by John B. Pinney, FCIArb
Partner, Bricker Graydon Wyatt LLP, Cincinnati
I. Introduction
Some 30 years ago, I became involved in a number of insurance disputes that took me to London to take evidence with respect to litigation pending in Ohio. From that point forward, I have been interested in and indeed focused upon cross-border commercial disputes in my law practice. In dealing with cross-border litigation in either United States courts or foreign courts, it quickly becomes apparent that the United States is not a party to any treaty or convention on enforcement of U.S. court judgments, state or federal, abroad or enforcement of foreign court judgments in the U.S. That means, as a practical matter, that enforcement in either situation is dependent not as a matter of right but rather on the discretion of the court in which enforcement is sought under the doctrine of comity. In other words, enforcement is not necessarily assured.
As will be discussed more fully below, enforcement of international arbitration awards is governed by the United Nations Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958, generally known as the New York Convention. Under this Convention, there are currently 172 contracting states. As indicated by its title, the New York Convention has two principal purposes: (1) the enforcement of arbitration agreements so that if a party brings a claim subject to arbitration in a court instead of in arbitration, the court before which such litigation is commenced, if in a contracting state, must stay its proceedings and direct the parties to arbitration; and (2) courts in contracting states must enforce, as well as recognize as binding, an international arbitration award without review of the merits of the decision. The New York Convention, with its 172 contracting states, is the cornerstone of international commercial arbitration. This is because the Convention reduces the risk that cross-border contracts and business relationships will not be enforced and thereby encourages international trade and commerce.
Another important element of international commercial arbitration is that it is a private, consensual dispute resolution procedure that is not conducted by any state, although its effectiveness is dependent on the support of the state and its courts. For example, arbitrators typically are private lawyers or sometimes retired judges selected by the parties having a dispute to hear the dispute and issue a binding decision or award. However, both domestically and internationally, the award is not worth the paper on which it is written unless the losing party voluntarily pays or otherwise complies with the award or a court enforces it. There also may be a need for a court to compel arbitration, enforce subpoenas or, in rare instances, vacate an award that was irregular. Importantly though, the doctrine that a court may not vacate a final arbitral award, except for procedural irregularities, is fundamental in both domestic and international arbitration.
An important final introductory point is that the parties to an international dispute, the claimant and respondent, are obviously from different countries, from different cultures and from different legal systems. To illustrate, would a claimant based in the United States with a breach of contract dispute with a German company typically want to litigate such dispute before a German civil law court in the German language where the German procedures provide, for the most part, no discovery, no depositions and no right to a jury? Similarly, for the same case, would the German respondent typically want to defend in an American common law court in the English language with costly discovery and mandatory depositions where the case is tried to an American jury? These are the principal reasons, coupled with the New York Convention’s enforceability, parties to cross-border business transactions will primarily choose to arbitrate, through the vehicle of a pre-dispute arbitration agreement in their international contracts. With arbitration, the parties can choose where the case will be heard (the “seat”), the arbitration institution to administer the case, the arbitration rules governing the procedures to be followed by the arbitrators hearing the case, the manner in which the arbitrators are to be chosen, and the language under which the arbitration will be heard. In fact, party autonomy is one of the principal attributes of international commercial arbitration.
II. Brief History of International Commercial Arbitration
With globalization of international business and trade, the amount of cross-border commerce has increased over the past century exponentially. Naturally, with the increase in commerce comes an increase in disputes and disagreements which, in turn, leads to the need for mechanisms and procedures for resolution of those disputes between parties in all the corners of the world. However, unlike court litigation in the United States where judgments of American state and federal courts are constitutionally entitled to full faith and credit throughout the United States, cross-border disputes mainly have only the New York Convention for enforcement.
While to be sure, arbitration since the early to mid-20th century has been an important part of dispute resolution domestically in the United States, arbitration is by no means as critical with regard to domestic disputes as it is for international ones. In other words, parties to a domestic commercial contract may secure certain benefits by choosing arbitration for dispute resolution, the default mechanism of domestic court litigation will likely make little difference in outcome where the parties simply ignore crafting a dispute resolution clause for their business relationships. Therefore, businesses large and small have, since about the 1970s, put arbitration clauses in their contracts. By doing so, they can assure themselves of avoiding their counterparty’s domestic courts, and they can jointly choose their judges (i.e., the arbitrators), the place at which the case will be heard (the seat), the institution administering the proceedings, procedural rules to be applied and the language in which the proceedings will take place.
Since the beginning of the 21st Century, there have been important developments intended to bridge the gaps between arbitration procedures in civil law jurisdictions (continental Europe, Japan, China) and common law jurisdictions (US, UK, Singapore, Australia). Those developments have included new uniform procedural laws, rules of evidence and ethical rules, among others. For example, in civil law jurisdictions, the right of a party to request and have produced relevant documentary evidence from an opponent is extremely limited, and prehearing oral depositions are unknown. In contrast, broad pre-hearing discovery, including oral depositions (although somewhat limited) and broad document discovery with a focus on electronic documents, is widely accepted as part of domestic arbitration practice in the United States. As will be discussed in more detail below, international arbitration practice in the United States, and more generally throughout the world, has substantially different procedural and evidentiary rules and practices than domestic arbitration practice in the United States, which is more closely akin to US court litigation than it is to international arbitration.
The role of international commercial arbitration as the principal means by which cross-border business disputes are resolved today cannot be overstated. Relatedly, because of the wide degree of party autonomy afforded parties in crafting arbitration agreements, well-counseled parties negotiating cross-border business contracts will consider the dispute resolution clause as important and material as any of the key business terms because frequently the dispute clause is outcome determinative of any dispute that might arise.
III. Differences between Domestic and International Arbitration
The key differences between domestic and international arbitration in the United States include arbitrator selection, pre-hearing document disclosure or discovery, witness evidence at arbitral the hearing, expert witness evidence, form of awards, costs and enforcement. Each of these differences will be discussed below.
A. Arbitrator Selection
Depending on the arbitration clause, there typically will be a sole arbitrator or a panel or tribunal of three arbitrators. In domestic arbitrations, arbitrator selection is usually done through the list method where a list of ten to fifteen potential arbitrators is circulated to both parties by the administrator (usually the AAA or JAMS) and each party then is required to return the list, striking those it finds unacceptable and ranking in prepared order those who are acceptable. The AAA or other administrator determines who will serve on the tribunal base on the joint ranking scores of the arbitrators acceptable to both parties.
In contrast, the most common manner of arbitrator selection in international arbitration, especially for a three-member tribunal, is for each party to appoint an arbitrator of its choice, and then the two arbitrators are charged to appoint the chair or, as the position is sometimes referred to as, the president. A key fundamental part of international arbitration practice is that all arbitrators, including party-appointed arbitrators, are required to be neutral and objectively independent and impartial. Where the arbitration agreement provides for a sole arbitrator, some institutions will use a list procedure similar to that described above for domestic cases, but other institutions will simply appoint an arbitrator from its established panel of qualified arbitrators who meet the parties’ disclosed qualifications.
Another significant difference for international cases is the issue of arbitrator nationality. In the cases where there is a sole arbitrator, the general rule is that, absent the parties agreeing otherwise, the arbitrator may not be a national of the country of either party. Similarly, the same is true for a tribunal chair or president for a three-arbitrator panel, although there is no restriction on the nationality of party-appointed arbitrators.
B. Pre-Hearing Document Disclosure or Discovery
After the Tribunal has been constituted, there will be pre-hearing conference in both domestic and international cases between the parties and the members of the Tribunal to establish a case schedule. In addition to setting a hearing date, the case schedule will include a timetable for document disclosure (or discovery) of both documents that each party intends to offer as evidence from its own files and for service of requests directed to the opposing party for production of documents.
However, this is where the common practice ends. In domestic cases, document discovery proceeds much like it does in US litigation with document requests served on the opposing party that likely describe the requested documents beginning with the phrase: “Any and all documents referring or relating to . . .” In contrast, under the IBA Rules on the Taking of Evidence in International Arbitration (“IBA Evidence Rules”),1The IBA Evidence Rules were originally adopted by the International Bar Association in 1999 and most recently updated in 2020. Since originally promulgated in 1999, the IBA Rules have largely being adopted and applied by arbitrators in most cases involving American parties, where the arbitrators are American or from other countries. each document requests must be limited to a single described document or “a description in sufficient detail (including subject matter) of a narrow and specific requested category of Documents that are reasonably believed to exist; in the case of Documents maintained in electronic form, the requesting Party may request, or the Arbitral Tribunal may order that [the requesting party] shall be required to, identify specific files, search terms, individuals or other means of searching for such Documents in an efficient and economical manner.” The point is that the IBA Evidence Rules attempt to bridge the difference between common law jurisdictions that provide for broad document production and civil law jurisdictions that provide for very little, and sometimes no document production from opposing parties.2In other words, parties in civil law countries are required largely to prove their case from documents in their own files. The IBA Evidence Rules relax that extreme position but are far more restricted than ordinary document discovery in common law countries. In addition, the IBA Rules also require that the requesting party state affirmatively that the requested documents are relevant to the case and material to its outcome and that the Documents are not within its possession, custody or control.
C. Witness Evidence at Arbitral Hearing
For American lawyers, the practice relating to the presentation of witness evidence in international arbitration is even more different from US litigation practice that is document disclosure and production. Beginning with a fundamental difference between the probative value given witness evidence, as opposed to documentary evidence, in civil law jurisdictions versus common law jurisdictions, courts in civil law countries generally give far less weight to the testimony of a witness at a hearing, especially oral evidence, than courts in common law countries. This is due largely because in civil law jurisdictions, courts follow the inquisitional system of justice where the judges are charged affirmatively with determining the material facts, coupled with the skepticism regarding the accuracy (i.e., truth) of oral witness testimony, especially without cross-examination by opposing counsel. Of course, in common law jurisdictions following the adversarial system, oral witness evidence, coupled with counsel-led cross-examination, is fundamental.
This key difference let the drafters of the IBA Evidence Rules adopt the procedure at Article 4 requiring direct witness evidence to be submitted entirely by written witness statements without any oral direct examination by the proponent of the witness’ evidence,3As a minor exception, the practice has developed and is widely followed that the witness will be permitted to “warm the chair” by a short (typically about 15 minutes) segment of oral testimony about his or her personal background and basis for having knowledge about the case. but also require that, to be received and given probative weight, the witness must appear at the hearing,4In this era of virtual hearings, the Tribunal has the discretion to allow the witness to appear virtually over Zoom or Teams for cross-examination. unless waived by the opponent, for cross-examination and potential examination by the arbitrators. This procedure is now widely accepted as the normal manner for presenting witness evidence in international arbitration.
The use of witness statements for the presentation of witness evidence has also been successful for three other important reasons. First, the use of written statements, which typically must be exchanged weeks before the final hearing, as must the documents being offered as evidence, serves the interest of providing advance disclosure of each side’s case. In the absence of pre-hearing discovery, depositions, and interrogatories that are generally not allowed in international arbitrations, the use of witness statements has proved to be a satisfactory substitute for pre-hearing discovery and enables opposing counsel fair opportunity to investigate the witness’ evidence and prepare appropriate cross-examination to test the accuracy and veracity of the proffered evidence.
Second, by virtue of the cross-border nature of the dispute giving rise to the arbitration, many witnesses may not speak the language in which the proceedings are being conducted. In that instance, the witness’ statement may be prepared and signed in the witness’ own language, and then a translation of it will be presented at the hearing. Of course, the cross-examination of that witness will be conducted in the language of the arbitration, with the assistance of an interpreter.
Third, and perhaps equally significant with the first point above, is the fact that using written witness statements both reduces the length of the hearing and therefore the costs for the parties’ counsel and the fees due the arbitrators and mostly eliminates the costs of pre-hearing depositions and other discovery in international cases.
D. Expert Witness Evidence
Although the practice is also sometimes being used in domestic arbitrations, the practice of “hottubbing” for expert witnesses has become widely used in international cases. Hottubbing refers to a practice that the arbitrators will require the experts for both sides to appear together, typically toward the end of the hearing, so that they can confront one another regarding their differences of opinion on key issues in the case. It also provided the arbitrators with the opportunity to ask directly to explain why and how he or she disagrees with the other side’s expert, and vice versa, all during the course of a single session of the hearing. Ordinarily, this means that claimant’s experts will not necessarily appear during the claimant’s case-in-chief to present their opinions supporting the claimant and that the respondent’s experts will separately present their contra opinions in the respondent’s case-in-chief, which would even later be followed by the claimant’s experts offering rebuttal opinion testimony. Instead, the experts for both sides on each distinct area of expert evidence would be required to appear together in the “hottub,” with the metaphor being that the truth will emerge as the water in the tub gets hotter. International arbitrators very much like the process, and it is currently used in most cases.
In addition to hottubbing, arbitrators in international cases more frequently exercise their power to appoint their own expert instead of relying entirely on party-appointed experts. To some degree, this is a by-product of the differences between the inquisitional system of justice and the common law system. Consequently, tribunal-appointed experts are more frequently appointed by arbitral tribunals involving European or Asian parties than American parties. Not insignificantly, the cost of tribunal-appointed experts becomes a part of the final award and therefore usually paid by the losing party.
Finally, it is quite common in international arbitrations for there to be expert evidence presented on the applicable law, which frequently involves the law of a place other than the seat and also other than their home jurisdiction of some or even all of the arbitrators. Because, in domestic practice, the arbitrators will usually be applying domestic law from a particular state, the presumption is that the arbitrators themselves are capable of receiving legal arguments on the law and making an appropriate decision on the law.
E. Form of Awards
Historically, the form of domestic arbitration awards frequently has been “standard awards” where the panel simply included its conclusion as to which party wins and the amount, if any, that is owed by the winner against the loser. In contrast, the applicable practice, and in many countries the requirement, is that international arbitration awards are “reasoned awards” where the arbitrators explain their reasoning and rationale for their award. This difference, in the opinion of the writer, is fortunately less common today than it was thirty years ago, in large part because a reasoned award tends to be less subject to inadequate or flawed analysis. This reflects the adage that “an award isn’t right, if it doesn’t write.”
F. Costs
The last major difference between domestic arbitrations and international cases is what is included in the costs awarded to the prevailing party. In domestic arbitrations in the United States, the “American Rule” on legal fees and legal costs in litigation prevails. That means that attorneys’ fees and other legal costs incurred by the parties to a domestic arbitration will not be awarded their legal fees and other legal costs incurred in prosecuting or defending the case, absent an express contractual agreement providing for awarding such fees and costs, or a statutory entitlement to fees and costs for the prevailing party.
However, it is virtually universal practice in international arbitration that arbitral tribunals have the inherent discretionary power to award attorneys’ fees and other legal costs as part of their award to the prevailing party. This is based on the principle, entrenched in international law and practice, that “costs [(viz, legal fees and costs of legal recourse] follow the event [viz., the breach of contract or other violation of a legal right that causes loss or damage].” This legal doctrine is applied in varying degrees in virtually every country in the world other than the United States, where legal fees and costs customarily are not recoverable. This practice in international arbitration is also reflected in international arbitration rules that expressly state in substance that the tribunal,5See UNCITRAL Arbitration Rules, art. 40; International Centre for Dispute Resolution Arbitration Rules, art. 37(d) (ICDR is the international branch of the American Arbitration Association); International Chamber of Commerce, Arbitration Rules, art. 41.1. in its discretion, may include in its award as costs the reasonable legal and other costs incurred by the prevailing party.
Importantly, inclusion of legal fees in international arbitral awards in which such fee awards frequently are granted for six or seven figures in US dollars is critical for valuing the merits of the case for settlement purposes. Such fee awards may be rendered for either a prevailing claimant or for a prevailing respondent, in which case, American lawyers, especially, are cautioned that analysis of both a potential favorable or unfavorable costs award needs to be included in both the claimant’s and respondent’s valuation of the case for settlement purposes.
G. Enforcement
In domestic cases, the first step for enforcement is an application for confirmation of the arbitral award. Once confirmed, the order of confirmation becomes a court judgment, which is enforceable as a matter of course throughout the United States according to the full faith and credit provision of the United States Constitution. If confirmation is sought in a federal court, the petition for confirmation must be brought in the district in which the seat of arbitration was located. There is also a jurisdiction hurdle in federal court for domestic cases because the Federal Arbitration Act (“FAA”) does not itself confer subject matter jurisdiction but there must be an independent jurisdictional basis for the court to confirm—typically either diversity with over $75,000 in controversy or the existence of a federal question in the underlying dispute giving rise to the award.
Interestingly, state courts in the United States may also confirm domestic arbitral awards governed by the FAA because they have concurrent subject matter jurisdiction for confirmation. If enforcement is sought in a state court for a case governed by the FAA or where a state arbitration act applies because the underlying dispute did not involve interstate commerce, the state court must have personal jurisdiction over the award debtor in order to confirm.
The same jurisdictional issues apply with regard to petitions to vacate filed by the loser. Although in most states the time within which a vacature petition must be filed in three months from issuance of the award, the same as for federally filed vacature petitions, the state time limits apply for any vacature petition filed in a state court, even if the FAA were to apply.
For international arbitration awards, Chapter 2 of the FAA grants federal question subject matter jurisdiction to federal courts to both confirm and vacate international awards. However, in contrast to cases involving domestic awards, petitions for confirmation and vacature may be filed in any district having personal jurisdiction over the award debtor (in addition to the district at the seat of the arbitration). Moreover, international cases seeking confirmation or vacature in a state court, which again would have concurrent subject matter jurisdiction with federal courts, are removable to federal court. Importantly, US federal or state courts have exclusive jurisdiction to vacate an international arbitration award for all arbitrations seated in the United States.
Another difference for enforcement of international awards is that enforcement other in the country in which the seat is located can be obtained without confirmation. This is a key part in Articles III and IV of the New York Convention. For example, the New York Convention allows an international award rendered in the New York against a French company may be enforced in a French court without the award having first been confirmed in the United States. Similarly, an award in an international case seated in Singapore can be directly enforced in Cincinnati.
IV. Concluding Observations
For arbitrations practitioners, there are significant differences between domestic cases and ones involving international parties. The purpose of this post is to highlight many of those differences and to provide context regarding the reasons they have developed. Additionally, in this era of expanding international trade and commerce, US trial lawyers, especially those who serve clients in both commercial litigation and domestic arbitrations, are more frequently having cases involving international parties. This paper should provide important insights regarding how such cases can be effectively prosecuted or defended even though the procedures may differ from domestic litigation and arbitration practices in the United States.
Cover Photo by Kyle Glenn on Unsplash
Author
References
- 1The IBA Evidence Rules were originally adopted by the International Bar Association in 1999 and most recently updated in 2020. Since originally promulgated in 1999, the IBA Rules have largely being adopted and applied by arbitrators in most cases involving American parties, where the arbitrators are American or from other countries.
- 2In other words, parties in civil law countries are required largely to prove their case from documents in their own files. The IBA Evidence Rules relax that extreme position but are far more restricted than ordinary document discovery in common law countries.
- 3As a minor exception, the practice has developed and is widely followed that the witness will be permitted to “warm the chair” by a short (typically about 15 minutes) segment of oral testimony about his or her personal background and basis for having knowledge about the case.
- 4In this era of virtual hearings, the Tribunal has the discretion to allow the witness to appear virtually over Zoom or Teams for cross-examination.
- 5See UNCITRAL Arbitration Rules, art. 40; International Centre for Dispute Resolution Arbitration Rules, art. 37(d) (ICDR is the international branch of the American Arbitration Association); International Chamber of Commerce, Arbitration Rules, art. 41.1.