there is a risk that you could be stuck with an unfavourable decision. - Lack of transparency
The lack of public scrutiny may lead to concerns about accountability and the consistency of arbitral decisions. - Limited discovery available
Arbitration often has more limited discovery procedures compared to court litigation. This can be a disadvantage if a party needs extensive evidence from the other side to build their case. - Risk of inconsistent decisions
Without a formal system of precedent, arbitration decisions can be inconsistent. Different arbitrators might reach different conclusions on similar issues, leading to unpredictability in outcomes.
Arbitration vs litigation for international disputes
When businesses engage in international transactions, disputes can arise that require effective resolution methods.
Two primary avenues for resolving these disputes are arbitration and litigation.
Each method has distinct advantages and disadvantages and the choice between them can significantly impact the outcome and efficiency of the dispute resolution process.
Bias and impartiality of decisions
- In arbitration, parties can select neutral arbitrators with no ties to any involved party, ensuring impartiality.
- In litigation, judges are assigned by the court and might not always be perceived as neutral, especially in international disputes.
Skills and specialised knowledge
- Arbitrators are often chosen for their specific expertise and experience relevant to the dispute.
- Judges may not have specialised knowledge related to the specific issues of the case.
Binding nature and enforceability
- The arbitrator’s decision is binding and generally enforceable under international treaties.
- Court judgments are binding, but enforcement across borders can be complex and less predictable.
Privacy and discretion of dispute process
- In arbitration, proceedings are private, and details are not made public.
- Court proceedings are typically public, and details can be accessed by anyone.
Procedural flexibility and control
- In arbitration, parties have significant control over procedural rules, choice of arbitrators, and the location of the arbitration.
- In litigation, procedural rules and the conduct of the trial are determined by the court’s jurisdiction and are less flexible.
Speed and efficiency of dispute resolution
- Arbitration tends to be faster and more streamlined, avoiding many of the delays inherent in court systems.
- Litigation can be slow due to court schedules, procedural requirements, and potential appeals.
International recognition and global reach
- Arbitration awards are generally recognised and enforceable internationally, providing a practical solution for cross-border disputes.
- Enforcing a court judgment in another country can be complicated and less reliable.
Finality and certainty of decisions
- Arbitration awards are final with very limited grounds for appeal, providing closure and certainty.
- Litigation decisions can often be appealed, leading to potentially lengthy and costly proceedings.
Cost-effectiveness and expenses
- Commercial arbitration can be more cost-effective due to streamlined procedures.
- While there are no arbitrator fees, extended litigation processes can result in high legal costs.
Transparency and public accountability
- The lack of transparency in arbitration can be a disadvantage for those seeking public accountability.
- Public litigation proceedings ensure transparency and can serve as a deterrent against unethical behaviour.
Is international arbitration a better option than going to court?
When a dispute happens, it must be resolved as quickly and effectively as possible to minimise the disruption to those involved.
Commercial litigation is one option that can be used to resolve a dispute. But it becomes more complex when international issues are involved. Of course, arbitral tribunals have no inherent power or jurisdiction when it comes to commercial disputes.
As such, some companies prefer traditional litigation. However, because of the provisions of the New York Convention, once an arbitration award is made, the relevant jurisdictions should enforce it if necessary. As such, in most cases, arbitration awards are more straightforward to enforce internationally than court judgments.
Regardless of the benefits, arbitration is not suitable for every situation. And there are cases where an aggressive court-based strategy is required. Some businesses prefer the procedural safeguard of an appeal, so avoid arbitration due to its final and binding nature.
Contact our arbitration lawyers
Achieve the best outcome for your business with Summit Law’s dedicated international arbitration lawyers. Our experienced team offers exceptional guidance in arbitration cases, focusing on swift resolutions tailored to your needs.
Our goal is to streamline the process, maintain positive relationships, and reduce stress for all parties involved. Serving clients globally, including London, Europe, Middle East, South America, and the USA, we have a wealth of experience delivering positive outcomes for our clients.
For your free consultation, contact our specialist arbitration lawyers on 020 7467 3980 or complete the enquiry form on this page.