16 Mar 2010

Why is arbitration the best way to resolve cross-border disputes?

by Doug Jones, Julia Dreosti

International commercial arbitration offers a flexible, enforceable method of dispute resolution.

International commercial arbitration is the dispute resolution process of choice for international contracts as it is tailored to suit the circumstances of parties located in different States, and most importantly because it increases the ease of enforceability of the decision.

What is arbitration?

Arbitration is a type of dispute resolution process. Instead of the parties' dispute being determined by a judge in a court (or by some other dispute resolution process) the dispute is determined by a privately appointed arbitrator or arbitral tribunal. The arbitrator delivers an "award", which may be enforced as a judgment of a court.

Why is it easier to enforce an arbitral award than a court's decision?

A successful outcome in a dispute is not just about winning the case, it is more importantly about being able to enforce the decision and recover the money awarded. This can be a particularly difficult exercise when your opponent's assets are located outside Australia.

In such circumstances, enforcement of arbitral awards is significantly easier than enforcement of court judgments as a result of the operation of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which has been ratified by Australia and over 140 other countries (including Australia's major trading partners).

The New York Convention only allows very limited grounds upon which the courts in Convention countries can refuse the enforcement of a foreign award, thereby setting boundaries for domestic judges. This is in stark contrast to the invariably complex and uncertain process of seeking to enforce a foreign judgment, which is a process that varies from jurisdiction to jurisdiction and is far more vulnerable to interference by national courts.

The International Arbitration Act (Cth) 1974 gives effect to Australia's obligations under the New York Convention, as well as providing the legislative framework for international arbitration generally.

What are some of the other potential advantages of arbitration?

The arbitral process also offers a number of other potential advantages:

  • Neutrality: arbitration can overcome the often perceived disadvantages of having a judge in the courts of one party's home jurisdiction deciding the dispute between the parties. In arbitration, a neutral person from a different jurisdiction can be appointed to determine the dispute as an arbitrator.
  • Choice of decision-maker: arbitration allows parties the opportunity to choose arbitrators that have suitable qualifications and experience in the area that is the subject of the dispute (which may not always be the case when a judge is assigned to a case).
  • Flexibility and speed: in arbitration parties have a great degree of flexibility to tailor the procedure to suit their particular contract and needs and to ensure (so long as all those involved are willing) that it proceeds as quickly as possible. Arbitrators are not usually bound by the local rules of evidence.
  • Confidentiality: the parties can agree that the procedure and outcome of an international arbitration are private and confidential.

What do other market players think about arbitration?

The results of a study (sponsored by PricewaterhouseCoopers) into the attitudes to arbitration of in-house counsel in some of the biggest corporations in the world show an overwhelming preference for arbitration for cross-border disputes.

The facts and figures from the PricewaterhouseCoopers study speak for themselves:

  • 86 percent of in-house counsel interviewed said that they were satisfied with international arbitration;
  • arbitration is the default dispute resolution mechanism in the insurance, energy, oil and gas and shipping industries;
  • there is a high levels of compliance with arbitral awards. Enforcement proceedings were only required in just over 10 percent of cases, and if required the awards were usually enforced within one year. Enforcement was ranked as the most important advantage of arbitration in an earlier PricewaterhouseCoopers study in 2006.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.